SALES AND DISTRIBUTION

MANAGEMENT

(FOR PRIVATE CIRCULATION ONLY)

2019
PROGRAMME COORDINATOR
Dr. Narendra Parchure

COURSE DESIGN AND REVIEW COMMITTEE

Prof. Dr. Pramod Jogdeo Prof. Dr. Narendra Parchure
Dr. Shailesh Kasande Dr. Avinash Joshi
Prof. Jayant Saha Prof. Nazima Shaikh
Prof. Sudeep Limaye

COURSE WRITER
Prof. A. K. Sood

EDITOR
Ms. Neha Mule

Published by Symbiosis Centre for Distance Learning (SCDL), Pune

July, 2006 (Revision 04, 2014)

Copyright © 2019 Symbiosis Open Education Society

All rights reserved. No part of this book may be reproduced, transmitted or utilised in any form or by any
means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval
system without written permission from the publisher.

Acknowledgement
Every attempt has been made to trace the copyright holders of materials reproduced in this book. Should any
infringement have occurred, SCDL apologises for the same and will be pleased to make necessary corrections
in future editions of this book.
 PREFACE

Sales and Distribution Management is an integral part of Marketing Management. Modern Sales and
Distribution Management is a complex and disciplined mix of: marketing skills, professional selling
and negotiation skills, people management skills (including selection, motivation, communicating and
training), sales strategy and tactical planning skills, data management and performance monitoring
skills (involving a high level of numeracy and experience in using computers to advantage) in sales
and customer management. This text is targeted at the professional sales managers who want to make
the most of the market opportunities; and develop the productivity of his or her team. Companies are
facing increased competition, with threats to many traditional markets and customer bases as supply
and purchases points in many market segments become more concentrated. To tackle the threats and
capitalise on opportunities the modern sales manager needs a far broader range of selling and managerial
skills, and experience than in past decades.

The aim is to provide some skill developing inputs that will enable the proactive sales manager to build
on this material in managing the sales team and sales environment more profitably and productively.

A. K. Sood

iii
 ABOUT THE AUTHOR

Prof. A.K. Sood, a Management Consultant and a member of the Institute of Management Consultants
of India, provides training services to several organisations.
Mr. Sood has successfully combined a career in industry with teaching management courses in premier
Institutions of Management and Communications like Symbiosis Institute of Business Management,
Symbiosis Institute of Management Studies, Indsearch, I.M.E., Pune University, Vaikunth Mehta
National Institute of Cooperative Management and Sancheti Institute for Hospital Management
(Sancheti Institute for Orthopaedics & Rehabilitation) all of which he still retains associations with.
Prof. Sood is the Founder, Director of Institute for Sales Training, an organisation set up to provide
value to customers through education, job assistance, counselling and training programmes.

iv
 CONTENTS

Unit No. Title Page No.

Part I
SALES MANAGEMENT
1 Introduction to Sales Management 1 – 18
1.1 Introduction
1.2 Evolution of Sales Management
1.3 Challenges to Sales Management
1.4 Definition of Sales Management
1.5 Objectives of Sales Management
1.6 Sales Management Process
1.7 Sales - A Challenging and Rewarding Career
1.8 Women in Sales
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
2 Personal Selling 19 – 38
2.1 Introduction
2.2 Meaning of Personal Selling
2.3 Nature of Personal Selling
2.4 Objectives of Personal Selling
2.5 Qualities of a Successful Salesperson
2.6 Classifying Selling Roles
2.7 Personal Selling Process
2.8 Advantages and Disadvantages of Personal Selling
2.9 Trends in Personal Selling
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

v
 Unit No. Title Page No.
3 Effective Sales Executive 39 – 60
3.1 Introduction
3.2 Sales Representative
3.3 Changing Role of Field Sales Manager
3.4 Sales Manager – Responsibilities
3.5 Sales Management Competencies
3.6 Time Management of Sales Executives
3.7 The Sales Hierarchy Pyramid
3.8 The Sales Career Path
3.9 Sales Managers’ Relations with other Departments
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
4 Sales Planning and Budgeting 61 – 82
4.1 Introduction
4.2 Definitions of Planning
4.3 Meaning of Sales Planning
4.4 Characteristics of Sales Planning
4.5 Advantages of Planning
4.6 Levels of Planning
4.7 Sales Planning Process
4.8 Management by Objectives (MBO)
4.9 Sales Budgets
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

vi
Unit No. Title Page No.
5 Sales Forecasting 83 – 104
5.1 Introduction
5.2 Sales Forecast
5.3 Factors in Sales Forecasting
5.4 Basic Concepts in Sales Forecasting
5.5 Sales Forecasting Approaches
5.6 Non-Quantitative Forecasting Techniques
5.7 Quantitative Forecasting Techniques
5.8 Evaluating Quantitative and Qualitative Techniques
5.9 Personal Computers and Sales Forecasting
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
6 Sales Organisation 105 – 122
6.1 Introduction
6.2 Definitions of Sales Organisation
6.3 Characteristics of Sales Organisation
6.4 Purpose of Sales Organisation
6.5 Centralisation vs. Decentralisation
6.6 Principles of Organisational Design
6.7 Evolution of Sales Department
6.8 Types of Sales Organisations
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

vii
 Unit No. Title Page No.
7 Recruitment and Selection of Sales Force 123 – 144
7.1 Introduction
7.2 Definition of Recruitment
7.3 Importance of Recruitment
7.4 The Recruitment Process
7.5 Selection Process
7.6 Sales Force Selection in Multinational Companies
7.7 Sales Force Socialisation
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
8 Sales Training 145 – 164
8.1 Introduction
8.2 The Purpose of Sales Training
8.3 The Benefits of Sales Training
8.4 Effects of Lack of Training
8.5 Sales Training Program
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
9 Sales Quota and Compensating Sales Personnel 165 – 182
9.1 Introduction
9.2 Definitions of Sales Quota
9.3 Features of Sales Quota
9.4 Objectives/Importance of Sales Quota
9.5 Types of Quotas
9.6 Characteristics of Sales Jobs
9.7 Requirements of a Good Sales Compensation Plan
9.8 Devising a Sales Compensation Plan
9.9 Types of Compensation Plans
9.10 Fringe Benefits
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

viii
Unit No. Title Page No.
10 Leading and Motivating the Sales Personnel 183 – 206
10.1 Introduction
10.2 What is Leadership
10.3 Leadership and Management
10.4 Differences between a Manager and a Leader
10.5 Functions of a Leader
10.6 Leader Influence and Power
10.7 Principles of Leadership
10.8 Characteristics of an Effective Leader
10.9 Theories of Motivation
10.10 Motivating the Sales Force
10.11 Motivational Techniques
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
11 Evaluation and Control of Sales Force 207 – 224
11.1 Introduction
11.2 Marketing Audit
11.3 The Sales Audit
11.4 The 80:20 Principle
11.5 Iceberg Principle
11.6 What is Sales Analysis
11.7 Sales Analysis Framework
11.8 Marketing Cost Analysis
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

ix
 Unit No. Title Page No.
12 Sales Territory 225 – 242
12.1 Introduction
12.2 Meaning of Sales Territory
12.3 Reasons for establishing Sales Territories
12.4 Responsibility of designing Sales Territories
12.5 Reasons for not developing Sales Territories
12.6 Factors to be considered while designing Sales Territories
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
13 Key Account Management 243 – 262
13.1 Introduction
13.2 What is Key Account Management
13.3 Objectives of Key Account Management
13.4 Characteristics of defining a Key Account
13.5 Traditional and Key Account Paradigms
13.6 The Stages in Key Account Management
13.7 Future Trends and Challenges of Key Account Management
13.8 Benefits of Key Account Management
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

x
Unit No. Title Page No.
Part - II
DISTRIBUTION MANAGEMENT
1 Introduction to Distribution Management 265 – 286
1.1 Introduction
1.2 Understanding Distribution Channels
1.3 Scope of Distribution Channels
1.4 Functions of Distribution Channels
1.5 Multiple Channels of Distribution
1.6 Types of Channel Members
1.7 Benefits Offered by Channel Members
1.8 Physical Distribution Management (PDM)
1.9 Systems or Total Approach to PDM
1.10 Distribution Resource Planning (DRP)
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
2 Retailing 287 – 310
2.1 Introduction
2.2 What is Retailing
2.3 Functions of Retailers
2.4 Retail Formats
2.5 Retail Ownership
2.6 Retail Strategies
2.7 Technology in Retail
2.8 Radio Frequency Identification (RFID) in Retail
2.9 Challenges to Retailers
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

xi
 Unit No. Title Page No.
3 Wholesaling 311 – 332
3.1 Introduction
3.2 Wholesale Markets
3.3 Meaning of Wholesaling
3.4 Benefits of Wholesaling
3.5 Functions of Wholesalers
3.6 Wholesale Formats
3.7 Types of Wholesalers
3.8 Appointment of Distributors
3.9 Concerns of Wholesalers
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
4 Warehousing 333 – 358
4.1 Introduction
4.2 Meaning and Definition of Warehousing
4.3 Need for Warehousing
4.4 Types of Warehouses
4.5 Characteristics of Ideal Warehouse
4.6 Functions of Warehouse
4.7 Advantages of Warehouse
4.8 Activities in Warehouses
4.9 Warehouse Designing and Configuration
4.10 Distribution Center
4.11 Clearing and Forwarding Agents
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

xii
Unit No. Title Page No.
5 Transportation 359 – 378
5.1 Introduction
5.2 Benefits of Transportation
5.3 Elements of Transportation Costs
5.4 Modes of Transport
5.5 Multimodal Transport
5.6 Containerisation
5.7 Factors in Selecting Mode of Transportation
5.8  Changing Practices and Priorities in Freight Transportation
Demand
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
6 Distribution Channels in Services 379 – 400
6.1 Introduction
6.2 Distribution Channels in Services
6.3 Major Intermediaries for Service Industry
6.4 Distribution Channels in Banking Industry
6.5 Distribution Channels in Insurance Industry
6.6 Distribution Channels in Hotel Industry
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

xiii
 Unit No. TITLE Page No.
7 Distribution Planning and Control 401 – 432
7.1 Introduction
7.2 Customer Service Levels
7.3 Developing Customer Service Policy
7.4 The Total Distribution Concept
7.5 Requirements of a Distribution Planning and Control System
7.6 Inventory Planning and Control
7.7 Transport Planning and Control
7.8 Warehouse Capacity Planning
7.9 Distribution Resource Planning and Control
7.10 Just-in-Time
7.11 Material Requirement Planning
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

xiv
 PART - I
SALES MANAGEMENT
Introduction to Sales Management
UNIT

1
Structure:

1.1 Introduction
1.2 Evolution of Sales Management
1.3 Challenges to Sales Management
1.4 Definition of Sales Management
1.5 Objectives of Sales Management
1.6 Sales Management Process
1.7 Sales - A Challenging and Rewarding Career
1.8 Women in Sales
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Introduction to Sales Management 1

 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Explain the evolution of sales management
----------------------
• Identify the challenges to sales management
---------------------- • State the sales management competencies
---------------------- • Define sales management

---------------------- • Enumerate the responsibilities of the sales manager

----------------------
1.1 INTRODUCTION
----------------------
Every organisation ultimately needs to sell its products. Therefore,
---------------------- to facilitate the same the organisation needs to deploy people to contact its
customers (sales personnel). Sales are a very dynamic function. This is so because
---------------------- the consumer/customer’s needs are constantly and continuously changing due
to change in the environment. Hence, the sales people need to overcome the
----------------------
obstacles and satisfy the customers by making the products available at the right
---------------------- place and at the right time.

---------------------- This leads us to understand that the sales function is not a static but a
dynamic function. The sales personnel need to be dynamic, alert, on the move
---------------------- and catalysts. They are the people who make things happen. Therefore the sales
management is a very dynamic function which involves generation of profits,
---------------------- reduction in operational costs and is looked up by the entire organisation as a
---------------------- revenue generating function of the organisation.

---------------------- 1.2 EVOLUTION OF SALES MANAGEMENT

---------------------- Before the industrial revolution it was broadly the product or the production
concept which was in vogue. Therefore, during that era organisations focused on
----------------------
production and subsequently on the quality of the production. Consumers were
---------------------- never a focus and hence sales as a function was not given its due importance.

---------------------- The industrial revolution brought with it mechanization of production

leading to increase in production. Production increased by leaps and bound.
---------------------- Thus, it became necessary to sell the products on a larger geographical area.
With the need to increase the production to satisfy the ever increasing consumer
---------------------- demand, the focus continued still on production and other aspects of business
---------------------- and sales function was not given importance.
However, the advent of large enterprises called for delegation of authority
---------------------- which resulted in creation of separate functional departments. Sales departments
---------------------- were opened after activating all other functional departments like production,
finance, purchase etc.
----------------------

2 Sales and Distribution Management

 Over a period time the manufacturers slowly shifted the portions of Notes
the marketing functions to the middlemen (wholesalers/retailers). As a result
the manufacturer’s sales departments became increasingly distanced from ----------------------
the customers. This resulted in the sales departments losing control over the
marketing environment. Hence, excessive reliance on the middlemen for ----------------------
carrying out the marketing and sales functions became a hindrance in the ----------------------
process of market expansion and growth.
----------------------
With the passage of time, the functions carried out by the sales departments
became increasingly complex. This resulted in creation of various departments ----------------------
like advertising, market research, sales promotion, receivables management
etc. in spite of the rise in various specialized functions within marketing like ----------------------
advertising, packaging development, new product development etc., the sales
----------------------
function occupies a strategically important position since it is the revenue
generating department/function of the organisation. ----------------------
Table 1.1
----------------------
TRADITIONAL (1960’s through MODERN (essential today to sustain
to 1980’s and amazingly still found success in business-to-business and ----------------------
today) consumer markets) ----------------------
standard product customized, flexible, tailored product
and service ----------------------
sales function performed by a ‘sales- sales function performed by a ‘strategic ----------------------
person’ business manager’
----------------------
seller has product knowledge seller has strategic knowledge of
customer’s market-place and knows all ----------------------
implications and opportunities resulting
from product/service supply relating to ----------------------
customer’s market-place ----------------------
delivery service and supporting strategic interpretation of the customer
information and training are typical organisation’s market opportunities, ----------------------
added value aspects of supply and assistance with project evaluation
----------------------
and decision-making are added value
aspects of supply ----------------------
good lead-time is a competitive just-in-time (JIT) is taken for granted,
----------------------
advantage as are mutual planning and scheduling;
competitive advantages are: capability to ----------------------
anticipate unpredictable requirements,
and assistance with strategic planning ----------------------
and market development
----------------------
value is represented and judged value is assessed according to the cost to the
according to selling price customer, plus non-financial implications ----------------------
with respect to CSR (corporate social
----------------------
responsibility), environment, ethics, and
corporate culture ----------------------

Introduction to Sales Management 3

 Notes the benefits and competitive strengths the benefits and competitive strengths
of the products or service are almost of the product or service now include
----------------------
entirely tangible, and intangibles are many significant intangibles, and the
---------------------- rarely considered or emphasised onus is on the selling organisation to
quantify their value
----------------------
benefits of supply extend to products benefits of supply extend way beyond
---------------------- and services only products and services, to relationship,
continuity, and any assistance that the
---------------------- selling organisation can provide to the
customer to enable an improvement for
----------------------
their staff, customers, reputation and
---------------------- performance in all respects
selling price is cost plus profit margin, selling price is market driven (essentially
----------------------
and customers have no access to cost supply and demand), although certain
---------------------- and margin information customers may insist on access to cost
and margin information
----------------------
seller knows the business customers’ seller knows the needs of the business
---------------------- needs customers’, customers and partners and
suppliers
----------------------
sales person sells (customers only whole organisation sells (customers
---------------------- deal with sales people, pre-sale) expect to be able to deal with anybody
organisation, pre-sale) in supplier
----------------------
sales people only sell externally, i.e., sales people need to be able to sell
---------------------- to customers internally to their own organisation, in
order to ensure customer needs are met
----------------------
strategic emphasis is on new strategic emphasis is on customer
---------------------- business growth (i.e., acquiring new retention and increasing business
customers) to those customers (although new
---------------------- business is still sought)
---------------------- buying and selling is a function, buying and selling is a process, in which
with people distinctly responsible many people with differing jobs are
---------------------- for each discipline within selling and involved in both selling and customer
---------------------- customer organisations organisations
hierarchical multi-level management management structures are flat, with
---------------------- structures exist in selling and few management layers
---------------------- customer organisations
authority of sales person is minimal, authority of sales person is high (subject
----------------------
flexibility to negotiate is minimal, to experience), negotiation flexibility
---------------------- approvals must be sought via exists, and exceptions are dealt with
management channels and levels for quickly and directly by involving the
---------------------- exceptions relevant people irrespective of grade
----------------------

4 Sales and Distribution Management

1.3 CHALLENGES TO SALES MANAGEMENT Notes

It is certainly an era of change. Powerful forces are at work that are ----------------------
changing the way that salespeople and sales managers understand, prepare for, ----------------------
and accomplish their jobs. There is no going back. Some of the more important
competitive and customer related forces of change are discussed here below: ----------------------
Competition ----------------------
The 1980s and early 1990s were generally a seller’s market. Today, the number
----------------------
of competitors in most markets has phenomenally across the board for all product
categories. The key reasons for this development are globalization of markets, shorter ----------------------
product cycles, and evolution of this world into a boundryless market.
----------------------
Globalisation
----------------------
Companies around the globe are feeling the effects of globalised
competition. It is not unusual to compete with companies from other countries, ----------------------
to use suppliers located in other parts of the world, or to sell to customers that
are selling in other countries. Any of these situations may result in intensified ----------------------
competition and require that the sales force adjust from a local to a global focus.
----------------------
Particularly in a country like India which has witnessed influx of multinationals
in almost all the product categories, in products as well as services. Therefore, ----------------------
there is a need to have a global perspective.
----------------------
For example, well-known companies such as Coca-Cola, Colgate-
Palmolive, and Avon Products have changed the total perspective of selling ----------------------
and sales management. Chief Executives of such companies know that their
companies’ growth is likely to depend on how well they manage customer ----------------------
relationships in global markets. This means more travelling, hiring the right ----------------------
people, defining new roles and duties, and developing a global perspective and
world-class skills at addressing an increasingly eclectic sales force. ----------------------
Shorter Product Cycles ----------------------
The rate of technology transfer is increasing. Processes and products
----------------------
that were once proprietary are quickly becoming available to competitors. As
a result of the proliferation/spread of technology and the increasing number ----------------------
of competitors, product cycles are shorter, imitation is more rapid, and as a
consequence, the window of product differentiation has narrowed considerably. ----------------------
Sales and customer relationship skills are most important when a product is
----------------------
new and again when it is late in its life cycle.
New products need careful presentation because a buyer’s risk is highest ----------------------
owing to lack of experience with the product. The sales force’s task is to help ----------------------
customers understand that the benefits of the new product outweigh the risks
and costs associated with the requisite business changes. In the late stages of ----------------------
the life cycle, the salesperson again becomes very important. With very few
important differences in competing products, the personal relationship and ----------------------
intimate customer knowledge of the sales force become the primary point of ----------------------
differentiation and leverage for a supplier.

Introduction to Sales Management 5

 Notes Boundaryless Global Markets
Contributing importantly to increased competition is the phenomenon
---------------------- of boundaryless global markets. Formerly indirect competitors were entering
---------------------- each other’s businesses. Steel, aluminum, plastic, paper, and glass, for instance,
compete for the same application. Banks, insurance companies, mutual funds,
---------------------- new Internet companies, and credit-card companies all compete for the same
consumer savings and investment money.
----------------------
Developments in information and communication technology have reduced
---------------------- the distances and the world looks like integrated/seamless market. As a result,
sellers have to call on new decision influencers in different countries/markets
---------------------- who are looking for new value proposition. These developments have made it
---------------------- more difficult and complex to sell effectively against a broader set of competitors.
Customers
----------------------
The increase in competition clearly calls for new selling and sales
---------------------- management approaches. However, identifying the correct selling and sales
management approach is further complicated by customer developments such
---------------------- as increasing buying skills, rising expectations and increasing power.
---------------------- Increasing buying Skills
Due to tough competition in the market place, pressure on margins, the
----------------------
need for reduction in costs is become a must. The same effect is also felt in
---------------------- the purchase of raw materials and consumables. Unlike in the past, now the
purchase function is being increasingly looked up as a profit centre. Therefore,
---------------------- the purchasing function is expected to excel and become more and more
efficient and contribute in reduction in costs. This is posing a challenge to the
----------------------
sales personnel. A new orientation in the sales function is required which calls
---------------------- for shift from transactional to relationship selling.
Rising Expectations
----------------------
Due to rising literacy rates, rising income levels, dual income families,
---------------------- information explosion due to electronic media, internet, lateral movement of
cultures, cross cultural integration, today customers have become smart. He
---------------------- is demanding best at the least price. Despite a focus on quality and service,
---------------------- customer satisfaction remains low. Customer satisfaction is difficult to manage
because as customers receive good treatment, they become accustomed to it and
---------------------- demand even better treatment.
---------------------- In other words, the bar is being constantly raised. Customer expectations
are raised not just by how well a business performs versus competitors, but also
---------------------- by the higher standards set in other industries. People are aware of the standard
in the consistency of service at McDonald’s, the cleanliness at Disney, and the
---------------------- product quality at Sony. Customers are aware of the product and service quality
---------------------- they receive from these companies and are holding everyone else to a higher
standard.
---------------------- In business-to-business sales, rising customer demands are occurring in a
---------------------- variety of ways, including:

6 Sales and Distribution Management

●● ccess to greater levels of information, both from electronic and human
A Notes
sources, on demand.
●● Ever increasing speed of response to customer problems and issues. ----------------------

●● demonstrated understanding of the customer’s business and issues

A ----------------------
before being permitted to ask questions. ----------------------
●● Personalisation of offerings, services. This calls for joint decisions on
----------------------
the part of marketing and sales functions regarding price, product, and
promotion. This has added a new dimension the way products and services ----------------------
are sold in today’s changed environment. For example, the software
industry gives individual customers need based products and services. ----------------------

The changes discussed so far have resulted in the change in the traditional ----------------------
sales attitude of “I can sell anything to anyone.” The financial stakes are too
----------------------
high and the problems too complex for a single salesperson to handle.
----------------------
Check your Progress 1
----------------------

State True or False. ----------------------

1. The rate of technology transfer is increasing. ----------------------

----------------------
Activity 1 ----------------------

Give five examples, which will explain how the consumers’ expectations ----------------------
are changing and posing challenges to selling function. ----------------------

----------------------
1.4 DEFINITION OF SALES MANAGEMENT
----------------------
Sales management is defined as the planning, direction and control of
personal selling, including recruiting, selecting, equipping, assigning routing, ----------------------
supervising, paying and motivating as these tasks apply to the sales force. ----------------------
- Definition Committee of the American Marketing Association ----------------------

1.5 OBJECTIVES OF SALES MANAGEMENT ----------------------

Sales Management is the revenue generating function of the organisation. ----------------------

Sales managers make major contribution to reach the three general objectives ----------------------
of the sales management.
●● Sales volume ----------------------
●● Contribution to profit ----------------------
●● Continued growth
----------------------

Introduction to Sales Management 7

 Notes Sales volumes and other objectives are decided on yearly basis. Once the
objectives are finalised, it is the responsibility of the sales managers to guide,
---------------------- lead and motivates the sales personnel of the organisation and members of the
distribution channels, including distributors, dealers, wholesalers, retailers etc.
---------------------- who make valuable contribution in implementation and execution of the sales
---------------------- plan.
Sales Management Functions
---------------------- Planning

---------------------- customer-oriented
sales team
---------------------- Resources Performance
Human Controlling Obtain goals
---------------------- Evaluating the Hiring the right Product sales
Raw materials past to guide the people to sell Customer
---------------------- Technology future and lead satisfaction
Information
Leading Training E ffectiveness
---------------------- Educating sales
people to perform
personnel to satisfy
at above-average
---------------------- levels
customers

---------------------- Fig 1.1

----------------------
1.6 SALES MANAGEMENT PROCESS
----------------------
Sales management refers to the administration of the personal selling
---------------------- component of a company’s marketing program. It includes the planning,
implementation, and control of sales programs, as well as recruiting, training,
----------------------
motivating, and evaluating members of the sales force. In a small business,
---------------------- these various functions may be performed by the owner or by a specialist called
a sales manager. The fundamental role of the sales manager is to develop and
---------------------- administer a selling program that effectively contributes to the organisation’s
goals. The sales manager for a small business would likely decide how
----------------------
many salespeople to employ, how best to select and train them, what sort of
---------------------- compensation and incentives to use to motivate them, what type of presentation
they should make, and how the sales function should be structured for maximum
---------------------- contact with customers.
---------------------- Sales management is just one facet of a company’s overall marketing
mix, which encompasses strategies related to the “four Ps”: products, pricing,
---------------------- promotion and place (distribution). Objectives related to promotion are
achieved through three supporting functions: 1) advertising, which includes
----------------------
direct mail, radio, television, and print advertisements, among other media;
---------------------- 2) sales promotion, which includes tools such as coupons, rebates, contests, and
samples; and 3) personal selling, which is the domain of the sales manager.
----------------------
Although the role of sales managers is multidisciplinary in scope, their
---------------------- primary responsibilities are: 1) setting goals for a sales force; 2) planning,
budgeting, and organising a program to achieve those goals; 3) implementing
---------------------- the program; and 4) controlling and evaluating the results. Even when

8 Sales and Distribution Management

a sales force is already in place, the sales manager will likely view these Notes
responsibilities as an ongoing process necessary to adapt to both internal and
external changes. ----------------------
Goal Setting ----------------------
The overall goals of the sales force manager are essentially mandated
----------------------
by the marketing mix. The company coordinates objectives between the major
components of the mix within the context of internal constraints, such as ----------------------
available capital and production capacity. The sales force manager, however,
may play an important role in developing the overall marketing mix strategies. ----------------------
For example, the sales manager may be in the best position to determine the
----------------------
specific needs of customers and to discern the potential of new and existing
markets. ----------------------
One of the most critical duties of the sales manager is to estimate the
----------------------
market potential and sales potential of the company’s offerings, and then to
make realistic forecasts of sales. Market potential is the total expected sales of a ----------------------
given product or service for the entire industry in a specific market over a stated
period of time. Sales potential refers to the share of a market potential that an ----------------------
individual company can reasonably expect to achieve. A sales forecast is an
----------------------
estimate of sales (in dollars or product units) that an individual firm expects to
make during a specified time period, in a stated market, and under a proposed ----------------------
marketing plan.
----------------------
Estimations of sales and market potential are often used to set major
organisational objectives related to production, marketing, distribution, and ----------------------
other corporate functions, as well as to assist the sales manager in planning
and implementing the overall sales strategy. Numerous sales forecasting tools ----------------------
and techniques, many of which are quite advanced, are available to help the ----------------------
sales manager determine potential and make forecasts. Major external factors
influencing sales and market potential include: industry conditions, such as ----------------------
stage of maturity; market conditions and expectations; general business and
economic conditions; and regulatory environment. ----------------------

Planning, Budgeting and Organising ----------------------

After determining goals, the sales manager of a small business must ----------------------
develop a strategy to attain them. A very basic decision is whether to hire a
sales force or contract with independent selling agents or manufacturers’ ----------------------
representatives outside of the organisation. The latter strategy eliminates costs
----------------------
associated with hiring, training, and supervising workers, and it takes advantage
of sales channels that have already been established by the independent ----------------------
representatives. On the other hand, maintaining an internal sales force allows
the manager to exert more control over the salespeople and to ensure that they ----------------------
are trained properly. Furthermore, establishing an internal sale force provides
----------------------
the opportunity to hire inexperienced representatives at a very low cost.
The type of sales force developed depends on the financial priorities and ----------------------
constraints of the organisation. If a manager decides to hire salespeople, the next
----------------------
step is to determine the optimal size of the force. This determination typically

Introduction to Sales Management 9

 Notes entails a compromise between the number of people needed to adequately
service all potential customers and the resources available to the company.
----------------------
One technique sometimes used to determine sales force size is the “work
---------------------- load” strategy, whereby the sum of existing and potential customers is multiplied
by the ideal number of calls per customer. That sum is then multiplied by the
---------------------- preferred length of a sales call (in hours).
---------------------- Next, that figure is divided by the selling time available from one
salesperson. The final sum is theoretically the ideal sales force size.
----------------------
A second technique is the “incremental” strategy, which recognizes
---------------------- that the incremental increase in sales that results from each additional hire
continually decreases. In other words, salespeople are gradually added until the
----------------------
cost of a new hire exceeds the benefit.
---------------------- A sales manager who is in the process of hiring an internal sales force also
---------------------- has to decide the degree of experience to seek and determine how to balance
quality and quantity. Basically, the manager can either “make” or “buy” his
---------------------- force. Recruits without previous experience whom the company must “make”
into salespeople, cost less over the long-term and do not bring any bad sales
---------------------- habits with them that were learned in other companies.
---------------------- On the other hand, the initial cost associated with experienced salespeople is
usually lower, and experienced employees can start producing results much more
----------------------
quickly. Furthermore, if the manager elects to hire only the most qualified people,
---------------------- budgetary constraints may force him to leave some territories only partially
covered, resulting in customer dissatisfaction and lost sales. Therefore, it usually
---------------------- makes more sense for small businesses to hire green troops and train them well.
---------------------- After determining the composition of the sales force, the sales manager
creates a budget, or a record of planned expenses that is (usually) prepared annually.
---------------------- The budget helps the manager decide how much money will be spent on personal
---------------------- selling and how that money will be allocated within the sales force. Major budgetary
items include: sales force salaries, commissions, and bonuses; travel expenses; sales
---------------------- materials; training; clerical services; and office rent and utilities.

---------------------- Many budgets are prepared by simply reviewing the previous year’s
budget and then making adjustments. A more advanced technique, however, is
---------------------- the percentage of sales method, which allocates funds based on a percentage of
expected revenues. Typical percentages range from about two percent for heavy
----------------------
industries to as much as eight percent or more for consumer goods and computers.
---------------------- After a sales force strategy has been devised and a budget has been
---------------------- adopted, the sales manager should ideally have the opportunity to organise, or
structure, the sales force. The structure of the sales force allows each salesperson
---------------------- to specialise in a certain sales task or type of customer or market, so that they
will be more likely to establish productive, long-term relationships with their
---------------------- customers. Small businesses may choose to structure their sales forces by
---------------------- product line, customer type, geography, or a combination of these factors.

10 Sales and Distribution Management

Implementing Notes
After setting goals and establishing a plan for sales activities, the next
----------------------
step for the sales manager is to implement the strategy. Implementation
requires the sales manager to make decisions related to staffing, designing ----------------------
territories, and allocating sales efforts. Staffing-the most significant of these
three responsibilities-encompasses recruiting, training, compensating, and ----------------------
motivating salespeople.
----------------------
Recruiting
----------------------
The first step in recruiting salespeople involves analysing the positions
to be filled. This is often accomplished by sending an observer into the field, ----------------------
who records the amount of time a salesperson must spend talking to customers,
----------------------
traveling, attending meetings, and doing paperwork. The observer then reports
the findings to the sales manager, who uses the information to draft a detailed ----------------------
job description. The observer might also report on the characteristics and
needs of the buyers, since it can be important for salespeople to share these ----------------------
characteristics.
----------------------
The manager may seek candidates through advertising, college recruiting,
company sources, and employment agencies. Candidates are typically evaluated ----------------------
through personality tests, interviews, written applications, and background ----------------------
checks. Research has shown that the two most important personality traits that
salespeople can possess are empathy, which helps them relate to customers, ----------------------
and drive, which motivates them to satisfy personal needs for accomplishment.
Other important traits include maturity, appearance, communication skills, and ----------------------
technical knowledge related to the product or industry. Negative traits include ----------------------
fear of rejection, distaste for travel, self-consciousness, and interest in artistic
or creative originality. ----------------------
Training ----------------------
After recruiting a suitable sales force, the manager must determine how ----------------------
much and what type of training to provide. Most sales training emphasises
product, company and industry knowledge. Only about 25 per cent of the average ----------------------
company training program, in fact, addresses personal selling techniques. Due
to the high cost, many small businesses try to limit the amount of training they ----------------------
provide. The average cost of training a person to sell industrial products,. ----------------------
For example, commonly exceeds $30,000. Sales managers can however,
----------------------
achieve many benefits with competent training programs. For instance, research
indicates that training reduces employee turnover, thereby lowering the effective ----------------------
cost of hiring new workers. Good training can also improve customer relations,
increase employee morale, and boost sales. Common training methods include ----------------------
lectures, case studies, role playing, demonstrations, on-the-job training, and
----------------------
self-study courses. Ideally, training should be an ongoing process that continually
reinforces the company’s goals. ----------------------

----------------------

Introduction to Sales Management 11

 Notes Compensation
After the sales force is in place, the manager must devise a means of
----------------------
compensating individuals. The ideal system of compensation reaches a balance
---------------------- between the needs of the person (income, recognition, prestige, etc.) and the
goals of the company (controlling costs, boosting market share, increasing cash
---------------------- flow, etc.), so that a salesperson may achieve both through the same means.
Most approaches to sales force compensation utilise a combination of salary and
----------------------
commission or salary and bonus. Salary gives a sales manager added control
---------------------- over the salesperson’s activities, while commission provides the salesperson
with greater motivation to sell.
----------------------
Although financial rewards are the primary means of motivating workers,
---------------------- most sales organisations also employ other motivational techniques. Good
sales managers recognise that salespeople have needs other than the basic ones
---------------------- satisfied by money. For example, they want to feel like they are a part of a
---------------------- winning team, that their jobs are secure, and that their efforts and contributions
to the organisation are recognised. Methods of meeting those needs include
---------------------- contests, vacations, and other performance-based prizes, in addition to self-
improvement benefits such as tuition for graduate school.
----------------------
Another tool managers commonly use to stimulate their salespeople is
---------------------- quotas. Quotas, which can be set for factors such as the number of calls made
per day, expenses consumed per month, or the number of new customers added
---------------------- annually, give salespeople a standard against which they can measure success.
---------------------- Designing Territories and Allocating Sales Efforts
---------------------- In addition to recruiting, training, and motivating a sales force to achieve
the company’s goals, sales managers at most small businesses must decide how
---------------------- to designate sales territories and allocate the efforts of the sales team. Territories
are geographic areas assigned to individual salespeople. The advantages of
----------------------
establishing territories are that they improve coverage of the market, reduce
---------------------- wasteful overlap of sales efforts, and allow each salesperson to define personal
responsibility and judge individual success. However, many types of businesses,
---------------------- such as real estate and insurance companies, do not use territories.
---------------------- Allocating people to different territories is an important sales management
task. Typically, the top few territories produce a disproportionately high sales
---------------------- volume. This occurs because managers usually create smaller areas for trainees,
medium-sized territories for more experienced team members, and larger areas
----------------------
for senior sellers. A drawback of that strategy, however, is that it becomes
---------------------- difficult to compare performance across territories.
An alternate approach is to divide regions by existing and potential
----------------------
customer base. A number of computer programs exist to help sales managers
---------------------- effectively create territories according to their goals. Good scheduling and
routing of sales calls can reduce waiting and travel time. Other common
---------------------- methods of reducing the costs associated with sales calls include contacting
numerous customers at once during trade shows, and using telemarketing to
----------------------
qualify prospects before sending a salesperson to make a personal call.
12 Sales and Distribution Management
Controlling and Evaluating Notes
After the sales plan has been implemented, the sales manager’s
----------------------
responsibility becomes controlling and evaluating the program. During this
stage, the sales manager compares the original goals and objectives with the ----------------------
actual accomplishments of the sales force. The performance of each individual
is compared with goals or quotas, looking at elements such as expenses, ----------------------
sales volume, customer satisfaction, and cash flow. Each salesperson should
----------------------
be evaluated using both subjective (i.e., product knowledge, familiarity with
competition, work habits) and objective (i.e., number of orders compared to ----------------------
number of calls, number of new accounts landed) criteria.
----------------------
An important consideration for the sales manager is profitability. Indeed,
simple sales figures may not reflect an accurate image of the performance of ----------------------
the sales force. The manager must dig deeper by analysing expenses, price-
cutting initiatives, and long-term contracts with customers that will impact ----------------------
future income. An in-depth analysis of these and related influences will help
----------------------
the manager to determine true performance based on profits. For use in future
goal-setting and planning efforts, the manager may also evaluate sales trends by ----------------------
different factors, such as product line, volume, territory, and market.
----------------------
After the manager analyzes and evaluates the achievements of the sales
force, that information is used to make corrections to the current strategy and sales ----------------------
program. In other words, the sales manager returns to the initial goal-setting stage.
----------------------
Environments and Strategies
The goals and plans adopted by the sales manager will be greatly ----------------------
influenced by the company’s industry orientation, competitive position, and ----------------------
market strategy. The basic industry orientations available to a firm include
industrial goods, consumer durables, consumer non-durable, and services. ----------------------
Companies that manufacture industrial goods or sell highly technical services
tend to be heavily dependent on personal selling as a marketing tool. Sales ----------------------
managers in those organisations characteristically focus on customer service ----------------------
and education, and employ and train a relatively high-level sales force.
In contrast, sales managers that sell consumer durables will likely ----------------------
integrate the efforts of their sales force into related advertising and promotional ----------------------
initiatives. Sales management efforts related to consumer non-durable and
consumer services will generally emphasise volume sales, a comparatively ----------------------
low-caliber sales force, and an emphasis on high-volume customers.
----------------------
In his classic book Competitive Strategy, Michael Porter lists three common
market strategies adopted by firms-low-cost supplier, differentiation, and niche. ----------------------
Companies that adopt a low-cost supplier strategy are usually characterised by
----------------------
a vigorous pursuit of efficiency and cost controls. Sales management efforts in
this type of organisation should generally stress minimising expenses-by having ----------------------
salespeople stay at budget hotels, for example-and appealing to customers on
the basis of price. Salespeople should be given an incentive to chase large, ----------------------
high-volume customers, and the sales force infrastructure should be designed
----------------------
to efficiently accommodate large order-taking activities.

Introduction to Sales Management 13

 Notes Companies that adhere to a differentiation strategy achieve market success
by offering a unique product or service. They often rely on brand loyalty or patent
---------------------- protection to insulate them from competitors, and thus are able to achieve higher-
than-average profit margins. In this environment, selling techniques should stress
---------------------- benefits, rather than price. Firms that pursue a niche market strategy succeed by
---------------------- targeting a very narrow segment of a market and then dominating that segment.
The company is able to overcome competitors by aggressively protecting its
---------------------- niche and orienting every action and decision toward the service of its select
group. Sales managers in this type of organisation would tend to emphasize
---------------------- employee training or to hire industry experts. The overall sales program would
---------------------- be centered on customer service and benefits other than price.
Regulation
----------------------
Besides markets and industries, another chief environmental influence
---------------------- on the sales management process is government regulation. Indeed, selling
activities at companies are regulated by a multitude of state and federal laws
----------------------
designed to protect consumers, foster competitive markets, and discourage
---------------------- unfair business practices. For example, TRAI regulates the working of Telecom
industry in India which has witnessed downward trend in telephone and mobile
---------------------- charges and improvement in customer service.
----------------------
Check your Progress 2
----------------------

---------------------- Fill in the blanks.

1. The type of sales force developed depends on the ______________
---------------------- and constraints of the organisation.
---------------------- 2. The ______________ step in recruiting salespeople involves
analyzing the positions to be filled.
----------------------

----------------------
1.7 SALES -ACHALLENGINGAND REWARDING CAREER
----------------------
Sales is one of the most exciting, financially rewarding and challenging
---------------------- of careers. Unlike many jobs, sales jobs are dynamic and hence lively, for it
deals with human beings and their wants which are always changing. The sales
----------------------
personnel have to face very uncertain and challenging situations because of the
---------------------- constant changes taking in the marketing environment. More often salespeople
are away from their company offices and from their superiors and working
---------------------- under tough conditions and taking decisions on their own.
---------------------- A wrong decision by the salesperson may put the company into losses.
Hence he needs to be always well informed, continuously analyse the environment
---------------------- and take judicious and rational decisions which increase his affectivity. Being
in the selling profession one necessarily has to undertake long journeys away
----------------------
from family under trying conditions. This in itself is a challenge since it puts lot
---------------------- of emotional stress on him and hence calls for lot of resolve and determination
to overcome these issues and always stay cheerful and motivated.
14 Sales and Distribution Management
 A sales career is undoubtedly one of the surest and fastest routes to the Notes
top of an organisation. One survey of 1,708 top-level managers in Fortune 500
companies showed that many of these executives began their business careers in ----------------------
either sales or marketing positions. One of the major reasons for corporate success
via the sales route is that of all. Sales people have the closest relationships with ----------------------
customers, and this they learn the business from the perspective of those who ----------------------
determine its ultimate success or failure. Also sales representatives are usually
the last to be fired in any cutback of company personnel because reducing sales ----------------------
force normally results in a reduction of sales revenue.
----------------------
Not only does a sales position offer the potential of high earning, but there
are frequent expense-account benefits (which permit the enjoyment of good life ----------------------
while wooing customers) and tax write-offs for home office expenses (which
----------------------
allow sales people to live better than their basic incomes suggest).
----------------------
1.8 WOMEN IN SALES
----------------------
Recent studies have found that some females have better selling skills.
Many women are more nurturing, have stronger listening skills and empathise ----------------------
better than males, “In sales, you have to be really people oriented,” “You have ----------------------
to listen and understand to the client’s wants and needs. If you can empathise
with what they are going through, you are going to do well in sales. Women are ----------------------
generally better at that than most men.”
----------------------
With females having more potential to be better salespeople, it is
little wonder why companies are hiring women to fill the vast majority of ----------------------
sales vacancies, a sales position is an important part of any company. Every
----------------------
salesperson generates enough revenue to pay for nine other positions at most
companies, according to Selling Power Magazine. ----------------------
The magazine also reported that sales is one of the most rapidly
----------------------
expanding fields in the United States with about 12 million people currently
in sales positions. The top 125 manufacturing companies employ 342,000 ----------------------
sales people who produce $1.3 trillion in sales. The top 125 service companies
employ 625,000 sales people with over $1.1 trillion in sales. The amount of ----------------------
sales produced per salesperson across all companies’ averages $2.5 million per
----------------------
year. Women have started to outnumber men in college sales courses.
It was only 10 to 15 years ago when there were few, if any, women in any ----------------------
of his selling classes. The turnaround came when female alumni began to speak
----------------------
on college campuses about their success in sales fields. Women see sales as a
tremendous opportunity because of high pay and rapid advancement. In every ----------------------
field both women and men are being hired in large numbers.
----------------------
In India too we now see around us that increasingly more and more women
are joining management courses and taking sales as a career. The campus ----------------------
recruitments indicate clearly women taking sales as a career is increasing by the
day across the companies covering many industries. We have lot of examples ----------------------
around about women who have reached the top of selling career like Indira ----------------------
Nooyi, President and CEO Pepsico, India.

Introduction to Sales Management 15

 Notes
Activity 2
----------------------

---------------------- Write names of five women who have made to the top in the corporate
world.
----------------------

---------------------- Summary
----------------------
●● It can be seen that selling as a profession which was looked down in the
---------------------- earlier era has now become a sought after profession due to the challenges
it offers and rewards that are in store.
---------------------- ●● Today, sales management function is looked up as a revenue generating
---------------------- function and thus this function with all the odds contributes significantly to
the organisational success. No wonder that even women are increasingly
---------------------- seen undertaking management courses and opting sales as a career. With
all the challenges associated with the sales and sales management it is
---------------------- increasingly becoming a sought after profession.
----------------------
Keywords
----------------------
●● Boundaryless global markets: Is said so because of globalisation
----------------------
countries are opening their doors to multinational thereby integrating
---------------------- with world economy. Moreover technology has shrunk the world in size
thus making it a unified/boundryless market.
---------------------- ●● Competitive advantage: Advantage a company has over the competition
---------------------- due to some strength.
●● Downward trend: Is generally used when these is fall in sales from the
---------------------- normal levels.
---------------------- ●● Multinational: An organisation operating in more than one country.
---------------------- ●● Short Product Cycles: Due to continuous innovation in technology, new
products are going out of fashion due to introduction of new products
---------------------- there by reducing the lifestyle of existing products.

----------------------
Self-Assessment Questions
----------------------
1. Define sales management and discuss its objectives.
----------------------
2. Discuss the evolution of sales management.
---------------------- 3. “Selling - a challenging and rewarding sales career”. Do you agree?
Discuss.
----------------------
4. Discuss the sales management process.
----------------------
5. What are the various challenges to sales management? Discuss in details.
----------------------

16 Sales and Distribution Management

Answers to Check your Progress Notes

Check your Progress 1 ----------------------

State True or False. ----------------------
1. True ----------------------
Check your Progress 2
----------------------
Fill in the blanks.
----------------------
1. The type of sales force developed depends on the financial priorities and
constraints of the organisation. ----------------------
2. The first step in recruiting salespeople involves analyzing the positions to ----------------------
be filled.
----------------------
Suggested Reading ----------------------
1. Bowersox, Logistical Management: The Integrated Supply Chain Process. ----------------------
2. Calvin, Robert J. Sales Management.
----------------------
3. Chopra, Supply Chain Management.
----------------------
4. Ghoshal, World Class in India. Penguin India.
5. Lamba, A.J. The Art of Retailing. ----------------------

6. Scheuing, Kurtz, Johnson. Sales Management: Concepts, Practices and ----------------------

Cases.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

Introduction to Sales Management 17

 Notes

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

18 Sales and Distribution Management

Personal Selling
UNIT

2
Structure:

2.1 Introduction
2.2 Meaning of Personal Selling
2.3 Nature of Personal Selling
2.4 Objectives of Personal Selling
2.5 Qualities of a Successful Salesperson
2.6 Classifying Selling Roles
2.7 Personal Selling Process
2.8 Advantages and Disadvantages of Personal Selling
2.9 Trends in Personal Selling
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Personal Selling 19
 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Explain the nature of personal selling
----------------------
• Enumerate the objectives of personal selling
---------------------- • Classify personal selling
---------------------- • Describe the personal selling process
---------------------- • Define sales management

---------------------- • Discuss the advantages and disadvantages of personal selling

• State the trends in personal selling
----------------------

----------------------
2.1 INTRODUCTION
----------------------
Salesman’s sample case
----------------------
“… a solid wooden box; 26 inches in length, containing specially hollowed
---------------------- compartments having various types of axes, sword, blade, buttons etc.”

---------------------- Early sellers and traders were not held in high esteem. The Roman word
for salesman meant ‘Cheater’ and ‘Mercury’: the God of cunning and barter
---------------------- was regarded the patron deity of merchants and traders.
---------------------- The first salesmen in the U.S. were ‘Yankee Peddlers’ (pack peddlers),
who carried clothing, spicer and notions in backpacks from East Coast
---------------------- manufacturing centers to settlers in the western frontier regions. Many traders
---------------------- came to be viewed as shrewd; unprincipled tricksters who would not think twice
about putting sand in the sugar; dust in pepper and chicory in coffee.
----------------------
In the early 1800’s, some peddlers began to use horse drawn wagons and
---------------------- to stock heavier goods such as furniture, ammunition etc. Some of these wagon
peddlers settled in frontier villages and opened the first general stores and
---------------------- trading posts. The larger retailers travelled once or twice a year to the nearest
---------------------- major city to replenish their stock. Eventually, wholesalers and manufacturers
hired greeters; on drummers who would meet incoming trains and ships to beat
---------------------- their competition.

---------------------- Before 1860, there were fewer than 1000 travelling salesmen, many of
whom were credit investigators who also took orders for goods. By 1870, there
---------------------- were 7000; by 1880, 28000; and by 1900, 93000 travelling salesmen.
---------------------- Modern selling and sales management techniques were refined by
John Henry Patterson (1844-1922), widely regarded as the father of modern
----------------------
salesmanship. Patterson showed the other companies the way to turn a sales
---------------------- force into an effective tool for building sales and profits.

20 Sales and Distribution Management

 The competitive environment mandates that sellers not only sell but also Notes
serve. In the competitive selling environment that all businesses face, there is
no one formula for success, but, if there were, it just might be “Find innovative ----------------------
ways to fulfill a deep commitment to customer satisfaction”.
----------------------
In a broader sense, this is the service aspect of personal selling, to identify
each customer’s needs and problems and to respond to them individually. This ----------------------
is the “value added” or extra benefit that salespeople can provide. This value ----------------------
added is often the difference between sales success and failure in today’s very
competitive markets. Today Salespeople and Sales Managers are often involved ----------------------
in other important aspects of the total marketing process: distributor credit, the
customer’s use or promotion of the product, pricing and so forth. ----------------------

----------------------
2.2 MEANING OF PERSONAL SELLING
----------------------
Personal selling refers to the presentation of goods and services before
----------------------
the customers and convincing or persuading them to buy the products or
services. Personal selling is a promotional method in which one party (e.g., ----------------------
salesperson) uses skills and techniques for building personal relationships
with another party (e.g., those involved in a purchase decision) that results in ----------------------
both parties obtaining value. In most cases, the “value” for the salesperson is
----------------------
realised through the financial rewards of the sale while the customer’s “value”
is realised from the benefits obtained by consuming the product. ----------------------
However, getting a customer to purchase a product is not always the
----------------------
objective of personal selling. For instance, selling may be used for the purpose
of simply delivering information. ----------------------
As selling involves personal contact, this promotional method often
----------------------
occurs through face-to-face meetings or via a telephone conversation, though
newer technologies allow contact to take place over the Internet including using ----------------------
video conferencing or text messaging (e.g., online chat).
----------------------
2.3 NATURE OF PERSONAL SELLING ----------------------
The nature of Personal Selling gives marketers ----------------------
●● the greatest freedom to adjust a message to satisfy customers’informational ----------------------
needs
●● most precision, enabling marketers to focus on most promising leads vs. ----------------------
advertising, publicity and sales promotion
----------------------
●● give more information
●● two way flow of information, interactivity. ----------------------
●● to discover the strengths and weaknesses of new products and pass this ----------------------
information to the marketing department.
●● highest cost. Businesses spend more on personal selling than on any other ----------------------
form of promotional mix. ----------------------

Personal Selling 21
 Notes ●● goals range from (a) finding prospects (b) convincing prospects
to buy and (c) keeping customers satisfied-help them pass the word
---------------------- along.

---------------------- Check your Progress 1

----------------------
Fill in the blanks.
----------------------
1. Businesses spend more on ____________ than on any other form of
---------------------- promotional mix.
----------------------

---------------------- 2.4 OBJECTIVES OF PERSONAL SELLING

---------------------- Personal selling is used to meet the five objectives of promotion in the
following ways:
----------------------
1. Building Product Awareness: A common task of salespeople, especially
---------------------- when selling in business markets, is to educate customers on new product
offerings. In fact, salespeople serve a major role at industry trade shows
---------------------- where they discuss products with people visiting the trade show. But
---------------------- building awareness using personal selling is also important in consumer
markets. We will discuss, the advent of controlled word-of-mouth
---------------------- marketing leading to personal selling becoming a useful mechanism for
introducing consumers to new products.
----------------------
2. 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.
---------------------- 3. Providing Information: When salespeople engage customers, a large
---------------------- part of the conversation focuses on product information. Marketing
organisations provide their sales staff with large amount of sales support
---------------------- including brochures, research reports, computer programs and many other
forms of informational material.
----------------------
4. 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.
---------------------- 5. 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 helps strengthen
---------------------- customers’ knowledge of what the company has to offer.

22 Sales and Distribution Management

 Notes
Check your Progress 2
----------------------
State True or False. ----------------------
1. Most personal selling is intended to build long-term relationships
----------------------
with customers.
----------------------

2.5 QUALITIES OF A SUCCESSFUL SALESPERSON ----------------------

i) Physical quality: A salesman should have a good appearance and an ----------------------

impressive personality. He should also have a sound health.
----------------------
ii) Mental quality: A good salesman should possess certain mental qualities
like imagination, initiative, self-confidence, sharp memory, alertness etc. ----------------------
He should be able to understand the needs and preferences of customers. ----------------------
iii) Integrity of character: A good salesman should possess the qualities of
honesty and integrity. He has to gain the confidence of the customers. He ----------------------
should be able to understand their needs and guide them as how to satisfy ----------------------
those needs. His employer too should have faith in him. A salesman
should be loyal both to the employer and to the customers. ----------------------
iv) Knowledge of the product and the company: A salesman should have ----------------------
full knowledge of the product and the company he represents. He should
be able to explain each and every aspect of the product i.e., its qualities, ----------------------
how to use it, what precautions to be taken, etc. and he should be able to
----------------------
explain the business and service record of the company. He should also
have knowledge of products of rival companies so that he can put across ----------------------
the superiority of his own products.
----------------------
v) Good behaviour: A salesman should be co-operative and courteous.
Good behaviour enables one to win the confidence of the customers. ----------------------
He should not feel irritated if the buyer puts up many questions even if
the questions are irrelevant. It is also not necessary that the person he is ----------------------
trying to convince buys the product. The salesman has to remain cool and
----------------------
courteous in every case.
vi) Ability to persuade: A good salesman should be good in conversation ----------------------
so that he can engage the person he is attending to in a conversation.
----------------------
He should be able to convince him and create the desire in his mind to
possess the commodity ----------------------

2.6 CLASSIFYING SELLING ROLES ----------------------

----------------------
As we noted above, worldwide millions of people have careers that fit
in the personal selling category. However, the actual functions carried out by ----------------------
someone in sales may be quite different. Below we discuss the four major
types of selling roles: order getters, order takers, order influencers, and sales ----------------------

Personal Selling 23
 Notes support. It should be noted that these roles are not mutually exclusive and that a
salesperson can perform more than one and possibly all activities.
----------------------
Order getters
---------------------- The role most synonymous with selling is a position in which the
---------------------- salesperson is actively engaged in using their skills to obtain orders from
customers. Such roles can be further divided into:
---------------------- ●● New Business Development: A highly challenging yet potentially

---------------------- lucrative sales position is one where the main objective is to find new
customers. Sales jobs in this category are often in fields that are very
---------------------- competitive, but offer high rewards for those that are successful. The key
distinguishing factor of these positions is that once a sale is made new
---------------------- business salespeople pass customers on to others in their organisation
---------------------- who handle account maintenance. These positions include:
●● Business Equipment Sales: These salespeople are often found
----------------------
in industries where a company’s main profits come from the sale of
---------------------- supplies and services that come after an initial equipment purchase.
The key objective of business equipped salespeople is to get buyers to
---------------------- purchase the main piece of equipment for which supplies and service
are needed in order, for the equipment to function. For instance, in the
----------------------
photocopier industry certain salespeople only seek out new accounts
---------------------- and once a photocopier sale is made they pass along the account to
other sales personnel who handle the sales of maintenance and supply
---------------------- products.
---------------------- ●● Telemarketing: This category includes product sales over the phone,
whether aimed at business or consumer.
----------------------
●● Consumer Selling: Certain companies are very aggressive in their use
---------------------- of salespeople to build new consumer business. These include: retailers
selling certain high priced consumer products including furniture,
---------------------- electronics and clothing; housing products including real estate, security
---------------------- services, building replacement products (e.g., windows); and in-home
product sellers including those selling door-to-door and products sold
---------------------- at “home party” events such as cosmetics, kitchenware and decorative
products.
----------------------
●● Account Management: Most people engaged in sales are not only
---------------------- involved in gaining the initial order, but work to build and maintain
relationships with clients that are intended to last a long time.
----------------------
Salespeople involved in account management are found across a broad
---------------------- range of industries. Their responsibilities involve all aspects of building
customer relationships from initial sale to follow-up account servicing.
---------------------- These include:
---------------------- i) Business-to-Business Selling: These salespeople sell products
for business use with an emphasis on follow-up sales. In many
---------------------- cases, business-to-business salespeople have many different items

24 Sales and Distribution Management

 available for sale (i.e., broad and/or deep product line) rather than Notes
a single product. So while the initial sale may only result in the
buyer purchasing a few products, the potential exists for the buyer ----------------------
to purchase many other products as the buyer-seller relationship
grows. ----------------------

ii) Trade Selling: Sales professionals working for consumer product ----------------------
companies normally do not sell to the final user (i.e., consumer).
----------------------
Instead their role is focused on first getting distributors, such
wholesalers and retailers, to handle their products and once ----------------------
this is accomplished, helping distributors sell their product by
offering ideas for product advertising, in-store display and sales ----------------------
promotions.
----------------------
Order Influencers
----------------------
Some salespeople are not engaged in direct selling activities at all. That
is, they do not sell directly to the person who is the ultimate purchaser for ----------------------
their product. Instead these salespeople concentrate on selling activity that
targets those who influence purchases made by the final customer. The primary ----------------------
example of an order influencer is the missionary salesperson:
----------------------
●● Missionary: These salespeople are used in industries where customers
make purchases based on the advice or requirements of others. ----------------------
Two industries in which missionary selling is commonly found are ----------------------
pharmaceuticals, where salespeople, known as product detailers, discuss
products with doctors (influencers) who then write prescriptions for their ----------------------
patients (final customer) and higher education, where salespeople call on
college professors (influencers) who make requirements to students (final ----------------------
customer) for specific textbooks. ----------------------
Order Takers
----------------------
Selling does not always require a salesperson use methods designed to
encourage customers to make a purchase. In fact, the greatest number of people ----------------------
engaged in selling are not order getters, rather they are considered order takers.
In this role, salespeople primarily assist customers with a purchase in ways that ----------------------
are much less assertive than order getters. As might be expected, compensation ----------------------
for order takers is generally lower than that of order getters. Among those
serving an order taker role are: ----------------------
●● Retail Clerks: While some retail salespeople are involved in new business ----------------------
selling, the vast majority of retail employees handle order taking tasks,
which range from directing customers to products to handling customer ----------------------
checkout.
----------------------
●● Industrial Distributor Clerks: Industrial purchase situations, such as
distributors of building products, will also have clerks to handle customer ----------------------
purchases.
----------------------
●● Customer Service: Order taking is also handled in non face-to-face
ways through customer service personnel. Usually this occurs via phone ----------------------

Personal Selling 25
 Notes conversations, though newer technologies now allow for these tasks to be
handled through electronic means such as online chat.
----------------------
Sales Support
---------------------- A final group involved in selling mostly assist with the selling activities
---------------------- of other sales professionals. These include:
Technical Specialists: When dealing with the sale of technical products,
----------------------
particularly in business markets, salespeople may need to draw on the expertise
---------------------- of others to assist with the process. This is particularly the case when the buying
party consists of a buying center. In Part 4: Business Buying Behaviour, we
---------------------- indicated that in business selling many people from different functional areas
may be involved in the purchase decision. If this buying center includes technical
----------------------
people, such as scientists and engineers, a salesperson.
---------------------- Office Support: Salespeople also may receive assistance from their
---------------------- company’s office staff in the form of creating promotional materials, setting up
sales appointments, finding sales leads, arranging meeting space or organizing
---------------------- trade shows exhibits.
----------------------
Check your Progress 3
----------------------

---------------------- Fill in the blanks.

1. ___________ category includes product sales over the phone, whether
----------------------
aimed at business or consumer.
----------------------

---------------------- Activity 1
----------------------
Mention few products in which the following types of personal selling takes
---------------------- place: a) Missionary Selling b) Trade Selling c) Consumer Selling.

----------------------

----------------------
2.7 PERSONAL SELLING PROCESS

---------------------- Personal selling has been defined as ‘that method of selling in which the
influence is exerted directly by the salesperson.
----------------------
Professional selling requires sales representatives to develop an efficient,
---------------------- systematic approach adaptable to the particular customer type and selling
situation.
----------------------
Seven major stages have been identified in the personal selling process:
----------------------
●● Prospecting
---------------------- ●● Pre-approach
---------------------- ●● Approaching the prospect

26 Sales and Distribution Management

●● Making the sales presentation Notes
●● Dealing with prospect is objection
----------------------
●● Closing the sales
----------------------
●● Follow-up on the sales
----------------------
Here, we shall discuss the first four stages of personal selling process.
These areas follows: ----------------------
1. Prospecting ----------------------
If the sales representatives hope to increase or even maintain their sales
----------------------
volume, they must continually seek out to prospect for a new customer. In
fact, more number of salespersons are required for prospecting than any ----------------------
other selling activity.
----------------------
Prospecting is the ‘life blood’ of sales because it identifies potential
customers. For two reasons a sales person must look out constantly for ----------------------
new customers:
----------------------
To increase the sales
----------------------
To replace the customers that will be lost in course of time.
----------------------
In prospecting, the salespeople must obtain LEADS on people who have
a need for their products. The lead must be qualified in terms of needs, wants, ----------------------
the ability to buy, the authority to buy and the eligibility to buy.
----------------------
Qualifications
i) Need/Want: Trying to sell your product to people who don’t need it or ----------------------
want it is simply a waste of time and efforts. Industrial salespeople often ----------------------
find that initial contact with their leads usually enables them to determine
whether there is a genuine need/want. Sometimes, however the needs / ----------------------
wants remain latent until the sales person points them out.
----------------------
ii) Ability to Buy: The individual or the organization must necessarily have
the ability to buy. Local credit services, banks, other customers, even ----------------------
competitors can provide information about the lead’s ability to buy. If the
----------------------
lead doesn’t have the wherewithal to buy or make payments, there is little
use in pursuing the negotiations. ----------------------
iii) Authority to Buy: Most sales representatives have wasted many hours ----------------------
talking to some person with an official sounding title that did not have the
authority to make the purchase decision. ----------------------
Even at the consumer level, salespeople may sometimes find that the ----------------------
decision to buy a household appliance is shared.
----------------------
iv) Eligibility to Buy: Eligibility to buy is with those people who are eligible
to buy. Like Life Insurance salespeople know that many unhealthy people ----------------------
who would like to buy life insurance at regular rates would not pass the
medical examination and thus are ineligible. ----------------------

Personal Selling 27
 Notes When the lead qualifies on all four criteria – need, ability, authority and
eligibility to buy – it can be declared a prospect.
----------------------
Now, we discuss the approaches to locate the prospects. There are as
---------------------- follows:
Major Prospecting Methods
----------------------
i) Centers of Influence: By joining country clubs, civic organisations,
---------------------- professional association, fraternal aides – and such other groups,
salespeople have the opportunity to meet influential people who may
----------------------
become customers or who can assist the sales representative in meeting
---------------------- potential customers.

---------------------- ii) Spatters: Sales associates or ‘spatters’ are people who seek out leads for
sales people and are sometimes paid a fee. The best spatters are current
---------------------- customers who provide referrals to potential prospects. Anyone who deals
with the public can be a spatter.
----------------------
iii) Endless Chain: Current customers and especially new buyers have a
---------------------- vested interest in praising your product because they want to alleviate
their own anxiety by justifying their purchases. They are even willing to
---------------------- provide testimonial letters as satisfied customers. By using these referrals,
---------------------- the sales representatives can develop an endless chain of leads. If the
satisfaction is not received by the customers the chain will break.
---------------------- iv) Observation: Organized observer like leading local newspapers can
---------------------- provide the sales persons with many leads. A change in peoples needs and
wants etc. are available here hence enabling the salespeople to seek leads.
----------------------
v) Advertising: Many sales organisation do not adequately follow up on
---------------------- direct telephone or letter enquiry from people who come across the
company’s advertisement in papers, the yellow pages, direct-mail and
---------------------- trade-magazine, popular magazines, bulletin boards, televisions, radios.
---------------------- Hence, all companies need a systematic response procedure for follow-up
on all inquiries because they are interested people: ‘hot prospects’.
----------------------
Cold Consulting: Cold consulting includes securing appointments and
---------------------- then calling them, can be fruitful as people who agree to give time are interested
and can qualify as prospects. Cold canvassing can be a very productive method
---------------------- of prospecting.
---------------------- 2. The Pre-approach

---------------------- ‘Planning the Sales Call’

After qualifying a prospect as a potential customer, the sales representative
----------------------
must plan how best to approach the prospect. In this pre approach stage, the
---------------------- salesperson needs to obtain strategic information about the prospective buyer
and ensure a favourable reception.
----------------------
Obtaining Strategic Information
---------------------- Nearly everything the salesperson can learn about the prospect can be

28 Sales and Distribution Management

strategically useful. At a minimum, you should learn the potential buyer’s full Notes
home address, position, title, and educational background, level of technical
knowledge, authority in the company with respect to buying, the normal buying ----------------------
behaviour and other personality traits.
----------------------
The salesperson also ought to take time to learn as much as possible about
the prospect’s family, hobbies, interests, lifestyle etc. ----------------------
When approaching the prospect, the salesperson needs to understand the ----------------------
total buying situation. This includes the relative competitive position of the firm
in the industry, its basic goals and objectives, its major customers’ problems and ----------------------
opportunities.
----------------------
Also a preliminary call on the prospect can be made to obtain first hand
pre approach information. Even the buyers cooperate in providing the required ----------------------
information as they know that the sales representatives must fully understand
----------------------
and analyse their purchasing needs.
Ensuring a Favourable Reception : ----------------------

One way to help ensure a favourable initial reception is to ask your ----------------------
company’s top executive to set up an appointment with the prospect company’s
top executive so that the key members of the seller team can meet the buyer ----------------------
team’s key members. ----------------------
The other way can be by first sending a useful sales promotion gift along
with a personal letter and brochure providing basic product information in ----------------------
advance. ----------------------
After the appointments are fixed, the sales person must plan the sales call
----------------------
route so as to minimize travelling time and expenses.
3. Approaching the Prospect ----------------------
Depending upon the selling situation, there are several methods that can ----------------------
be used to approach the prospect. A buyer’s reaction to the sales person in the
initial minutes of the approach is critical to successful sales. This short time ----------------------
period is so important that it is treated as an individual step in the selling process ----------------------
and referred to as the approach.
The approach may differ from person to person, customer to customer, ----------------------
situation to situation or even product to product. ----------------------
The various types of approaches used are discussed here further :
----------------------
i) Introductory Approach: Salespeople never get a second chance to
make the first impression, so they should make sure their introduction is ----------------------
well thought out and smoothly executed. A friendly greeting, sincere but
----------------------
firm handshake and a genuine smile at the very outset creates a positive
reception. During the introduction, the sales representatives must identify ----------------------
themselves by company and also a business card should be presented to
give official and residential address. ----------------------
ii) Reference Approach: Mentioning the names of several satisfied ----------------------

Personal Selling 29
 Notes customers who are respected by the prospect can be a compelling
approach, testimonial letters from satisfied customers can be a valuable
---------------------- asset in selling such products/services that involve high investment, a
social risk. But be sure to contact the referred person beforehand.
----------------------
iii) Customer – Benefit Approach: Prospects, always seek to solve problems
---------------------- or obtain benefits through their purchases and generally they have one
predominant buying motive which the salesperson has to identify and
----------------------
then appeal to it.
---------------------- iv) Compliment Approach: A sincerely delivered compliment when subtly
---------------------- conveyed can be a positive approach and also sets a pleasant atmosphere
for the interview. Many prospects are anxious for a positive feedback or
---------------------- phase.
---------------------- Be careful not to indulge in flattery but deliver the compliment indirectly.

---------------------- v) Free gift Approach: For door to door salespeople, a sample of their
product or a small free incentive often helps them for a fair entry into the
---------------------- prospects’ home and for professional salespeople, a free seminar, a free
trial etc. can fetch them dividends. But legal and ethical guidance’s must
---------------------- not be violated in using this approach.
---------------------- vi) Question Approach: Questions that necessitate thoughtful considerations
by the prospects are often used in this approach. Asking questions involves
----------------------
the prospect in a two way communication since the responses are required.
---------------------- Such questions should evoke a thought process in the prospect which will
encourage both information and questions from the buyers thus making
---------------------- the sale quicker.
---------------------- vii) Ingredient Approach: Some salespeople like to carry a sample of their
product or at least a graphic mock-up when, first approaching prospects.
---------------------- This allows prospects to see exactly what the sales person is selling and
---------------------- permits smooth transition into the sales presentation.
viii) Dramatic Approach : Should the other approaches fail, the sales person
----------------------
can turn to a dramatic or attention getting gimmick.
---------------------- The danger here is that sometimes the prospect may dislike such blatant
---------------------- showmanship and become defensive. Only when sure that the prospect will
be receptive to it, should the salesperson resort to such gimmicks. Do not
---------------------- overdo it.

---------------------- Making of the Sales Presentation

---------------------- Each prospect will project a different personality, but sales people can
usually classify prospects into one of the several basic categories, which aids in
---------------------- developing an appropriate selling strategy.

---------------------- Various communication tools can aid the sale representative in the sales
presentation by bringing into play more dramatically all the prospects senses:
---------------------- Right hearing, touch, smell, taste, etc.

30 Sales and Distribution Management

 Wherever possible, it is particularly effective to allow the prospect to Notes
participate in a demonstration of the product of service.
----------------------
In order to prepare an effective sales presentation to achieve price
objectives, sales representatives must understand alternative strategies namely: ----------------------
●● Stimulus response
----------------------
●● Formula
----------------------
●● Problem solution
●● Need satisfaction ----------------------
●● Team selling ----------------------
●● Depth selling
----------------------
i) Stimulus Response: Stimulus response strategies call for stimuli –
selling paints, to be presented in such a way as to obtain favourable ----------------------
responses from prospects while leading them down a desired path to the
sales close. ----------------------

Professional salespeople who deal with sophisticated buyers should ----------------------

use the stimulus response approach only briefly in conjunction with the
product demonstration. ----------------------

ii) Formula: While permitting more prospect focus and participation, ----------------------
formula strategies still tend to emphasise product features rather than
customer needs. Here we have AIDA Principle– Attention, Interest, ----------------------
Desire and Action. ----------------------
iii) Problem Solution: While applying this strategy, the salesperson makes
----------------------
full use of his or her professional consultative selling abilities. This
approach is typically used with more technical selling, in which several ----------------------
solution or alternatives are used with explanation while a long run
relationship of trust, confidence and respect is developed. ----------------------
iv) Need Satisfaction: These strategies call for no talk about the product/ ----------------------
services until the sales representative has discovered what dominant
needs or wants the prospects have. Skillful questioning on part of the ----------------------
sales person reveals these. The prospect’s interests, opinions, personality,
----------------------
attitudes etc. enable the sales person to estimate the needs of the prospect.
This requires the sales person to be a patient, perceptive listener and ----------------------
observer of body language.
----------------------
v) Team Selling: As organization grows larger, buying becomes more
centralised and buying committees or centers are formed. The salesperson ----------------------
then acts on the coordination and contact person for the buyer team
which may consist of technical specialists in various fields. When the ----------------------
sales representative is dealing with a group of people influential in the
----------------------
purchasing process, team selling becomes necessary.
The sales team must be prepared to identify the dominant buying motives ----------------------
of each member of the group in one-on-one sale negotiations. ----------------------

Personal Selling 31
 Notes vi) Depth Selling: In the depth selling strategy all the previously discussed
strategies are applied. Depth selling in a strategic mix of sales presentation;
---------------------- AIDA, need satisfaction and stimulus response. All these strategies may
have to be resorted in depth selling one after another or even at once.
----------------------
So, the effective use of this strategy requires a very bright and perceptive
---------------------- sales person.
----------------------
Check your Progress 4
----------------------

---------------------- State True or False.

1. Personal selling has been defined as the method of selling in which
---------------------- influence is exerted directly by the salesperson.
---------------------- 2. Cold canvassing can be a very productive method of prospecting.
----------------------
---------------------- 2.8 ADVANTAGES AND DISADVANTAGES OF
PERSONAL SELLING
----------------------
One key advantage personal selling has over other promotional methods
---------------------- is that it is a two-way form of communication. In selling situations the message
---------------------- sender (e.g., salesperson) can adjust the message as they gain feedback from
message receivers (e.g., customer). So if a customer does not understand the
---------------------- initial message (e.g., doesn’t fully understand how the product works) the
salesperson can make adjustments to address questions or concerns. Many
---------------------- non-personal forms of promotion, such as a radio advertisement, are inflexible,
---------------------- at least in the short-term, and cannot be easily adjusted to address audience
questions.
----------------------
The interactive nature of personal selling also makes it the most effective
---------------------- promotional method for building relationships with customers, particularly in
the business-to-business market. This is especially important for companies
---------------------- that either sell expensive products or sell lower cost but high volume products
(i.e., buyer must purchase in large quantities) that rely heavily on customers
----------------------
making repeat purchases. As such purchases may take a considerable amount
---------------------- of time to complete and may involve the input of many people at the purchasing
company (i.e., buying center), sales success often requires the marketer develop
---------------------- and maintain strong relationships with members of the purchasing company.
---------------------- Finally, personal selling is the most practical promotional option for
reaching customers who are not easily reached through other methods. The best
---------------------- example is in selling to the business market where, compared to the consumer
market, advertising, public relations and sales promotions are often not well
----------------------
received.
---------------------- Disadvantages of Personal Selling
---------------------- Possibly the biggest disadvantage of selling is the degree to which

32 Sales and Distribution Management

this promotional method is misunderstood. Most people have had some bad Notes
experiences with salespeople who they perceived were overly aggressive or
even downright annoying. While there are certainly many salespeople who fall ----------------------
into this category, the truth is, salespeople are most successful when they focus
their efforts on satisfying customers over the long term and not focus on their ----------------------
own selfish interests. ----------------------
The second disadvantage of personal selling is the high cost in maintaining ----------------------
this type of promotional effort. Costs incurred in personal selling include:
----------------------
●● High cost-per-action (CPA): Promotion Decisions, CPA can be an
important measure of the success of promotion spending. Since personal ----------------------
selling involves person-to-person contact, the money spent to support a
sales staff (i.e., sales force) can be steep. This cost is incurred whether ----------------------
a sale is made or not! These costs include compensation (e.g., salary,
----------------------
commission, and bonus), providing sales support materials, allowances
for entertainment spending, office supplies, telecommunication and much ----------------------
more. With such high cost for maintaining a sales force, selling is often
not a practical option for selling products that do not generate a large ----------------------
amount of revenue.
----------------------
●● Training Costs: Most forms of personal selling require the sales staff to
----------------------
be extensively trained on product knowledge, industry information and
selling skills. For companies that require their salespeople attend formal ----------------------
training programs, the cost of training can be quite high and include such
expenses as travel, hotel, meals, and training equipment while also paying ----------------------
the trainees’ salaries.
----------------------
The third disadvantage is that personal selling is not for everyone. Job
turnover in sales is often much higher than other marketing positions. For ----------------------
companies that assign salespeople to handle certain customer groups (e.g., ----------------------
geographic territory), turnover may leave a company without representation in
a customer group for an extended period of time while the company recruits and ----------------------
trains a replacement.
----------------------

2.9 TRENDS IN PERSONAL SELLING ----------------------

Customer Information Sharing ----------------------

Possibly the most dramatic change to occur is as to how the salespeople ----------------------
function on a day-to-day basis. It involves the integration of customer
----------------------
relationship management (CRM) systems into the selling arena. CRM is the
name given to both the technology and the philosophy that drives companies to ----------------------
gain a better understanding of their customers with the goal of building stronger
long-term relationships. The essential requirement for an effective CRM system ----------------------
is the need for all customer contact points (e.g., salespeople, customer service,
----------------------
and websites) to gather information so that this can be shared with others in the
company. ----------------------

Personal Selling 33
 Notes But CRM has faced some rough times within the sales force for the exact
reason of its importance. Salespeople must share their information. Salespeople
---------------------- have historically been very good at developing relationships and learning
about customers, but often loath sharing this since, in effect, information is
---------------------- what makes them important. In the minds of some salespeople, letting go of
---------------------- the information reduces their importance to the company. For example, some
salespeople feel that sharing all they know about a customer will make them
---------------------- expendable as a salesperson since a company can simply insert someone new
into their spot at anytime.
----------------------
While the attitude towards CRM has made its implementation difficult
---------------------- in many companies, salespeople should understand that it is not fading away.
CRM and information sharing has proven to be critical for maintaining strong
---------------------- customer relations and salespeople must learn to adapt to it.
---------------------- Electronic Sales Presentations
---------------------- Technology is also playing a major role in how sales professionals reach
prospects and existing customers. While audio/video conferencing has been available
---------------------- for many years using high-end telecommunication hookups, it has only been within
the last few years that improvements in Internet access speeds, computing power
---------------------- and meeting software have made this method for reaching customers a practical
---------------------- alternative to face-to-face sales meetings. These options include:
●● Online Video Conferencing: Online conferencing essentially acts in
---------------------- the same way as telecommunications videoconferencing, with one big
---------------------- exception; it is delivered over the Internet. Anyone who has an Internet
connection knows that trying to deliver video over the Internet can be a
---------------------- trying experience as video often appears to be slow, jittery and sometimes
not even recognizable. But these problems are quickly disappearing and
---------------------- while real time Internet video conferencing (i.e., television quality video
---------------------- and audio) is still not routinely accessible to most salespeople, this is
expected to change.
---------------------- ●● Web/Phone Conferencing: To offset the problems associated with
---------------------- Internet delivery of real time audio and video, many companies deliver
sales presentations using a combination of web and telecommunications.
---------------------- The most widely used services use the Internet, to deliver visual material
(typically a slide presentation) and telecommunications, to allow for
---------------------- voice conversation.
---------------------- The process has a salesperson arrange for a conferencing time with a
prospect who enters the conference by: 1) using their web browser to
---------------------- gain access to the visual presentation and 2) using their telephone to call
---------------------- into an audio conference. Splitting the visual and audio feeds allows for
smoother presentations since the conference participants’ computers need
---------------------- only process the visual material. It should be noted, that while audio access
is now being carried out over telephone connections, the emergence of
---------------------- telephone over the Internet (i.e., VOIP - Voice Over Internet Protocol)
---------------------- may soon help resolve some of the problems that have been encountered
when delivering both.
34 Sales and Distribution Management
●● Online Text Chat: Online chat allows for real time communication Notes
between multiple participants using text messaging. While this form of
buyer-seller communication may not be very effective at getting customers ----------------------
to agree to make a purchase, it has proven very effective in building initial
product interest. For example, potential customers visiting a website may ----------------------
use the chat feature to ask a few questions about the company’s products. ----------------------
Engaging a customer this way can then lead to the customer agreeing to
receive a phone call from a salesperson to further discuss the product. ----------------------
Electronic Sales Training ----------------------
Developing the skills and techniques needed to be successful at selling
requires an extensive commitment by the individual seller and the seller’s ----------------------
company to sales training. Sales training is the hallmark of professional selling. ----------------------
If there is one thing that separates the truly successful salesperson from those
who are not, it is the amount of training and preparation they engage in. ----------------------
Most organisations that employ a sales force offer new salespeople an ----------------------
extensive formal training program often held at dedicated training facilities.
These training programs can range from a few days to many months depending ----------------------
on the industry. But once a salesperson has made the move to the field, training
----------------------
does not stop. Those involved in selling must continue to stay abreast of their
products, customers, markets and competitors. ----------------------
While many companies may continue to employ the same methods used
----------------------
when they first trained their salespeople, a large number of firms are finding
that ongoing training can be just as effective using electronic options such as ----------------------
delivering training over the Internet, through downloadable computer programs
or through interactive CDs or DVDs. ----------------------
While feedback using electronic means is not as personal as it might be ----------------------
with in-person training, sophisticated electronic training programs are effective
in educating and testing trainee’s knowledge. Also, a live trainer can be contacted ----------------------
very quickly via e-mail, online chat or by a phone call if a question does arise.
----------------------
Using electronic delivery, the cost to the company for adding or updating
training material is inexpensive and quick compared to the cost and time needed to ----------------------
produce and ship paper-based materials. Additionally, the use of RSS feeds or email ----------------------
enables salespeople to be quickly notified when new training material is available.
This is useful when the sales force must be made aware of a recent change that ----------------------
will create an impact on how products are promoted such as a price change, new
information to be used as comparison to competitor’s products, a potential problem ----------------------
that has arisen when installing or using a product or some other adjustment. ----------------------
Mobile Technology and Web-based Computing
----------------------
The move to an information sharing approach is most effective when
salespeople have access to information sharing features when they need it most. ----------------------
Mobile technologies, such as wireless internet (WiFi) and cellular Internet
access, allow salespeople to retrieve needed information at any time. For ----------------------
example, if a salesperson takes a customer to lunch, the salesperson can quickly ----------------------

Personal Selling 35
 Notes access company material to respond to questions such as how long it may take
to receive product if an order is placed.
----------------------
Additionally, there is a growing trend to make key business applications
---------------------- available through a browser rather than having programs loaded on a
salesperson’s computer. This allows for the application to be accessed from
---------------------- anywhere at anytime. For example, many companies have moved to web-based
CRM systems where simply having Internet access allows salespeople to enter
----------------------
and retrieve information. Also, many new office productivity applications, such
---------------------- as word processing and spreadsheets, are now becoming web-accessible.
New generation cell phones or smart phones along with other handheld
----------------------
devices, such as personal digital assistants (PDA), lighten the burden of carrying
---------------------- laptop computers. But because these handheld devices are web-enabled they
provide access to much of the same information as a standard computer. While
---------------------- the computing power of handheld devices is still underpowered compared to
conventional computers, the move to web-based computing may some day make
----------------------
the handheld the main instrument for inputting and outputting information.
---------------------- Use of Customer Sales Teams
---------------------- As we noted in our discussion of technical specialists, salespeople may
require the assistance of others in their organization to effectively deal with
---------------------- prospects. In fact, many companies are moving away from the traditional sale
---------------------- force arrangement, where a single salesperson handles nearly all communication
with an account, in favour of a team approach where multiple people are
---------------------- involved.

---------------------- Teams consist of individuals from several functional areas such as

marketing, manufacturing, distribution and customer service. In some
---------------------- configurations all members share bonuses if the team meets sales goals. Clearly
to be effective a team approach requires the implementation of customer
---------------------- relationship management systems that we discussed earlier.
---------------------- Value-Added Selling: Provision of selling services that exceed the
customer’s expectations. Here salespeople are expected to exceed their
---------------------- customer’s expectations. The salesperson must go beyond selling products
---------------------- and provide “value-added” services for more demanding customers such as
installation, employee-training and product adaptation.
----------------------
Consultative Selling: Salespeople who act as problem solvers for their
---------------------- customers. In their role as consultants or problem solvers, salespeople must
adapt their products or services to the specific needs of customers.
----------------------

---------------------- Check your Progress 5

---------------------- Fill in the blanks.

---------------------- 1. Sales training is the hallmark of ___________ selling.
----------------------

36 Sales and Distribution Management

 Summary Notes

●● Now-a-days salesmanship is accepted as an essential service, as it is ----------------------

considered as an assistance given to the customer to buy wisely. It is an
----------------------
important technique of promotion. Personal selling has a vital role to play
in decision making on the part of consumers. ----------------------
●● In case of individual purchase, the salesman acts as a guide and friend
----------------------
to consumers. He informs him of new products and new uses of existing
products. He assists him in selecting products which match his needs ----------------------
and income and guides him in purchasing products that will give him
maximum satisfaction. ----------------------
●● Salesmen help the businessmen in more than one way. They help the ----------------------
businessmen to locate prospective customers and thus to increase sales.
They help in the creation of demands for new products as well as help ----------------------
to sustain demand for the existing products. This helps the businessmen
----------------------
in designing and developing the products according to the needs of the
customers. Through large and rapid sales turnover, salesmen help in ----------------------
increased employment and income.
●● Besides helping the customers and businessmen; the salesmen perform ----------------------
certain other functions such as after sales service, meeting complaints, ----------------------
giving information about credit facilities, delivering goods, collecting
payments etc. They help in increasing the standard of living of the people ----------------------
by introducing new products.
----------------------

Keywords ----------------------

●● Trade Selling: Long-term business relationship with a stable group of ----------------------

customers like wholesalers and retailers.
----------------------
●● Missionary Selling: When salesman pursues indirect customers to buy
the product like Medical Representatives pursue doctors to provide the ----------------------
product.
----------------------
●● New Business Development: Primary task is to identify and persuade
new customers to buy the product/service. ----------------------
●● Stimulating Demand: Increasing demand by introducing products to ----------------------
consumers and persuading him to buy.
----------------------
Self-Assessment Questions ----------------------

1. What is meant by personal selling? ----------------------

2. What are the occupational qualities of salespersons engaged in personal ----------------------
selling?
----------------------
3. Do you think that to be a successful salesperson only personal and mental
qualities are sufficient? Give reasons in support of your answer. ----------------------

Personal Selling 37
 Notes 4. Discuss the trends in personal selling.
5. Discuss various methods used in approaching the prospects.
----------------------

---------------------- Answers to Check your Progress

---------------------- Check your Progress 1
---------------------- Fill in the blanks.
1. Businesses spend more on personal selling than on any other form of
----------------------
promotional mix.
---------------------- Check your Progress 2
---------------------- State True or False.

---------------------- 1. True
Check your Progress 3
----------------------
Fill in the blanks.
----------------------
1. Telemarketing category includes product sales over the phone, whether
---------------------- aimed at business or consumer.

---------------------- Check your Progress 4

State True or False.
----------------------
1. True
----------------------
2. True
---------------------- Check your Progress 5
---------------------- Fill in the blanks.

---------------------- 1. Sales training is the hallmark of professional selling.

---------------------- Suggested Reading

----------------------
1. Bowersox, Logistical Management: The Integrated Supply Chain Process.
---------------------- 2. Calvin, Robert J. Sales Management.
---------------------- 3. Chopra, Supply Chain Management.

---------------------- 4. Ghoshal, World Class in India. Penguin India.

5. Lamba, A.J. The Art of Retailing.
----------------------
6. Scheuing, Kurtz, Johnson. Sales Management: Concepts, Practices and
---------------------- Cases.
----------------------

----------------------

----------------------

38 Sales and Distribution Management

Effective Sales Executive
UNIT

3
Structure:

3.1 Introduction
3.2 Sales Representative
3.3 Changing Role of Field Sales Manager
3.4 Sales Manager – Responsibilities
3.5 Sales Management Competencies
3.6 Time Management of Sales Executives
3.7 The Sales Hierarchy Pyramid
3.8 The Sales Career Path
3.9 Sales Managers’ Relations with other Departments
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Effective Sales Executive 39

 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Describe the changing role of field sales manager
----------------------
• State the sales manager’s responsibilities
---------------------- • Explain the sales manager’s competencies
---------------------- • Discuss the sales hierarchy pyramid
---------------------- • Define sales career path.

---------------------- • Elaborate on sales managers’ relations with other departments

----------------------
3.1 INTRODUCTION
----------------------
A sales function is a revenue generating function for an organisation.
----------------------
Though it is one of the elements of marking mix, still it occupies a critical
---------------------- position in the organisation. Therefore, the sales function or the sales personnel
should live up to this reality and keep themselves fighting fit. Only such
---------------------- organisations or sales personnel would survive who have customers as their
---------------------- focus point. Salespeople need to get a deeper understanding of the customers
long-term needs and the overall business climate. As a result due to changing long
---------------------- term needs of the customers and constantly evolving marketing environment it
is the affectivity of the sales personnel that can keep the customers in the fold
---------------------- and generate revenues for the organisation.
---------------------- In today’s world, selling has become an exclusive club of highly skilled
---------------------- professionals where product knowledge and time management skills are the
basic requirements. Shedding the traditional selling practices, the sales people
---------------------- should develop the ability to think from the customer’s point of view and
understanding the customer’s agenda, buying cycle and best interests. This can
---------------------- be achieved by the exceptional salesperson who is busy defining the “basic
---------------------- skills of tomorrow”.
Ongoing research demonstrates that to day’s ‘average’ salesperson
----------------------
is just as effective as the high performer in explaining features and benefits
---------------------- effectively, relating a service or product to customer needs and closing a sale.
What is essential is the exceptional salesperson is busy defining the “basic skills
---------------------- of tomorrow”. Building an up-to-date foundation in sales competence does
mean sacrificing some old notions of what it takes to succeed in a competitive
----------------------
marketplace. For example, a salesperson can no longer just “win by knowing”.
---------------------- Every company needs to test their assumptions about what skills really contribute
to sales success.
----------------------

----------------------

40 Sales and Distribution Management

3.2 SALES REPRESENTATIVE Notes

Sales representatives are an important part of manufacturers’ and ----------------------

wholesalers’ success. Regardless of the type of product they sell, their primary ----------------------
duties are to interest wholesale and retail buyers and purchasing agents in their
merchandise and to address clients’questions and concerns. Sales representatives ----------------------
represent one or several manufacturers or wholesale distributors by selling one
product or a complementary line of products. Sales representatives demonstrate ----------------------
their products and advise clients on how using these products can reduce costs ----------------------
and increase sales. They market their company’s products to manufacturers,
wholesale and retail establishments, construction contractors, government ----------------------
agencies, and other institutions.
----------------------
Sales representatives spend much of their time travelling to and visiting
with prospective buyers and current clients. During a sales call, they discuss ----------------------
the client’s needs and suggest how their merchandise or services can meet
those needs. They may show samples or catalogues that describe items of their ----------------------
company stocks and inform customers about prices, availability, and ways in ----------------------
which their products can save money and boost productivity.
As a vast number of manufacturers and wholesalers sell similar products, ----------------------
sales representatives must emphasize on any unique qualities of their products ----------------------
and services. Manufacturers’ agents or manufacturers’ representatives might
sell several complementary products made by different manufacturers and, ----------------------
thus, take a broader approach to their customers’ business. Sales representatives
may help install new equipments and train employees in its use. They also can ----------------------
take orders and resolve any problems or complaints about the merchandise. ----------------------
Obtaining new accounts is an important part of the job. Sales
----------------------
representatives follow leads from other clients, track advertisements in trade
journals, participate in trade shows and conferences, and may visit potential ----------------------
clients unannounced. In addition, they may spend time meeting with and
entertaining prospective clients during evenings and weekends. ----------------------
In a process that can take several months, sales representatives present ----------------------
their product to a customer and negotiate the sale. Aided by a laptop computer
connected to the Internet, or other telecommunications device, they can make ----------------------
a persuasive audiovisual sales pitch and often can answer technical and non
----------------------
technical questions immediately.
Frequently, sales representatives who lack technical expertise work as ----------------------
a team with a technical expert. In this arrangement, the technical expert—
----------------------
sometimes a sales engineer attends the sales presentation to explain the
product and answer questions or concerns. The sales representative makes the ----------------------
preliminary contact with customers, introduces the company’s product, and
closes the sale. The representative is then able to spend more time maintaining ----------------------
and soliciting accounts and less time acquiring technical knowledge.
----------------------
After the sale, representatives may make follow-up visits to ensure that the
equipment is functioning properly and may even help train customers’ employees ----------------------

Effective Sales Executive 41

 Notes to operate and maintain a new equipment. Those selling consumer goods often
suggest how and where merchandise should be displayed. Working with retailers,
---------------------- they may help arrange promotional programs, store displays, and advertising.
---------------------- Sales representatives have several duties beyond selling products. They
analyse sales statistics; prepare reports; and handle administrative duties, such
---------------------- as filing expense account reports, scheduling appointments, and making travel
plans. They read about new and existing products and monitor the sales, prices,
----------------------
and products of their competitors.
---------------------- Manufacturers’ agents who operate a sales agency also must manage their
---------------------- business. This requires organisational and general business skills, as well as
knowledge of accounting, marketing, and administration.
----------------------
Some sales representatives have large territories and travel considerably.
---------------------- As a sales region may cover several States, sales representatives may be away
from home for several days or weeks at a stretch. Although the hours are long
---------------------- and often irregular, most sales representatives have the freedom to determine
---------------------- their own schedule. Sales representatives are often on their feet for long periods
and may carry heavy sample products, necessitating some physical stamina.
----------------------
Dealing with different types of people can be stimulating but demanding.
---------------------- Sales representatives often face competition from representatives of other
companies. Companies usually set goals or quotas that representatives are
---------------------- expected to meet. As their earnings depend on commissions, manufacturers’
agents are also under the added pressure to maintain and expand their clientele.
----------------------
The background needed for sales jobs varies by product line and market.
----------------------
Many employers hire individuals with previous sales experience who lack a
---------------------- college degree, but they increasingly prefer or require a bachelor’s degree because
job requirements have become more technical and analytical. Nevertheless,
---------------------- for some consumer products, factors such as sales ability, personality, and
familiarity with brands are more important than the educational background.
----------------------
On the other hand, firms selling complex, technical products may require a
---------------------- technical degree in addition to some sales experience. Many sales representatives
---------------------- attend seminars in sales techniques or take courses in marketing, economics,
communication, or even a foreign language to provide the extra edge needed
---------------------- to make sales. In general, companies are looking for the best and brightest
individuals who have the personality and desire to sell. Sales representatives
---------------------- need to be familiar with computer technology as computers are increasingly
---------------------- used in the workplace to place and track orders and to monitor inventory levels.

---------------------- Sales representatives stay abreast of new products and the changing
needs of their customers in a variety of ways. They attend trade shows at which
---------------------- new products and technologies are showcased. They also attend conferences
and conventions to meet other sales representatives and clients and discuss
---------------------- new product developments. In addition, the entire sales force may participate
---------------------- in company-sponsored meetings to review sales performance, product
development, sales goals, and profitability.
42 Sales and Distribution Management
 Frequently, promotion takes the form of an assignment to a larger account Notes
or territory where commissions are likely to be greater. Experienced sales
representatives may move into jobs as sales trainers, who instruct new employees ----------------------
on selling techniques and on company policies and procedures. Those who have
good sales records and leadership ability may advance to higher level positions ----------------------
such as Sales Supervisor, District Manager, or Vice President (sales). ----------------------
The role of field sales in the past focused around selling products to ----------------------
customers. The role is shifting rapidly to developing solutions and programs
for customers that, once sold, allow product to flow through the business-to- ----------------------
business relationship. When developing process management tools for use in the
field sales management function, the list below should be addressed carefully. ----------------------

The professional field sales representative must ----------------------

1. plan allocation of their personal time and other available resources to ----------------------
optimize performance against the expectations (frequently conflicting) of
----------------------
their employer, their customers and their suppliers.
2. gather information from customers, suppliers and their own employer in ----------------------
areas of needs and requirements. Needs would include organisation, job ----------------------
and personal needs within all three groups.
----------------------
3. gather information continuously on threats and opportunities as well
as emerging trends within their industry from sources outside their ----------------------
customers, suppliers and their own companies.
----------------------
4. analyse information from their three constituencies and outside sources to
formulate and develop solutions that increase economic value. ----------------------

5. plan, present, persuades and implement identified solutions. ----------------------

6. keep their employer informed with respect to activities, results, and work ----------------------
in process, threats and opportunities.
----------------------
7. support the ongoing transaction management activity including
pre-sell activity, transaction activity and post-sell activity. As distribution ----------------------
companies evolve, the role of field sales in this activity shifts from primary ----------------------
to supportive.
----------------------
8. ensure that they maintain an ongoing training and development activity to
increase their knowledge and professional effectiveness. ----------------------

----------------------
Check your Progress 1
----------------------
Fill in the blanks.
----------------------
1. Frequently, sales representatives who lack _________ work as a team
with a technical expert. ----------------------

----------------------

Effective Sales Executive 43

 Notes 3.3 CHANGING ROLE OF FIELD SALES MANAGER
---------------------- As customers become more sophisticated and as their expectations for
---------------------- product and service performances rise, sales representatives must continuously
raise their own standards of performance and strive for increasing professionalism.
---------------------- Enlightened managements are steadily enlarging the marketing-oriented role
for their professional sales forces.
----------------------
Instead of merely selling of products, today sales representatives are
---------------------- expected to understand the customer’s spectrum of existing and potential problems
while achieving both buyer and seller objectives. Beyond skillful application of
----------------------
the personal selling process, these new consultative sales representatives are
---------------------- accepting responsibility as FIELD MARKETING EXECUTIVES with profit
objectives for a designated territory or market. These expanding responsibilities
---------------------- require performance of a diversity of interactive roles, including the following :
---------------------- 1. Market Analysis and Planners

---------------------- Monitor competitor’s actions and changes in the uncontrollable

marketing environment and devise strategies to adjust to these changes
---------------------- by successfully satisfying customers.
---------------------- 2. Sales Forecasters

---------------------- Help sales management in estimating future sales and setting sales quotas
in the sales representative’s assigned territory.
----------------------
3. Opportunity Managers
---------------------- They are sensitive to unsatisfied or even unrecognized customer needs and
---------------------- potential problems calling for new products, new markets or innovative
marketing mixes.
----------------------
4. Ongoing study of consumer buying behaviour
---------------------- They are aware of customer decision making processes and the motivations
---------------------- that influence the buyer to buy.
5. Intelligence gatherers
----------------------
They are alert and conscious about providing feedback from the field to
---------------------- headquarters marketing for strategic planning purposes.
---------------------- 6. Team Coordinators
---------------------- They effectively utilise their core specialty skills in market research,
engineering, finance, operations and customer services to solve customer
---------------------- problems.
---------------------- 7. Marketing Cost Analysts
---------------------- They are aware of the differential costs associated with selling separate
products to different customers and territories so that they can concentrate
---------------------- on profitable sales – not merely on sales volume.

44 Sales and Distribution Management

8. Establishing Long-term relationships Notes
In the modern era of consultative selling, companies do not make purchases,
----------------------
they establish relationships. Sales people provide an irreplaceable market
element, for they serve as the personal link between the selling and buying ----------------------
systems. They are responsible for establishing and maintaining buyer-
seller interfaces that are mutually beneficial. Today’s sales representative ----------------------
must establish a “long range partnership” with the customers.
----------------------
Buyers want to know if they can expect the sales person’s help on a
regular basis. As customer problems have increased in complexity. Sales ----------------------
persons have had to interrelate sophisticated product systems to provide
----------------------
comprehensive solutions. Coordinating the sale of complex product
system has expanded the time necessary to complete sales transaction. It ----------------------
may take a year to get to know a potential customer and his or her range
of problems. ----------------------
9. Coordinating buyer-seller teams ----------------------
When selling complex product systems such as computer installations, the ----------------------
seller frequently employs team selling and the sales representative acts as
the team coordinator in contact with the buyer organisation. Now more ----------------------
and more companies are selling on many different levels, interlocking
their research, engineering, marketing and upper management with those ----------------------
of their customer. To make a major sale, it is essential for the buyer to feel ----------------------
that the seller is on his or her team.
----------------------
Check your Progress 2
----------------------

Fill in the blanks. ----------------------

1. _____________ effectively utilise their core specialty skills in market ----------------------
research, engineering, finance, operations and customer services to
solve customer problems. ----------------------

----------------------
3.4 SALES MANAGER – RESPONSIBILITIES ----------------------
1. Sales Planning ----------------------
Planning is the core to the sales management function. It provides tactical
----------------------
and long term (Strategic direction). Sales planning at the top management-
CEO level have long term perspective-strategic in nature. Whereas the ----------------------
planning at the GM (sales) or Sales Managers level is more tactical that
is short term, say one year. Planning at the operational level that is at the ----------------------
Regional Manager, Zonal/Managers tends to be on monthly or weekly
----------------------
basis depending on the position in the hierarchy.
2. Budgeting ----------------------

Preparation of sales and associated budgets is core to the entire functioning ----------------------

Effective Sales Executive 45

 Notes of the organisation. It is the sales budget which acts as a catalyst agent
in the organisation based on which other activities are initiated. Budgets
---------------------- serve as a guide for achieving the organisational goals and objectives.
Budgets facilitate efficient allocation of and control of expenses under
---------------------- various heads like travelling, TA/DA and other related expenses which
---------------------- are required to carry out the sales activities.

---------------------- 3. Sales Forecasting and Estimation of demand

Sales managers are expected to have thorough knowledge of the industry
----------------------
as well as the marketing environment and should be competent to
---------------------- estimate the potential of the industry in which the organisation operates.
Marketing environment is very dynamic and hence the potential of the
---------------------- industry and products varies due to change in marketing environment. It
is the responsibility of the sales manager to estimate the industry potential
----------------------
and also estimate the sales for the future period, generally say for a year,
---------------------- given certain marketing inputs.

---------------------- 4. Staffing-Recruiting and Selecting Sales Personnel

---------------------- The sales function and therefore the sales team is the revenue generating
agency for the organisation. Therefore, success and growth of the
---------------------- organisation depends on the right people manning the sales function.
Hence, one of the most important functions of the sales manager is to
---------------------- recruit and select the right people for the right job. He needs to establish
---------------------- a set of required qualifications before beginning to recruit.

---------------------- He must prepare a job description that lists specific tasks the salesperson
should perform and analyse traits of the successful salespeople within
---------------------- the organisation. He may use assessment centers for intense training
environment that places candidates in realistic problem settings in which
---------------------- they give priorities to their activities, make and act on decisions. Recruitment
---------------------- should be a continual activity aimed at reaching the best applicants.

---------------------- 5. Training the Sales Force

Sales is a very dynamic function. Sales personnel need to be highly
----------------------
flexible and adaptive to the ever changing market conditions. The changes
---------------------- in the market place bring in very fast obsolescence. Therefore, it is very
essential on the part of the sales personnel to observe, assimilate, learn
---------------------- and upgrade the selling skills. This calls for training and retraining on a
continuous basis. It is the responsibility of the sales manager to identify
----------------------
the training needs, identify the sales personnel who need the training,
---------------------- design the training programs, identify the trainer etc. The sales personnel
need to be trained in various areas like:
----------------------
• Product knowledge
----------------------
• Knowledge of the organisation
---------------------- • Knowledge of the competitors

46 Sales and Distribution Management

 • Selling skills Notes
• Training in new technologies deployed
----------------------
• Interpersonal relationship
----------------------
• Communication skills
----------------------
6. Leading, Motivating and Compensating the Sales Personnel
----------------------
Effective Sales Managers know how to supervise and lead their
salespeople. Sales managers provide leadership by inspiring people to ----------------------
grow and develop professionally, while achieving the revenue goals
of the firm. Good leaders provide models of behaviour for employees ----------------------
to emulate, often developing strong mutual trust and rapport with
----------------------
subordinates. Leadership styles vary, but effective leaders are adept at
initiating structure like organising and motivating employees, setting ----------------------
goals, enforcing rules, and defining expectations.
----------------------
In addition to leading the sales force in business results, sales managers are
also expected to lead by example in encouraging ethical behaviour within the ----------------------
sales force. Salespeople are continually confronted with ethical dilemmas.
----------------------
Sales managers use a variety of tools in their efforts to motivate salespeople
to work more efficiently and effectively. The sales managers need to put ----------------------
to use various techniques that have proved to be effective motivators, ----------------------
including sales meetings, quotas, sales contests, and recognition awards.
The most powerful motivator for salespeople is often a well-designed ----------------------
compensation package. Money is an important consideration for attracting
and motivating people to work hard. ----------------------

A key task for sales managers is to devise an effective mix of salary, ----------------------
bonuses, commissions, expenses, and benefits without putting the firm’s
----------------------
profitability in jeopardy. Last but not the least the sales manager needs a
systematic approach and must also satisfy non-financial needs like; ----------------------
• Job security ----------------------
• Working Conditions ----------------------
• Opportunities to succeed ----------------------
• Spend time with sales personnel and give personal attention
----------------------
7. Controlling-Measuring/Evaluation of Sales Performance
----------------------
It is the responsibility of the sales manager to ensure the selling activity
and the performance of the sales personnel is in lines with the sales plan. ----------------------
He needs to motivate constantly through very challenging but achievable ----------------------
sales targets and put in place the various performance standards against
which the actual performance can be measured and controlled. This ----------------------
facilitates taking proper corrective actions on time thereby keeping the
sales function on course. ----------------------

Effective Sales Executive 47

 Notes
Check your Progress 3
----------------------

---------------------- State True or False.

1. Effective Sales Managers know how to supervise and lead their
----------------------
salespeople.
----------------------

---------------------- Activity 1
----------------------
List some of the qualities of a sales representative he/she should have.
----------------------

---------------------- 3.5 SALES MANAGEMENT COMPETENCIES

----------------------
Marketing and sales environment undergoes changes on a continuous
---------------------- basis. This change brings with newer and newer challenges for the sales
function as discussed above. To keep pace with the changing environment and
---------------------- to ensure that sales personnel continue to deliver results on an ongoing basis,
the sales personnel need to acquire certain skill sets /competencies which will
----------------------
enable them to overcome the challenges/uncertainties faced by them as a result
---------------------- of environmental changes.
Sales management competencies are defined as sets of knowledge, skills,
----------------------
behaviours, and attitudes that a person needs to be effective in a wide range
---------------------- of industries and various types of organisations. People use many types of
competencies in their everyday lives.
----------------------
1. Strategic Action Competency
---------------------- Understanding the overall strategy and goals of the company and ensuring
---------------------- that your actions and those of the people you manage are consistent
with these goals involves strategic action competency. Strategic action
---------------------- competency includes:

---------------------- a) Understanding the Industry

• understands the history and general trends in the industry and
----------------------
their implications for the future
---------------------- • stays informed of and anticipates the actions of competitors
and strategic partners
----------------------
• identifies attractive market segments and their buying needs
----------------------
b) Understanding the Organisation
---------------------- • understands the vision, overall strategy, and goals of the
---------------------- organisation
• appreciates the distinctive competencies of the organisation
---------------------- with respect to market opportunities and limitations

48 Sales and Distribution Management

 • understands how to marshal organisational resources to meet Notes
the needs of the customers.
----------------------
c) Taking Strategic Actions
• assigns priorities and makes decisions that are consistent with ----------------------
the firm’s mission and strategic goals
----------------------
• implements specific account selection, retention, and
dominance strategies ----------------------

• develops an appropriate portfolio of account relationships ----------------------

• considers the long-term implications of actions in order to ----------------------
sustain and further develop the organisation
----------------------
• establishes tactical and operational goals that facilitate the
firm’s strategy implementation. ----------------------
2. Coaching Competency ----------------------
Coaching is defined as a sequence of conversations and activities that
----------------------
provide ongoing feedback and encouragement to a salesperson or sales
team member with the goal of improving that person’s performance. ----------------------
Performance improvement is achieved by
----------------------
a) Providing Verbal Feedback
• provides specific and continuous performance and selling ----------------------
skills feedback ----------------------
• builds a feeling of appreciation and recognition by taking the
----------------------
time to acknowledge a job well done, an effort beyond the
call of duty, or an important victory ----------------------
• reinforces success and positive attempts to support desirable
----------------------
behaviours.
b) Role Modelling ----------------------

• leads by example rather than decree ----------------------

• provides role models, either themselves or others, and shares ----------------------
best practices
----------------------
• models professional attitudes and behaviours.
c) Trust Building ----------------------

• maintains good rapport with the sales team and fosters open ----------------------
communications, collaboration, creativity, initiative, and
----------------------
appropriate risk taking
• adds value through communicating relevant selling ----------------------
experiences ----------------------
• helps salespeople to “look good” through two-way
communications. ----------------------

Effective Sales Executive 49

 Notes Coaching helps salespeople develop through one-on-one feedback and
encouragement.
----------------------
The best coaches don’t tell salespeople what to do; rather, they collaborate
---------------------- with them to achieve mutually agreed-upon goals. In this role, a sales
manager works with each person to create and implement a developmental
---------------------- plan to improve performance. This process often includes providing
ongoing training and coaching in selling skills, sales strategy, product
----------------------
and market knowledge.
---------------------- Sales coaching, however, involve more than just providing verbal
feedback on what a salesperson has done. Successful sales coaches also
----------------------
provide a role model of positive example through their own behaviour or
---------------------- that of others. Power of personal example is amazing. You can rant and
rave and threaten, but the most effective way to get results is to show
---------------------- someone what you want done.
---------------------- Many sales managers believe that being a good role model is the most
effective way to gain the respect of their salespeople. Still, a salesperson
---------------------- must be open to coaching, taking feedback constructively, and following
the sales manager’s example. This requires a level of trust between a
----------------------
salesperson and a sales manager. A climate of trust is created when a
---------------------- manager is honest and reliable, and shows a genuine concern about the
needs of the salespeople. This is achieved by listening and maintaining an
---------------------- open, two-way channel of communications.
---------------------- 3. Team-Building Competency
---------------------- Accomplishing tasks through small groups of people who are collectively
responsible and whose work is interdependent requires a team-building
---------------------- competency. Sales managers in companies that utilize sales teams can
become more effective by
----------------------
a) Designing Teams
----------------------
• implements an organisational architecture that will support
---------------------- teams
---------------------- • creates a reward system that is fair within the context of a
team effort
----------------------
• coordinates team goals with the overall goals of the
---------------------- organisation
• coordinates team activities with the requirements of functional
----------------------
areas within the organisation.
---------------------- b) Creating a Supportive Environment
---------------------- • hires people who will be successful in a team environment
---------------------- • trains with programs that encourage teamwork

---------------------- • integrates the individual members of the sales team together

to form a functioning and supportive team.
50 Sales and Distribution Management
 c) Managing Team Dynamics Notes
• understands the strengths and weaknesses of team members ----------------------
and uses their strengths to accomplish tasks as a team
----------------------
• facilitates cooperative behaviour and keeps the team moving
toward its goals. ----------------------
Team-building Competency ----------------------
“A well-designed team is capable of high performance, but it needs a ----------------------
supportive environment to achieve its full potential. In a supportive
environment, team members are empowered to take actions based on their ----------------------
best judgement. This means that it is very important to hire people who
can get along with others and who work well within a team environment. ----------------------
These salespersons are quite different from the traditional salespersons ----------------------
who survived by relying on their own abilities. Conflicts and disagreements
among team members are natural, which means that managing team ----------------------
dynamics is necessary for effective team building. Essentially, this means
maintaining cooperative relationships while pursuing a common goal. ----------------------
If managed well, conflict can be productive; if managed poorly, it can ----------------------
destroy the team.
----------------------
4. Self-Management Competency
----------------------
Taking responsibility for your actions at work and elsewhere involves
self-management competency. When problems arise, people often blame ----------------------
their difficulties on the situation or on others. Effective Managers don’t
fall into this trap. They strictly adhere to ----------------------

a) Fostering Integrity and Ethical Conduct ----------------------

• creates clear personal standards that serve as a foundation for ----------------------
a sense of integrity and ethical conduct by the sales team
----------------------
• projects self-assurance and doesn’t just tell people what they
want to hear ----------------------

• accepts responsibility for own actions and willingness to ----------------------

admit mistakes.
----------------------
b) Managing and Balancing Personal Drive
----------------------
• seeks responsibility, works hard, and is willing to take risks
----------------------
• shows perseverance in the face of obstacles and bounces back
from failure ----------------------

• motivates to achieve objectives, is ambitious, but doesn’t put ----------------------

personal ambition ahead of the organisation’s goals
----------------------
• understands that goals are achieved through the success and
development of the salespeople. ----------------------

Effective Sales Executive 51

 Notes c) Developing Self-awareness and Management Skills

---------------------- • perceives clear personal and career goals and knows his/her
own values, feelings, and areas of strengths and weaknesses
---------------------- • analyses and learns from work and life experiences
---------------------- • unlearns/relearns continually as changed situations call for
new skills and perspectives.
----------------------
Self-management Competency
----------------------
Sales managers are in a particularly sensitive position with respect to
---------------------- integrity and ethical conduct. To achieve success, the sales force must
trust and respect a sales manager. How is it possible to respect people
---------------------- you feel have no integrity and do not conduct themselves ethically? As
---------------------- a person who influences or controls the rewards salespeople receive, a
manager’s ethics and integrity are constantly under review. As the leader
---------------------- of the sales team, salespeople take their cues from the sales manager with
respect to the ethical treatment of customers. If salespeople are aware of
---------------------- instances in which a sales manager has bent the rules to make a sale to one
---------------------- customer, they are more likely to model this behaviour.
A sales manager’s job is more than just balancing the many issues that
----------------------
arise each day.
---------------------- The most important part of his or her job is achieving a balance between
personal goals and those of the organisation and of the people they manage.
----------------------
Perhaps the biggest adjustment that the new sales managers must make
---------------------- is to understand the difference between selling customers and leading
salespeople. At first glance, there appears to be quite a bit of overlap in
---------------------- what one does as a salesperson and as a manager.
---------------------- For instance, both the salesperson and the manager must be good listeners
and know how to take decisive action. With clients you have to decide
---------------------- quickly, in one or two meetings of twenty minutes or so, what you think
of them. You make quick, almost snap, judgements. You’re constantly
----------------------
reading people. You can’t judge so quickly when trying to read your own
---------------------- people. You need to really get to know what they’re like, because you’ll
have to trust them. It can’t be superficial.
----------------------
Self-awareness is a critical element of being a good sales manager.
---------------------- This begins with the reason for wanting to be a sales manager in the
first place. People are attracted to management for a variety of reasons,
---------------------- including being tired of their present job, the opportunity to assume more
---------------------- authority and make more money, and the opportunity to exercise power
and influence. New managers quickly discover that these reasons don’t
---------------------- help them much in the day-to-day life of a sales manager, which often
leads to self-doubts and a focus on the question of “Will I be good at it?”
---------------------- Following are the comments from three new sales managers regarding
---------------------- what they discovered about themselves through their salespeople:

52 Sales and Distribution Management

5. Global Perspective Competency Notes
Drawing on human, financial, information, and material resources from
----------------------
multiple countries and serving customers who span multiple cultures
requires a global perspective competency. Not all companies compete ----------------------
in global markets or service customers who sell throughout the world,
but during the course of your career, it’s likely that you will work for ----------------------
an organisation that has a global sales component. To be prepared for
----------------------
such an opportunity, you should begin to develop your global perspective
competency, which in sales is reflected in ----------------------
a) Cultural Knowledge and Sensitivity ----------------------
• stays informed of political, social, and economic trends and
----------------------
events around the world
• recognizes the impact of global events on the market and the ----------------------
organisation. ----------------------
• develops sensitivity to cultural cues and ability to adapt
----------------------
quickly in novel situations
• travels regularly and has a basic business vocabulary in ----------------------
languages relevant to the position. ----------------------
b) Global Selling Program
----------------------
• understands the selling situations in which a global selling
effort is needed ----------------------

• adopts an appropriate sales force architecture for global ----------------------

accounts
----------------------
• adjusts appropriately sales force measurement, competency
creation, and motivation systems to the local culture ----------------------

• adjusts own behaviour appropriately when interacting and ----------------------

managing people from various national, ethnic and cultural
----------------------
backgrounds.
By the time you become a sales manager in your home country, your ----------------------
own culture has become second nature to you. Yet because business ----------------------
is becoming global, many managers are now expected to develop a
knowledge and understanding of at least a few other cultures. Selling ----------------------
globally or to global accounts affects almost everything a sales manager
does. Selection, for instance, becomes more difficult. Coordination also ----------------------
becomes problematic as issues arise between sales efforts at global ----------------------
headquarters and in individual regions.
----------------------
In today’s context when the Indian economy is growing by leaps and
bounds and integrating successfully with the world economy, it is essential ----------------------
on the part of the sales managers to get an insight into the various issues
of overseas markets such as technology competency. ----------------------

Effective Sales Executive 53

 Notes 6. Technology Competency
Understanding the potential for technology to improve sales force
----------------------
efficiency and effectiveness and knowing how to implement the integration
---------------------- of technology into the sales force is referred to as possessing technology
competency. Technology competency includes:
----------------------
a) Understanding of New Technology
---------------------- • awareness of the potential for technology to increase sales
force efficiency and effectiveness
----------------------
• experience in using new technology
----------------------
• attitude toward adopting new technology.
---------------------- b) Implementing Sales Force Automation
---------------------- • knows what is to be accomplished and the possible benefits
---------------------- • adapts personal management style and procedures

---------------------- • fosters sales force acceptance and use of selling technology.

c) Implementing Customer Relationship Management
----------------------
• develops clear project objectives that are business focused
---------------------- and realistic
---------------------- • understands the processes that will be affected by CRM and
the data needed for these processes to be improved
----------------------
• understands and sells the benefits of the system and how it
---------------------- can be used.
Many experts consider the integration of communication technology,
----------------------
more commonly known as sales force automation (SFA), as not only a source
---------------------- of competitive advantage but increasingly as a necessity to stay competitive.
Sales and marketing adoption of technology tends to evolve over the years.
----------------------
In the first stage, sales force automation systems often focus on efficiency and
---------------------- consists of call reporting systems focused on tracking activities that are designed to
automate repetitive and error prone sales tasks such as order processing.
----------------------
In the next stage, a company may adopt an electronic territory management
---------------------- system to increase sales force effectiveness by assisting with targeting and
---------------------- customer profiling.

---------------------- In the third stage, a company may adopt a customer relationship

management perspective to technology in recognition that a firm’s relationship
---------------------- with a customer is a many-to-many relationship. Sales, service, marketing,
finance, product development, as well as company’s partners, all need to
---------------------- collaborate and share information in order to meet customer needs. A major
---------------------- focus of CRM systems is to ensure a consistent experience for a customer across
multiple sales channels. If a customer gets product information over the Internet,
---------------------- makes an inquiry over the phone, sees a technical specialist for product design

54 Sales and Distribution Management

assistance, and sees a salesperson for pricing information, CRM systems seek to Notes
ensure that all the parties have the same information for seamless collaboration.
This helps companies be more effective in communicating with a customer and ----------------------
more efficient in transacting business. When implemented correctly SFA and
CRM can streamline a company’s entire selling process. ----------------------

As the opportunities for integrating technology into the selling function ----------------------
are so widespread and important and because management plays such a vital ----------------------
role in the successful implementation of SFA and CRM technology competence
can be treated as a sales management competency. ----------------------

----------------------
3.6 TIME MANAGEMENT OF SALES EXECUTIVES
----------------------
Top Managers
----------------------
The role of the top management is strategic in nature. Participants in the
strategic planning process are CEO, Managing Directors, Functional Director, ----------------------
Presidents and Vice Presidents, General Manager, Sales Manager. At this
level they focus on the company mission, goals and objectives. Therefore ----------------------
much of the time at this level is spent on planning; followed by controlling ----------------------
and leading.
----------------------
Middle Managers
----------------------
At this level which is tactical in nature much emphasis is on formulating
strategies for achieving the goals and objectives set by the top managers. In ----------------------
this category, generally the likes of Regional Sales Manager, Divisional Sales
Manager, Zonal Sales manager are placed. At this level the time spent at the ----------------------
top is on leading, followed by planning and then by controlling, staffing and
----------------------
training 10% each of the executive time.
----------------------
First Line Managers
At this level which is operational, the emphasis is more on implementation ----------------------
of strategies formulated by top managers which calls for effective leading ----------------------
and staffing of competent sales people at the regional level. In this category
generally the likes of Area Sales Manager, Zonal Sales Managers are placed. ----------------------
Here the time spent is 25% each on training and leading, 15% each on planning
and controlling and staffing takes 20% of the executive time. ----------------------

----------------------
Top Planning Training Leading Controlling
Managers 35% 20% 5% 30% 20%
----------------------
Middle Planning Training Leading Controlling ----------------------
Managers 28% 20% 10% 30% 22%
----------------------
Planning Training Leading Controlling
Managers 15% 20% 25% 25% 15% ----------------------

Fig. 3.1: Time Management of Sales Executives ----------------------

Effective Sales Executive 55

 Notes 3.7 THE SALES HIERARCHY PYRAMID
----------------------

---------------------- CEO Top Sales Leaders

(strategic)
President
----------------------
Vice President of
---------------------- Marketing

National Sales Leader

---------------------- Middle Sales Leaders
Zone Sales Leader (Tactical)
----------------------
Regional Sales Leader
----------------------
Sales Leaders
District Sales Leader (Operationals)
---------------------- Assistant District Sales Leader
Non-managerial Sales People
---------------------- Sales Trainee Salesperson Key Account

----------------------
Fig. 3.2: The Sales Hierarchy Pyramid
---------------------- It can be seen that at the bottom of the pyramid are the non-managerial
---------------------- sales people, those who work in the administrative jobs, sales trainees and key
accounts of the company. At the first level are the first line sales managers who
---------------------- are designated as District Sales Managers, Area Managers. At the second or the
Middle level are Regional Sales Managers and Zonal Sales Managers. At the
---------------------- top level are National Sales Manager, Vice President of Marketing and Sales,
---------------------- President, Marketing and Sales and at the top is the Chief Executive Officer of
the organisation.
----------------------
3.8 THE SALES CAREER PATH
----------------------
President
----------------------
Vice President of Marketing
----------------------
National Sales Manager
----------------------
Zone Sales Manager

---------------------- Regional Sales Manager

---------------------- District Sales Manager

---------------------- Key Account Salesperson

Salesperson
----------------------
Sales Trainee
----------------------
Fig. 3.3: The Sales Career Path
----------------------
Sales are a great way to start a career. It is important to understand how
---------------------- someone moves into the position of sales manager and what the opportunities

56 Sales and Distribution Management

are for further advancement. Sales managers almost always begin their career Notes
paths as salespeople. Many selling and sales management experts will testify
that there is a significant positive correlation between salespeople’s success and ----------------------
the quality of their sales manager. Due to their enthusiasm and fresh ideas, new
sales managers are often able to boost the sales of the salespeople they supervise. ----------------------

The bottom line is that a starter at the bottom of the sales ladder, puts ----------------------
in dedicated and smart work and brings in results to the company, adapts to
----------------------
the changing circumstances and acquires skills and competencies, loves the
products he sells and the company he works for. If this is followed , one is ----------------------
sure to reach to the top of the ladder of the sales function. There are scores of
examples which can be seen around where salesman making it to the top. ----------------------
Compared to the 70/80’s wherein it would take somewhere between ----------------------
twenty to thirty years to make it to the top, today the average age of sales people
reaching to the position of Vice Presidents, General Managers, Sales Manager ----------------------
has reduced to around thirty five to forty.
----------------------
3.9 SALES MANAGERS’ RELATIONS WITH OTHER ----------------------
DEPARTMENTS
----------------------
In order to achieve the organisational objectives the organisation needs ----------------------
to take an integrated and holistic view of the customer. Then only it would
be in a position to satisfy the needs of the customers. It is therefore necessary ----------------------
that all the functions in the organisation should interact and function as a
cohesive team. In real life situations in the organisations it does not happen. ----------------------
There is always conflict which results from keeping the individual personal ----------------------
and functional goals above the organisational goals. The sales manager, has
therefore, a challenging task of establishing a rapport and at the personal level ----------------------
inter personal relationship with all the individuals working in various functions
in the organisations. This helps ensure that the sales function is carried out ----------------------
without any conflict and hindrance. ----------------------
1. Purchase
----------------------
Purchase Department is responsible for obtaining materials and
components in the right quantities and quality at the lowest possible cost. ----------------------
They see sales executives pushing for faster delivery of products. The sales
personnel with great difficulty book orders from their customers, if supplies are ----------------------
affected on time it amounts to loss of sale, customer dissatisfaction and effect ----------------------
on future business. Delayed supplies result in loss of market share. Many times
it so happens that due to non availability of raw material on time and of the ----------------------
right quality the production is delayed and there is delay in supplies. The sales
manager needs to have good formal and informal relationship with executives in ----------------------
the purchase department so as to ensure timely availability of material ensuring ----------------------
timely supplies of the finished products to the customers.
----------------------
2. Manufacturing
Manufacturing people are responsible for the smooth running of the ----------------------

Effective Sales Executive 57

 Notes factory to produce the right products in the right quantities at the right time
for the right cost. They have spent their lives in the factory, with its attendant
---------------------- problems of machine breakdowns, inventory stock outs, and labour disputes.
They see sales as having little understanding of factory economics or politics.
---------------------- Sales complain about insufficient capacity, delays in production, poor quality
---------------------- control, and poor customer service.
Yet marketers often turn in inaccurate sales forecasts, recommend features
---------------------- that are difficult to manufacture, and promise more factory service than is
---------------------- reasonable. Sales do not see the factory’s problems, but rather the problems of
their customers who need the goods quickly, who receive defective merchandise,
---------------------- and who cannot get factory service. The sales managers by establishing excellent
relationship with the factory personnel manages to make the things happen and
---------------------- ensure that the customer’s requirements are met with on time.
---------------------- 3. Finance
---------------------- Sales function is the revenue generating function in the organisation.
They sell the products as per the trade and credit policy of the company and
---------------------- are responsible for collection of the receivables. The sales managers with the
finance department have to jointly plan month wise cash inflow based on the
---------------------- projected sales and trade and credit policy of the company. The sales depend
---------------------- on the finance department for timely issue of salary for its people, settlement of
traveling and other reimbursements, issue of debit and credit notes and depend
---------------------- for settlement of the claims of the customers. since speed is the essence of sales,
the sales manager has to depend on the finance department.
----------------------
A sales manager, that he is bestowed with interpersonal skills, manages
---------------------- getting things done in a very cordial manner and ensure smooth working of his
department.
----------------------
4. HR
---------------------- Sales are the function in which the employee turnover is the highest
---------------------- in sales. The speed of career growth too is the fastest in the sales function.
Therefore there are numerous tasks for which the sales manger has to depend
---------------------- on the HR function for things moving in the areas like:
●● Timely recruitment and filling up of the vacancies
----------------------
●● Training
----------------------
●● Early settlement of the employees who have left the job
---------------------- ●● Issue of appointment letters
---------------------- Unless the sales manager gets timely support from the HR functions, he
would not be in a position to function in the first place. Therefore, by having
---------------------- excellent relationships with the executives in the HR department he has to
ensure that things keep on moving and happen on time and ensure that the
----------------------
selling function is managed smoothly.
---------------------- It can therefore be seen that effective sales managers need to be catalysts
who keep on making things happen by maintaining an excellent relationship
----------------------
inside and outside the organisation.

58 Sales and Distribution Management

 Notes
Check your Progress 4
----------------------
State True or False. ----------------------
1. Purchase Department is responsible for obtaining materials and
----------------------
components in the right quantities and quality at the highest possible
cost. ----------------------

----------------------
Summary
----------------------
●● The role of the sales representative is changing due to change in the
----------------------
environment. From purely selling he is now carrying out more of marketing
functions therefore he can be called a sales and marketing representative. ----------------------
A sales executive on the other hand is carrying out different roles like
market analyst and planner, sales forecaster, opportunity manager, ----------------------
on-going study of consumer buying behaviour, intelligence gatherer, team
----------------------
coordinator, establishing long term relationships and consultative selling.
●● The sales manager in order to cope up with the changing marketing ----------------------
environment needs to be a catalyst and hence has to have expertise in various
----------------------
skills like technology, developing self awareness and management skills,
global perspective, team building etc. He needs to excellent relationship ----------------------
with other departments in the organisation so as to keep the sales function
going on smoothly. ----------------------

----------------------
Keywords
----------------------
●● Front Line Managers: The first level of managers having direct
interaction with the field force and customers. ----------------------
●● Catalyst: A change agent. ----------------------
●● Sales Force Automation: Equipping the sales force with various selling
tools like lap top, various softwares like call reporting software, order ----------------------
tracking software etc. ----------------------
●● Sales Management Competencies: Sales management skills.
----------------------

Self-Assessment Questions ----------------------

1. Discuss the various functions of a sales representative. ----------------------

2. Analyse the changing role of sales executive. ----------------------
3. Dicuss the various sales management competencies. ----------------------
4. State the responsibilities of sales managers.
----------------------
5. “Sales manager needs to have cordial relations with other functions in the
organisation.” Discuss. ----------------------

Effective Sales Executive 59

 Notes Answers to Check your Progress
---------------------- Check your Progress 1
---------------------- Fill in the blanks.
---------------------- 1. Frequently, sales representatives who lack technical expertise work as a
team with a technical expert.
----------------------
Check your Progress 2
----------------------
Fill in the blanks.
---------------------- 1. Team coordinators effectively utilise their core specialty skills in market
---------------------- research, engineering, finance, operations and customer services to solve
customer problems.
----------------------
Check your Progress 3
---------------------- State True or False.
---------------------- 1. True
---------------------- Check your Progress 4
---------------------- State True or False.

---------------------- 1. False

----------------------
Suggested Reading
----------------------
1. Bowersox, Logistical Management: The Integrated Supply Chain Process.
---------------------- 2. Calvin, Robert J. Sales Management.
---------------------- 3. Chopra, Supply Chain Management.
---------------------- 4. Ghoshal, World Class in India. Penguin India.
---------------------- 5. Lamba, A.J. The Art of Retailing.

---------------------- 6. Scheuing, Kurtz, Johnson. Sales Management: Concepts, Practices and

Cases.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

60 Sales and Distribution Management

Sales Planning and Budgeting
UNIT

4
Structure:

4.1 Introduction
4.2 Definitions of Planning
4.3 Meaning of Sales Planning
4.4 Characteristics of Sales Planning
4.5 Advantages of Planning
4.6 Levels of Planning
4.7 Sales Planning Process
4.8 Management by Objectives (MBO)
4.9 Sales Budgets
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Sales Planning and Budgeting 61

 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Define planning
----------------------
• List the characteristics of sales planning
---------------------- • Explain the advantages of planning
---------------------- • Name the levels of planning
---------------------- • Describe the sales planning process

---------------------- • Elaborate on the concept of management by objectives

• Outline the process of formulating sales budgets
----------------------

---------------------- 4.1 INTRODUCTION

---------------------- Planning is the basic function of the management with it starts the other
---------------------- functions of management.
So long planning does not determine the objectives and the methods of
---------------------- achieving these objectives, the other functions like organising, staffing, directing,
---------------------- controlling etc. cannot be performed effectively. Plan is a fundamental course
of action to achieve specified objectives. It is based on reliable information and
---------------------- it is not merely guesswork.

---------------------- Planning is deciding in advance about what is to be done, how it is to be

done, when it is to be done and by whom it is to be done. Deciding about all
---------------------- these things is called planning. Planning involves the selection of objectives,
policies, procedures and programs to achieve the desired results. Planning is an
---------------------- intellectual process which means thinking before doing. Planning is the primary
---------------------- function of the management and all other functions depend on it. A planner
should have far sightedness, imaginative skills and decision making capacity.
---------------------- Planning clarifies the objectives of the organisations and coordinates different
activities. It helps to achieve economy in operation and helps to exercise control.
----------------------
Every single function in the organisation revolves around the sales plan.
---------------------- Once the sales plan process is initiated all the other functions in the organisation
like distribution, purchase, finance, HR etc. start initiating actions in their
----------------------
departments to fulfill the sales volume requirement as indicated in the sales
---------------------- plan. These functions are depending solely on the sales plan and therefore
inaccurate sales forecast will have an impact on these functions adversely.
---------------------- Requirement of raw material, personnel, Investment in plant and machinery,
making available the finances, training of personnel need to be planned which
----------------------
are solely dependent on the sales volumes as indicated in the sales plan.
---------------------- In case the sales are projected on the lower side leading to more demand
which will call for arranging all the materials on emergent basis leading to
----------------------
uncertain situation in suppliers, loss due to higher prices of inputs procured

62 Sales and Distribution Management

in emergencies and ultimately loss of sale. In case the sales are projected on Notes
higher side, it will lead to production on the higher side leading to blockage of
valuable inventory attracting inventory carrying costs resulting in loss to the ----------------------
organisation.
----------------------
Since the marketing environment is dynamic and ever changing, there is
a need for having flexibility in planning and budgeting. Planning and budgeting ----------------------
should develop alternative courses of action, flexible budget figures and should
----------------------
be reviewed continuously in order to see that the sales volumes forecasted are
met. It is therefore necessary to provided for tolerance in the sales forecasts. ----------------------

4.2 DEFINITIONS OF PLANNING ----------------------

Some of the important definitions of planning are ----------------------

“Planning is deciding in advance what to do, how to do, when to do it, ----------------------
and who is to do it”.
----------------------
- Koontz and O Donnel
“Planning is deciding in advance what is to be done”. ----------------------
- Helmann ----------------------
“Planning is deciding in advance what is to be done. It involves the
selection of objectives, policies, procedures and programs from among various ----------------------
alternatives”.
----------------------
- M.E. Harley
----------------------
4.3 MEANING OF SALES PLANNING ----------------------
Sales planning are a part of the overall planning of the whole organisation. ----------------------
In sales planning, answers to the following questions are decided:
----------------------
●● What types of selling functions are to be performed?
----------------------
●● How various selling functions are to be performed?
●● When these functions are to be performed? ----------------------

●● Who will perform these functions? ----------------------

In sales planning, sales related policies, procedures, programs, budget, ----------------------

schedules etc. are decided in advance so as to achieve these objectives. In sales
planning selling objectives are decided and the manner/procedure of achieving ----------------------
these objectives is chalked out. Sales planning are done by top officials of sales ----------------------
department in consultation with marketing, production and finance departments.
Sales plan is a written document for setting sales objectives, policies, procedures, ----------------------
programs to achieve these objectives.
----------------------
“Sales planning is the work of setting up of objectives for selling activities,
determining and scheduling the steps necessary to achieve these objectives.” ----------------------

- American Marketing Association ----------------------

Sales Planning and Budgeting 63

 Notes “Sales planning may be defined as managerial task of determining the
future course of sales action preceded by an analysis of the past and projection
---------------------- of future events culminating in a written document referred to as sales plan
which spells out in terms of time and resources, a systematic and operational
---------------------- program, so as to facilitate achievement of sales objectives”.
---------------------- - Johnson and Schewing
---------------------- Thus sales planning are the managerial task of determining the sales
objectives and future course of selling functions to achieve these objectives.
----------------------

---------------------- Check your Progress 1

----------------------
Fill in the blanks.
----------------------
1. Sales planning is the managerial task of determining the _________
---------------------- objectives and future course of ___________ functions to achieve
these objectives.
----------------------

----------------------
4.4 CHARACTERISTICS OF SALES PLANNING
----------------------
●● A sale planning is an intellectual activity. In sales planning questions like
---------------------- what, when, how and by whom are to be done etc. are answered.

---------------------- ●● A sale planning is the primary function of the sales management.

---------------------- ●● It is concerned with selecting best alternatives among the various available
alternatives.
----------------------
●● It includes deciding selling objectives, sales policies, procedures,
---------------------- programs, forecast, budget schedules etc.
---------------------- ●● Sales plans are prepared keeping in view the present and expected changes
in marketing plans and marketing environment.
----------------------
●● A sale planning is an important managerial function and it gives direction
---------------------- to various selling activities.
---------------------- ●● It is a continuous process.
---------------------- ●● A sale planning is flexible and it requires necessary adjustments in
response to changes in marketing environment.
----------------------
●● It affects the plans of production department, purchase department,
---------------------- finance department, personal department etc.
---------------------- ●● A sale planning leads to efficiency and economy in various selling
---------------------- activities and thus helps the organisation in utilizing its resource in the
most effective manner.
----------------------

64 Sales and Distribution Management

 4.5 ADVANTAGES OF PLANNING Notes

●● When the whole sales organisation gets involved and participates as a ----------------------
team, the morals of its members can be improved. ----------------------
●● The efforts of the organisation are focused towards its goals and directed
accordingly to achieve them. ----------------------

●● The efforts of the sales force can be coordinated. ----------------------

●● The individual and collective standards, which help to evaluate the ----------------------
performance, may be developed which helps in identifying deviations
and take corrective action. ----------------------
●● Planning often results in economies of operations because time can be ----------------------
taken to evaluate the alternatives and the most effective alternative can be
identified for implementation. ----------------------
●● Careful planning is likely to reduce the potential for crisis and mistakes. ----------------------
●● Indirect benefits of sales planning may be as follows: ----------------------
a) Proper inventory levels can be maintained.
----------------------
b) Production process may be smooth and under utilisation or over
utilisation of plant and machinery is avoided. ----------------------
c) Procurements of raw material based on sales forecasts and planning ----------------------
can be made at the right time.
----------------------
d) Customers can be served at the right time.
----------------------
e) Costs can be minimized.
f) Profits can be maximized. ----------------------

----------------------
4.6 LEVELS OF PLANNING
----------------------
Planning is the most important function of every manager in the
organisation right from the Board level to the managerial levels. Depending on ----------------------
ones position in the hierarchy and the functions handled, the nature of planning
----------------------
varies. Let us have a look at it more closely.
Strategic Planning ----------------------
Strategic planning is a management tool. As with any management tool, it ----------------------
is used for one purpose only i.e. to help an organisation do a better job - to focus
its energy, to ensure that members of the organisation are working towards ----------------------
the same goals, to assess and adjust the organisation’s direction in response ----------------------
to a changing environment. In short, strategic planning is a disciplined effort
to produce fundamental decisions and actions that shape and guide what an ----------------------
organisation is, what it does, and why it does it, with a focus on the future.
----------------------
A word by word dissection of this definition provides the key elements
that underlie the meaning and success of a strategic planning process: ----------------------

Sales Planning and Budgeting 65

 Notes The process is strategic because it involves preparing the best way to
respond to the circumstances of the organisation’s environment, whether or not
---------------------- its circumstances are known in advance. Being strategic, then, means being
clear about the organisation’s objectives, being aware of the organisation’s
---------------------- resources, and incorporating both into being consciously responsive to a
---------------------- dynamic environment.
The process is about planning because it involves intentionally setting
----------------------
goals (i.e., choosing a desired future) and developing an approach to achieving
---------------------- those goals.

---------------------- The process is disciplined in that it calls for a certain order and pattern to
keep it focused and productive. The process raises a sequence of questions that
---------------------- helps planners examine experience, test assumptions, gather and incorporate
information about the present, and anticipate the environment in which the
---------------------- organisation will be working in the future.
---------------------- Finally, the process is about fundamental decisions and actions because
choices must be made in order to answer the sequence of questions mentioned
---------------------- above. The plan is ultimately no more, and no less, than a set of decisions
---------------------- about what to do, why to do it, and how to do it. As it is impossible to do
everything that needs to be done in this world, strategic planning implies that
---------------------- some organisational decisions and actions are more important than others - and
that much of the strategy lies in making the tough decisions about what is most
---------------------- important to achieving organisational success.
---------------------- The strategic planning can be complex, challenging, and even messy, but
it is always defined by the basic ideas outlined above - and you can always
----------------------
return to these basics for insight into your own strategic planning process.
---------------------- Participants in the strategic planning process are CEO, Managing
---------------------- Directors, Functional Director, Presidents and Vice Presidents. As discussed
above at this level they focus on the company mission, goals and objectives.
----------------------
Tactical Planning
---------------------- Tactical planning deals primarily with the implementation phase of the
planning process. Tactical planning turns strategy into reality and usually has
----------------------
a 1-2 year time horizon Tactical planning is usually tightly integrated with the
---------------------- annual budget process.

---------------------- In Tactical planning the focus in departmental and time focus is on yearly,
half yearly, quarterly plans. The focus is also on formulating and implementing
---------------------- of policies, procedures and budgets.

---------------------- Monthly and weekly planning

---------------------- It is carried out at the Regional Sales Managers level. They are responsible
for formulating the regions plans and budgets and accountable for the regions
---------------------- achievements. They are responsible for implementation of the policies,
procedures in the respective regions ensure compliance by all concerned under
---------------------- their control.

66 Sales and Distribution Management

Daily Planning Notes
Daily planning happens at the junior most operational level of sales ----------------------
supervisors, area managers and sales representatives. The budgets and targets
given to them are broken down to the customer, town level and further broken ----------------------
down on daily basis so as to ensure achievement of the objects on daily basis.
This facilitates taking corrective action in time. ----------------------
Analyse the situation ----------------------
(external and internal)
----------------------
Set goals and objectives
----------------------

Determine market potential ----------------------

----------------------

----------------------

Select Strategies Take corrective ----------------------

sections
----------------------
Develop detailed activities
----------------------
Allocate necessary ----------------------
resources (budgeting)
----------------------
Implement the Plan ----------------------

Control the Plan Measure and Compare

----------------------
Performance
----------------------
Fig. 4.1 : The Sales Management Planning Process ----------------------

Check your Progress 2 ----------------------

----------------------
State True or False.
----------------------
1. Tactical planning deals primarily with the implementation phase of
the planning process. ----------------------

----------------------
Activity 1 ----------------------

As a sales manager of a company, while planning, what demographic and ----------------------

psychographic characteristics will you take into account? State five each of
----------------------
demographic and psychographic characteristics.
----------------------

Sales Planning and Budgeting 67

 Notes 4.7 SALES PLANNING PROCESS
---------------------- Sales planning process is a continuous/ongoing process. This facilitates
study of the marketing environment on an on going basis resulting in proactive
---------------------- actions on the part of the sales managers rather than being reactive. The steps in
the sales planning process are listed below.
----------------------
1. Analysing the Situation/Situational Analysis
----------------------
The situational analysis is designed to take a snapshot of where things
---------------------- stand at the time the plan is presented.
---------------------- This part of the Sales Plan is extremely important and quite time
consuming. For many, finding the numbers may be difficult, especially
---------------------- for those entering new markets.
---------------------- The situational analysis covers six key areas: product, target market,
distribution, competitors, financial and other issues.
----------------------
Product/benefits offered
----------------------
Product quality, Branding, Prices, After sales service, Warranties and
---------------------- Guarantees.
---------------------- Competitors

---------------------- Number and types of competitors, their strengths and weaknesses,

their products, brands, pricing strategy, market share, their past sales
---------------------- performance etc.
---------------------- Sales, cost and profitability

---------------------- By product, by market, by territory, by customer, by region etc.

Market characteristics
----------------------
Number and types of customers, demographics, psychographics, buying
---------------------- patterns etc.
---------------------- Promotional Mix
---------------------- Personal selling, advertising, sales promotion and publicity.

---------------------- Distribution system

Storage and transportation services, channels of distribution and intensity
----------------------
of distribution.
---------------------- 2. Establishing goals and objectives
---------------------- The second step is to establish the goals and objectives for the entire sales
organisation and for each subordinate sales unit. At the organisational
---------------------- level it the sales head who is responsible for the sales whereas down the
---------------------- line it could be the RSM, AM/ZM or the Sales Representative. Objectives
spell out the expected results and specify the end points of where we want
---------------------- to be and what we want to accomplish.

68 Sales and Distribution Management

 Here it is essential to understand the difference between goals and Notes
objectives. For example, the goals for the sales manager could be to
increase the market coverage during the year while on the other the ----------------------
objective could be to reduce sales force turnover by 5%.
----------------------
Following are the examples of how sales plans are made. Sales can be
planned according to your main products/services (or revenue streams) ----------------------
according to the profit drivers or ‘levers’ (variables that you can change
----------------------
which affect profit), e.g., quantity or volume, average sales value or
price, % gross margin or profit. Add different columns which reflect your ----------------------
own business profit drivers or levers, and to provide the most relevant
measures. They can be planned on the geographical area, like a region, or ----------------------
a territory, or on the basis of the customers, or for individual products, or
----------------------
for individual sales personnel.
Table 4.1 ----------------------

Quantity Total Average % gross Total sales ----------------------

sales revenue margin or gross
value margin ----------------------
Product 1 ----------------------
Product 2
----------------------
Product 3
Product 4 ----------------------
Totals
----------------------
Do the same for each important aspect of your business, for example, split
by market sector (or segment) : ----------------------
Table 4.2 ----------------------
Quantity Total Average % gross Total sales ----------------------
sales revenue margin or gross
value margin ----------------------
Sector 1
----------------------
Sector 2 s
Sector 3 ----------------------
Sector 4
----------------------
Totals
and, For example, split by distributor (or route to market): ----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

Sales Planning and Budgeting 69

 Notes Table 4.3

---------------------- Quantity Total sales Average % gross Total sales

value revenue margin or gross
---------------------- margin
---------------------- Distributor 1
Distributor 2
----------------------
Distributor 3
----------------------
Distributor 4
---------------------- Totals
---------------------- These simple split analysis tools are an extremely effective way to plan
the sales.
----------------------
3. Determining Market Potentials
----------------------
After establishing goals and objectives the next step in the planning
---------------------- process is to determine the market potential and sales potentials.
Market potential: Estimated size of total, present or future market.
----------------------
Alternatively, the maximum share of a market which can be reasonably
---------------------- achieved during a defined period.

---------------------- Sales potential: Share of a market that a company believes is achievable

when its plans and strategies have been fully implemented for a definite
---------------------- period of time.

---------------------- Determination of market and sales potential is based on a set of favorable

assumptions about the marketing environment and the marketing
---------------------- expenditures. It is preferable to determine the potential at three different
levels of assumptions-optimistic, expected and pessimistic. Based on
---------------------- the determination of potentials, the sales managers are in a position to
---------------------- set alternative sales budgets based on different assumptions as indicated
above. This facilitates immediate correction of the sales figures in response
---------------------- to changes happening in the marketing environment.
---------------------- 4. Forecasting Sales
Sales forecasting is the central part of the planning process because the
----------------------
sales forecast becomes the key stone for all company planning, budgeting
---------------------- and operational decision making. A sales forecast is the starting point
for sales and marketing planning, production scheduling, cash-flow
---------------------- projections, financial planning, capital investment, procurement,
inventory management, human resource planning and budgeting.
----------------------
For example, before a production schedule can be developed, the
---------------------- company must know how much it expects to sell in the coming period.
This production schedule, in turn, determines the material and labor inputs
----------------------
as well as the product outputs for the period. The purchasing department
---------------------- must time purchase of supplies and materials according to sales forecasts.
If the forecast is too high, the result may be a large inventory of unsold
70 Sales and Distribution Management
 goods, plant shutdowns, layoffs and deteriorating raw materials. On Notes
the other hand, too low a sales forecast can mean lost sales or even
permanently lost customers. Sales Managers must know how many new ----------------------
sales people to hire and what their operating budget will be. Reliable and
valid forecasting methods, improves the efficiency and effectiveness of ----------------------
the manager’s resource - allocation decisions. ----------------------
Forecasts should be flexible so that they can adjust to the changing
marketing environment. To be on safer side the organisations need to ----------------------
develop alternative sales and budget figures based on different assumptions/ ----------------------
market scenarios so that their forecasts can be quickly changed in the face
sudden changes ----------------------
5. Selecting growth Strategies ----------------------
Existing Products New Products
----------------------
Existing Markets

----------------------
Market Product
Penetration Development ----------------------

----------------------

----------------------
New Markets

Market ----------------------
Development
----------------------

----------------------

Fig. 4.2 : Growth Strategies ----------------------

The Ansoff Growth matrix is a tool that helps businesses decide their ----------------------
product and market growth strategy.
----------------------
Ansoff’s product/market growth matrix suggests that a business’ attempts
to grow depend on whether it markets new or existing products in new or ----------------------
existing markets.
----------------------
The output from the Ansoff product/market matrix is a series of suggested
growth strategies that set the direction for the business strategy. These are ----------------------
described below:
----------------------
Market penetration
Market penetration is the name given to a growth strategy where the ----------------------
business focuses on selling existing products into existing markets.
----------------------
Market penetration seeks to achieve four main objectives:
----------------------
●● aintain or increase the market share of current products - this can be
M
achieved by a combination of competitive pricing strategies, advertising, ----------------------
sales promotion and perhaps more resources dedicated to personal selling.
----------------------

Sales Planning and Budgeting 71

 Notes ●● Secure dominance of growth markets.
●● estructure a mature market by driving out competitors; this would
R
---------------------- require a much more aggressive promotional campaign, supported by a
---------------------- pricing strategy designed to make the market unattractive for competitors.
●● I ncrease usage by existing customers - for example, by introducing loyalty
---------------------- schemes
---------------------- A market penetration marketing strategy is very much about “business
as usual”. The business is focusing on markets and products it knows well. It
---------------------- is likely to have good information on competitors and on customer needs. It
---------------------- is unlikely, therefore, that this strategy will require much investment in new
market research.
---------------------- Market development
---------------------- Market development is the name given to a growth strategy where the
business seeks to sell its existing products into new markets.
----------------------
There are many possible ways of approaching this strategy, including:
----------------------
●● new geographical markets; for example, exporting the product to a new
---------------------- country
●● new product dimensions or packaging: for example
----------------------
●● new distribution channels
---------------------- ●● different pricing policies to attract different customers or create new
---------------------- market segments
Product development
----------------------
Product development is the name given to a growth strategy where a
---------------------- business aims to introduce new products into existing markets. This strategy
may require the development of new competencies and requires the business to
---------------------- develop modified products which can appeal to existing markets.
---------------------- Diversification
---------------------- Diversification is the name given to the growth strategy where a business
markets new products in new markets.
----------------------
This is an inherently more risk strategy because the business is moving
---------------------- into markets in which it has little or no experience.

---------------------- For a business to adopt a diversification strategy, therefore, it must have

a clear idea about what it expects to gain from the strategy and an honest
---------------------- assessment of the risks.

----------------------

----------------------

----------------------

----------------------

72 Sales and Distribution Management

 Notes

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

Fig. 4.3 : Boston Consulting Group Growth/Share Matrix ----------------------

●● Cash cows, units with high market share in a slow-growing industry. ----------------------
These units typically generate cash in excess of the amount of cash
needed to maintain the business. They are regarded as staid and boring, ----------------------
in a “mature” market, and every corporation would be thrilled to own ----------------------
as many as possible. They are to be “milked” continuously with as little
investment as possible, since such investment would be wasted in an ----------------------
industry with low growth.
----------------------
●● Dogs, or more charitably called pets, units with low market share in a
mature, slow-growing industry. These units typically “break even”, ----------------------
generating barely enough cash to maintain the business’s market share.
Though owning a break-even unit provides the social benefit of providing ----------------------
jobs and possible synergies that assist other business units, from an ----------------------
accounting point of view such a unit is worthless, not generating cash for
the company. They depress a profitable company’s return on assets ratio, ----------------------
used by many investors to judge how well a company is being managed.
Dogs, it is thought, should be sold off. ----------------------

●● Question marks, Question marks are growing rapidly and thus consume ----------------------
large amounts of cash, but because they have low market shares they
do not generate much cash. The result is large net cash consumption. A ----------------------
question mark (also known as a “problem child”) has the potential to ----------------------
gain market share and become a star, and eventually a cash cow when the
market growth slows. If the question mark does not succeed in becoming ----------------------
the market leader, then after perhaps years of cash consumption it will
degenerate into a dog when the market growth declines. Question marks ----------------------
must be analysed carefully in order to determine whether they are worth ----------------------
the investment required to grow market share.
●● Stars, units with a high market share in a fast-growing industry. The ----------------------
hope is that stars become the next cash cows. Sustaining the business ----------------------
unit’s market leadership may require extra cash, but this is worthwhile if
that’s what it takes for the unit to remain a leader. When growth slows, ----------------------

Sales Planning and Budgeting 73

 Notes stars become cash cows if they have been able to maintain their category
leadership, or they move from brief stardom to dogdom.
----------------------
As a particular industry matures and its growth slows, all business units
---------------------- become either cash cows or dogs.
●● The overall goal of this ranking was to help corporate analysts decide
----------------------
which of their business units to fund, and how much; and which units to
---------------------- sell. Managers were supposed to gain perspective from this analysis that
allowed them to plan with confidence to use money generated by the cash
---------------------- cows to fund the stars and, possibly, the question marks.
---------------------- 6. Developing Detailed Activities

---------------------- The next step in the planning process is that of developing detailed
activities of the sales personnel. The short-term or the tactical plans
---------------------- developed by the operations i.e. the sales people should be in lines with
the overall strategy for the organisation. For example the various tactical
---------------------- activities carried out like sales promotional activities, display schemes,
---------------------- product schemes; to create the trade push should be in lines with the
promotional strategy at the organisational level.
----------------------
7. Allocating Necessary Resources
---------------------- Excellent planning without necessary resources does not work. Therefore,
to support the field sales personnel to carry out their activities they should
----------------------
be supported with requisite support in terms of men, money, machine
---------------------- and time. Allocation of resources is the formal expression of managerial
support.
----------------------
8. Implementing the Plan
---------------------- The next step in the sales planning process is to implement the plan. The
---------------------- budgets/targets should be assigned to the respective sales personnel/
territories/ zones/ regions/ customers. Responsibility and accountability
---------------------- to be clearly defined. Formal Reporting relationships to be also clearly
specified. After the plan is delegated, the sales managers should ensure that
---------------------- the implementation of plan is closely monitored. Sales managers should
---------------------- be very proactive and respond to changing situations in the marketing
environment.
----------------------
Controlling the Plan
---------------------- The next step in the sales planning process is controlling the plan. The
mechanism of control should be in place. The basic control mechanism
----------------------
includes the following steps:
---------------------- 9. Establishing standards: for Example, the standard could be for the
---------------------- sales personnel to make thirty calls per day or arranging two displays, or
identifying ten new customers in a month etc.
----------------------

----------------------

74 Sales and Distribution Management

Measuring performance against these standards Notes
Correcting variation from standards and plans.
----------------------
Table 4.4
----------------------
Budget Actual % Variance growth
achievement ----------------------
Sales (Units)
New customers (No.) ----------------------
Market share %
----------------------
Selling costs (Rs.)
Displays ----------------------
By planning the budgeted and the actual figures, one can understand the
----------------------
performance at a glance against all the parameters. In case of a negative
variance by understanding the reasons immediate actions can be taken to ----------------------
correct the situations.
----------------------
10. Corrective Action
The last step in the sales planning process is the corrective action. If the ----------------------
performance is measured objectively as indicated above the sales managers ----------------------
would come to know the erring sales personnel and by evaluating the
actual performance against the budgeted figures. ----------------------
If the sales manager is alert to the situation, on a ongoing basis, he can ----------------------
during the course of working in the market with the sale personnel can
take review of how the sales are progressing against the plan can take ----------------------
timely corrective actions and ensure that the sales are on course.
----------------------
4.8 MANAGEMENT BY OBJECTIVES (MBO) ----------------------
What is Management by Objectives? ----------------------
MBO relies on the defining of objectives for each employee and then ----------------------
to compare and to direct their performance against the objectives which
have been set. It aims to increase the performance of the organisation by ----------------------
matching organisational goals with the objectives of subordinates throughout
the organisation. Ideally, employees receive strong input to identify their ----------------------
objectives, time lines for completion, etc. MBO includes continuous tracking ----------------------
of the processes and providing feedback to reach the objectives.
Management by Objectives was first outlined by Peter Drucker in 1954 in ----------------------
his book ‘The Practice of Management’. According to Drucker, managers should ----------------------
avoid ‘the activity trap’, getting so involved in their day to day activities that
they forget their main purpose or objective. One of the concepts of MBO was ----------------------
that instead of just a few top-managers, all managers of a firm should participate
in the strategic planning process, in order to improve the implementability of ----------------------
the plan. ----------------------

----------------------

Sales Planning and Budgeting 75

 Notes Management By Objectives (Peter Drucker)
---------------------- Supervisor

----------------------
Jointly Plan Individually act Jointly control
---------------------- Set objectives Perform task Review results
and Set Standards (subordinate) Discuss implementa-
Choose actions Provide support tions
---------------------- (Supervisor) Review MBO cycle

----------------------
Subordinate

----------------------

---------------------- Fig. 4.5 : MBO

---------------------- Principles of Management by Objectives are:
●● Cascading of organisational goals and objectives
----------------------
●● Specific objectives for each member
----------------------
●● Participative decision making
---------------------- ●● Explicit time period, and
---------------------- ●● Performance evaluation and provide feedback
---------------------- Management by Objectives also introduced the SMART method for
checking the validity of the objectives, which should be ‘SMART’:
----------------------
●● Specific
---------------------- ●● Measurable
---------------------- ●● Achievable
---------------------- ●● Realistic, and
●● Time-related
----------------------
In a sales organisation a sales manager, at the beginning of the time
---------------------- period, discusses with his subordinates about the various objectives to be
achieved which are mutually agreed and decide on measures of performance or
----------------------
Key Result Areas (KRA’s) such as
---------------------- 1. Sales in unit duly quantified like to sell one lac units during the year.
---------------------- 2. New customer to be identified. To identify 50 new customers during the
year.
----------------------
3. With reference to market coverage, the objective could be to appoint
---------------------- distributor in ten towns during the year.
---------------------- 4. The objectives with respective collection of outstanding could be to
reduce the Sundry Debtors by five percent by the end of the year.
----------------------
Both the sales person and the sales manager are benefited by MBO.
---------------------- A sales manager helps the sales personnel in setting his personal goals and

76 Sales and Distribution Management

provided meaningful guidance to him. In return, the sales person helps the sales Notes
manager by providing intimate knowledge of the market environment while the
sales manager is planning the sales. Progress made to achieve these objectives ----------------------
is regularly reviewed and appropriate corrective action taken. At the end of
the year the differences between actual and predefined objectives serve as the ----------------------
basis for negotiating future MBO contracts for setting new goals, objectives, ----------------------
strategies, tactics, evaluation methods and rewards.
----------------------
4.9 SALES BUDGETS ----------------------
A 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. ----------------------
In a business organisation, 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 organisation, for instance, ----------------------
production or profit goals in a business firm. Operating budgets may be
----------------------
sub-divided into various departmental or functional budgets.
Characteristics of a budget ----------------------
A good budget is characterized by the following: ----------------------
●● Participation: involve as many people as possible in drawing up a budget. ----------------------
●● Comprehensiveness: embrace the whole organisation
----------------------
●● Standards: base it on established standards of performance
●● Flexibility: allow for changing circumstances ----------------------
●● Feedback: constantly monitor performance ----------------------
●● nalysis of costs and revenues: this can be done on the basis of product
A
----------------------
lines, departments or cost centres
It is expressed in quantitative form, physical or monetary units, or both. ----------------------
Different types of budgets are prepared for different purposed 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 organisation.
----------------------
Advantages of budgets
----------------------
A budget helps us in the following ways:
1. It brings about efficiency and improvement in the working of the ----------------------
organisation. ----------------------
2. It is a way of communicating the plans to various units of the organisation.
----------------------

Sales Planning and Budgeting 77

 Notes 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 of 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.
---------------------- Problems in budgeting
---------------------- Whilst budgets may be an essential part of any marketing activity they do
have a number of disadvantages, particularly in perception terms.
----------------------
Budgets can be seen as pressure devices imposed by management, thus
---------------------- resulting in:
---------------------- a) Bad labour relations

---------------------- b) Inaccurate record-keeping

Departmental conflict arises due to:
----------------------
a) Disputes over resource allocation
----------------------
b) Blaming each other if targets are not attained
---------------------- It is difficult to reconcile personal/individual and corporate goals.
---------------------- Waste may arise as managers adopt the view, “we had better spend it
or we will lose it”. This is often coupled with “empire building” in order to
----------------------
enhance the prestige of a department.
---------------------- Responsibility versus controlling, i.e., some costs are under the influence
of more than one person, e.g. power costs.
----------------------
Managers may overestimate costs so that they will not be blamed in the
---------------------- future should they overspend.
---------------------- Sales Budget
---------------------- Past sales figures and trend and the record of previous experience forms
the most reliable guide as to future sales as the past performance is related
---------------------- to actual business conditions. However the other factors such as seasonal
fluctuations, growth of market, trade cycles etc., should not be lost sight of
----------------------
salesmen’s estimates. Salesmen are in a position to estimate the potential demand
---------------------- of the customers more accurately because they come in direct contact with the
customers. However, proper discount should be made for over-optimistic or too
---------------------- conservative estimates of the salesmen depending upon their temperament.

78 Sales and Distribution Management

 Plant Capacity: It should be the endeavour of the business to ensure proper Notes
utilisation of plant facilities and that the sale budget provides an economic and
balanced production on the factory. ----------------------
General trade prospects: The general trade prospects considerably affect ----------------------
the sales. Valuable information can be gathered in this connection from trade
papers and magazines. ----------------------
Orders on hand: In case of industries where production is quite a lengthy ----------------------
process, orders on hand also have a considerable influence in the amount of
sales. ----------------------
Seasonal fluctuations: Past experience will be the best guide in this ----------------------
respect. However, efforts should be made to minimize the effects of seasonal
fluctuations by giving special concessions or off-season discounts thus ----------------------
increasing the volume of sales.
----------------------
Potential market: Market research should be carried out for ascertaining
the potential market, for the company’s products on the basis of expected ----------------------
population growth, purchasing power of consumers and buying habits of the ----------------------
people.
Availability of material and supply: Adequate supply of raw materials and ----------------------
other supplies must be ensured before drafting the sales program. ----------------------
Financial aspect: Expansion of sales usually require increase in capital
outlay also, therefore, sales budget must be kept within the bounds of financial ----------------------
capacity. ----------------------
Other factors
----------------------
a. The nature and degree of competition within the industry;
----------------------
b. Cost of distributing the goods;
c. Government controls, rules and regulations related to the industry; ----------------------

d. Political situation-national and international as it may have an influence ----------------------

upon the market.
----------------------
The sales manager, after taking into consideration all these factors,
will prepare the sales budget in terms if quantities and money, distinguishing ----------------------
between products, periods and areas of sale.
----------------------
Usually the first of all budgets to be compiled is the sales budget: this
particular budget will be dependant for creating the others. For example, XYZ ----------------------
Ltd. is expecting (budgeting) the following sales revenue in the next three
----------------------
months:
(£) January February March ----------------------
Product A 500 500 600 ----------------------
Product B 600 700 600
----------------------
Product C 400 300 300
----------------------

Sales Planning and Budgeting 79

 Notes These figures may have been calculated by multiplying the expected
number of sales by the selling price of the product. If you have close relations
---------------------- with a majority of your customers, you could contact them in advance to find
out how much they are expecting to buy from you in the forthcoming budget
---------------------- period.
---------------------- If you allow credit to customers, it is important that you put all credit
---------------------- sales in the month that you receive the money: not when you made the sale. For
example, if you sell a product in January with two months credit, the revenue
---------------------- would be counted for in March and not January.

---------------------- The above example is assuming the business sells products. If your
business sells services, you would do the same by stating how much revenue
---------------------- you would expect to generate from each service.
---------------------- Zero based budgeting
---------------------- Is a technique that sets all budgets to nil at the beginning of the year
or period and requires from the departments that they justify all of their
---------------------- expenditures, not just those exceeding the budget. Money is allocated to the
---------------------- departments based on merit and not based on the previous year budget plus or
minus some percentage such as in many traditional budgeting systems.
----------------------
Its aim is to achieve is an optimal allocation of resources that incremental
---------------------- and other budgeting systems cannot achieve. Managers are asked to identify
and justify their areas of work in terms of decision packages prior to starting
---------------------- the work.
---------------------- a) Advantages of Zero based budgeting
---------------------- • The budget process focuses on a comprehensive analysis of
objectives and needs.
----------------------
• Planning and budgeting are combined into a single process.
----------------------
• Managers must evaluate the cost effectiveness of their operations in
---------------------- detail.
---------------------- • Management participation in planning and budgeting is expanded
---------------------- at all levels of the organisation.
b) Criticisms and drawbacks of Zero based budgeting
----------------------
• The huge amount of work involved.
----------------------
• May lead to micro management, offering less time and energy for
---------------------- the things that really matter.
---------------------- • Does it really lead to a material shift in the use of resources?
----------------------

----------------------

80 Sales and Distribution Management

 Notes
Check your Progress 3
----------------------
Fill in the blanks. ----------------------
1. A ____________ is a plan expressed in quantitative, usually monetary
----------------------
terms, covering a specific period of time, usually one year.
2. A _____________ budget aim is to achieve an optimal allocation ----------------------
of resources that incremental and other budgeting systems cannot
----------------------
achieve.
----------------------

Summary ----------------------

●● Planning is all about deciding today about the future. Plans may be ----------------------
short-term or long-term. Planning is very essential because without
----------------------
planning one may not know how to go, where to go, when to do and so on.
Though it takes considerable time, it results in systematic efforts leading ----------------------
to tremendous benefits by way of efficient and effective working.
----------------------
●● Tactical planning is of short-term nature generally one to two years.
However strategic planning, having long-term perspective of the business ----------------------
may stretch up to five to ten years. In both the cases the organisations
need to study the environment critically, be always alert to the changes ----------------------
in the marketing environment, grab the opportunities and overcome the
----------------------
challenges.
●● The elements of planning process are situational analysis, establishing ----------------------
goals and objectives, determining market potentials, forecasting sales,
----------------------
selecting growth strategies, developing detailed activities, allocating
resources, implementing and controlling the plan and taking corrective ----------------------
actions are very important from the sales manager’s perspectives since it
is he who is working on the issues on an on going basis. ----------------------
●● By dividing the sales plan and allocating the same to all individual sales ----------------------
personnel, territories, customers, areas, zones and regions sales budgets
help the sales managers in planning, coordinating, and controlling selling ----------------------
activities.
----------------------

Keywords ----------------------

●● Diversification: A business strategy of selling new products in new ----------------------

markets.
----------------------
●● Strategic Planning: Planning with long-term business perspective.
●● Tactical Planning: Planning with short-term business perspective. ----------------------

●● Zero based budgeting: It is a technique that sets all budgets to nil at the ----------------------
beginning of the year or period and requires that the departments justify
all their expenditures. ----------------------

Sales Planning and Budgeting 81

 Notes
Self-Assessment Questions
----------------------
1. Define sales planning.
---------------------- 2. State the characteristics of planning.
---------------------- 3. Discuss the various steps in sales planning process.

---------------------- 4 What is managing by Objectives? Discuss its benefits.

5. What is a budget? What are the characteristics of budgets?
----------------------
6. Discuss the various levels of planning.
----------------------

---------------------- Answers to Check your Progress

---------------------- Check your Progress 1

Fill in the blanks.
----------------------
1. Sales planning is the managerial task of determining the sales objectives
---------------------- and future course of selling functions to achieve these objectives.
---------------------- Check your Progress 2

---------------------- State True or False.

1. True
----------------------
Check your Progress 3
----------------------
Fill in the blanks.
---------------------- 1. A budget is a plan expressed in quantitative, usually monetary terms,
covering a specific period of time, usually one year.
----------------------
2. A zero-based budget aim is to achieve an optimal allocation of resources
---------------------- that incremental and other budgeting systems cannot achieve.
----------------------
Suggested Reading
----------------------
1. Bowersox, Logistical Management: The Integrated Supply Chain Process.
----------------------
2. Calvin, Robert J. Sales Management.
----------------------
3. Chopra, Supply Chain Management.
---------------------- 4. Ghoshal, World Class in India. Penguin India.
---------------------- 5. Lamba, A.J. The Art of Retailing.
---------------------- 6. Scheuing, Kurtz, Johnson. Sales Management: Concepts, Practices and
Cases.
----------------------

----------------------

----------------------

82 Sales and Distribution Management

Sales Forecasting
UNIT

5
Structure:

5.1 Introduction
5.2 Sales Forecast
5.3 Factors in Sales Forecasting
5.4 Basic Concepts in Sales Forecasting
5.5 Sales Forecasting Approaches
5.6 Non-Quantitative Forecasting Techniques
5.7 Quantitative Forecasting Techniques
5.8 Evaluating Quantitative and Qualitative Techniques
5.9 Personal Computers and Sales Forecasting
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Sales Forecasting 83
 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Explain the meaning of sales forecast
----------------------
• List the factors to be considered in sales forecasting
---------------------- • State the basic concepts in estimating sales forecast
---------------------- • Describe various sales forecasting approaches
----------------------
5.1 INTRODUCTION
----------------------
Sales forecasting is the central part of the strategic planning process
---------------------- because the sales forecast becomes the key for all company planning, budgeting
---------------------- and operational decision making. A sales forecast is the starting point for sales
and marketing planning, production scheduling, cash-flow projections, financial
---------------------- planning, capital investment, procurement, inventory management, human
resource planning and budgeting.
----------------------
For example, before a production schedule can be developed, the company
---------------------- must know how much it expects to sell in the coming period. This production
---------------------- schedule, in turn, determines the material and labour inputs as well as the
product outputs for the period. The purchasing department must time purchase
---------------------- of supplies and materials according to sales forecasts. If the forecast is too high,
the result may be a large inventory of unsold goods, plant shutdowns, layoffs
---------------------- and deteriorating raw materials. On the other hand, too low a sales forecast can
---------------------- mean lost sales or even permanently lost customers.
Sales Managers must know how many new sales people to hire and what
----------------------
their operating budget will be. Reliable and valid forecasting methods, improves
---------------------- the efficiency and effectiveness of the manager’s resource – allocation decisions.

----------------------
5.2 SALES FORECAST
----------------------
The sales forecast is a prediction of a business’s unit and dollars sales
---------------------- for some future period of time, up to several years or more. These forecasts are
generally based primarily on recent sales trends, competitive developments, and
---------------------- economic trends in the industry, region, and/or nation in which the organisation
---------------------- conducts business. Sales forecasting is management’s primary tool for predicting
the volume of attainable sales. Therefore, the whole budget process hinges on
---------------------- an accurate, timely sales forecast.
---------------------- These technical projections of likely customer demand for specific
products, goods, or services for a specific company within a specific time horizon
---------------------- are made in conjunction with basic marketing principles. For example, sales
---------------------- forecasts are often viewed within the context of total market potential, which
can be understood as a projection of total potential sales for all companies.
84 Sales and Distribution Management
Market potential relates to the total capacity of the market to absorb the entire Notes
output of a specific industry. On the other hand, sales potential is the ability of
the market to absorb or purchase the output from a single firm. ----------------------
Many agencies and organisations publish indexes of market potential. ----------------------
They base their findings on extensive research and analysis of certain
relationships that exist among basic economic data—for example, the ----------------------
location of potential consumers by age, education, and income for products
----------------------
that demonstrate a high correlation between those variables and the purchase
of specific products. This information allows analysts to calculate the market ----------------------
potential for consumer or industrial goods.
----------------------
Sales and Marketing Magazine publishes buying power indexes. Its
commercial indexes combine estimates of population, income, and retail sales ----------------------
to derive composite indicators of consumer demand according to U.S. Census
Bureau regions, by state, or by the bureau’s organised system of metropolitan ----------------------
areas. The buying-power index (BPI) provides only a relative value which
analysts adjust to determine the market potential for local areas. ----------------------
Forecasting methods and levels of sophistication vary greatly. Each ----------------------
portends to assess future events or situations which will impact either positively
or negatively on a business’s efforts. Managers prepare forecasts to determine ----------------------
the type and level of demand for both current and potential new products. They
----------------------
consider a broad spectrum of data for indications of growing and profitable
markets. Forecasting, however, involves not only the collection and analysis of ----------------------
hard data, but also the application of business judgement in their interpretation
and application. For example, forecasting requires business owners and managers ----------------------
to not only estimate expected units sold, but also to determine what the business’s
production (materials, labour, equipment) costs will be to produce those items. ----------------------

Computer-aided sales forecasting has revolutionized this process. ----------------------

Advances in computer technology, information highways, and statistical and
mathematical models provide almost every business with the ability to execute ----------------------
complex data analyses, thus reducing the risks and pitfalls prevalent in the past. ----------------------
These advances have made the process and costs of forecasting practical and
affordable for small- and mid-sized businesses. ----------------------

----------------------
5.3 FACTORS IN SALES FORECASTING
----------------------
Sales forecasts are conditional in that a company prepares the forecast
prior to developing strategic and tactical plans. The forecast of sales potential ----------------------
may cause management to adjust some of its assumptions about production
and marketing if the forecast indicates that: 1) current production capacity is ----------------------
inadequate or excessive, and 2) sales and marketing efforts need revisions. ----------------------
Management, therefore, has the opportunity to examine a series of alternate
plans that propose changes in resource commitments (such as plant capacity, ----------------------
promotional programs, and market activities), changes in prices and/or changes
in production scheduling. ----------------------
Through forecasting, the company determines markets for products, ----------------------

Sales Forecasting 85
 Notes plans corporate strategy, develops sales quotas, determines the number and
allocation of salespeople, decides on distribution channels, prices products or
---------------------- services, analyses products and product potential in different markets, decides
on product features, determines profit and sales potential for different products,
---------------------- constructs advertising budgets, determines the potential benefits of sales
---------------------- promotion programs, decides on the use of various elements of the marketing
mix, sets production volume and standards, chooses suppliers, defines financing
---------------------- needs, and determines inventory standards. For the forecasting to be accurate,
managers need to consider all of the following factors:
----------------------
1. Historical Perspective
----------------------
As a starting point, management analyses previous sales experience by
---------------------- product lines, territories, classes of customers, and other relevant details.
Management needs to consider a time line long enough to detect trends
---------------------- and patterns in the growth and the decline of dollar sales volume. This
period is generally five to ten years. If the company’s experience with a
----------------------
particular product class is shorter, management will include discernible
---------------------- experience of like companies.
The longer the view, the better management is able to detect patterns
----------------------
which follow cycles. Patterns which repeat themselves, no matter how
---------------------- erratically, are considered to be “normal,” while variations from these
patterns are “deviant.” Some of these deviations may have resulted from
---------------------- significant societal developments that carried an impact that filtered all
the way down to your business’s sales performance. Management may
----------------------
compensate for these abnormalities by adjusting the figures to reflect
---------------------- normal trends under normal conditions.

---------------------- 2. Business Competence

The ability of a company to respond to the results of a sales forecast
---------------------- depends on its production capacity, marketing methods, financing, and
---------------------- leadership, and its ability to change each of these to maximize its profit
potential.
---------------------- 3. Market Position
---------------------- Forecasting also considers the competitive position of the company with
respect to its market share; research and development; quality of service,
----------------------
pricing and financing policies; and public image. In addition, forecasters
---------------------- also evaluate the quality and quantity of the customer base to determine
brand loyalty, response to promotional efforts, economic viability, and
---------------------- credit worthiness.
---------------------- 4. General Economic Conditions

---------------------- Although consumer markets are often characterized as being increasingly

susceptible to segmentation in recent years, the condition of the overall
---------------------- economy is still a primary determinant of general sales volume, even in
many niche markets. Forecasters incorporate relevant data that correlate
---------------------- well or demonstrate a causal relationship with sales volume.

86 Sales and Distribution Management

5. Price Index Notes
If the prices for products have changed over the years, changes in ----------------------
dollar volume of sales may not correlate well with volume of units. At
one point in time when demand is strong, a company raises its prices. ----------------------
At another time, a company may engage in discounting to draw down
inventories. Therefore, accountants devise a price index for each year ----------------------
which compensates for price increases. By dividing the dollar volume ----------------------
by the price indexes, a company can track its “true” volume growth. This
process is similar to an inflation index, which provides prices in constant ----------------------
dollars. As a result, management is able to compare the price-adjusted
dollar sales volumes. ----------------------

6. Secular Trends ----------------------

The secular trend depicts: 1) general economic performance, or 2) the ----------------------

performance of the specific product for all companies. If a company’s
----------------------
trend line rises more rapidly than the secular trend line, a company would
be experiencing a more rapid growth in the rate of sales. Conversely, if ----------------------
a company’s trend line is below the secular trend line, its performance
is below the market’s average. Management also uses this type of ----------------------
comparison to evaluate and control annual performance.
----------------------
7. Trend Variations
----------------------
Although the secular trend represents the average for the industry, it may
not be “normal” for a particular company. The comparison of company ----------------------
trends to secular trends may indicate that the company is serving a ----------------------
specialised market, or that the company is not faring well. Forecasters
study the underlying assumptions of trend variations to understand the ----------------------
important relationships in determining the volume of sales. Although
markets may be strong, the sales force might need to be adjusted. ----------------------

8. “Intra-company” Trends ----------------------

By analysing month-to-month trends and seasonal variations over both the ----------------------
long and short-terms, small business owners and managers can adjust the
----------------------
sales forecast to anticipate variations that historically repeat themselves
during budget periods. Management may then construct a budget reflecting ----------------------
these variations, perhaps increasing volume discounts during traditionally
slow periods, exploring new territories, or having sales representatives ----------------------
solicit product and service ideas from current customers.
----------------------
9. Product Trends
----------------------
Forecasters also trend individual products, using indexes to adjust for
seasonal fluctuations and price changes. Product trends are important for ----------------------
understanding the life cycle of a product. ----------------------

----------------------

Sales Forecasting 87
 Notes
Check your Progress 1
----------------------

---------------------- Fill in the blanks.

1. Forecasters also trend individual products, using __________ to
----------------------
adjust for seasonal fluctuations and price changes.
----------------------

---------------------- 5.4 BASIC CONCEPTS IN SALES FORECASTING

---------------------- 1. Market Capacity
---------------------- Is the maximum quantity of a product or service that the market could use
regardless of price.
----------------------
2. Market Potential
---------------------- Is the highest possible industrywide sale of a product or service for a
given period.
----------------------
3. Sales Potential
----------------------
Is the largest share of market potential that a given company could hope
---------------------- to achieve.
4. Sales Forecast
----------------------
Is the company’s best estimate of Rupees or unit sales (unit sales) to be
---------------------- achieved during a given period under a proposed marketing plan .
---------------------- 5. Sales Quotas
Are the sales goals or sales targets assigned to individual sales people of
----------------------
the sales team?
---------------------- 6. Market Forecast
---------------------- This is the estimate of what that entire market will buy – from all sellers
– as conditions are and will be – during the coming year.
----------------------
7. Sales Forecast
---------------------- This figure is for a single seller. It is an estimate of how much of that
market forecast some specific seller will sell – if he adopts and follows
----------------------
a certain marketing program or plan – during the coming year. The total
---------------------- forecast figure must be broken down by buyer; by day, week, and/or
month; by sales territory and by basic unit; by product and/or product
---------------------- line; and, of course, by salesman. A company may consider two or three
marketing programs, each with its own sales forecast before choosing
----------------------
which one to adopt.
---------------------- 9. Market Share
---------------------- When this is a future figure, it is the ratio of a firm’s sales forecast to the
market forecast for that firm’s entire industry. When a past figure, it is the
---------------------- ratio of the firm’s sales for last year to entire industry sales for last year.

88 Sales and Distribution Management

 Notes
Check your Progress 2
----------------------
State True or False. ----------------------
1. Sales potential is the smallest share of market potential that a given
----------------------
company could hope to achieve.
2. Market Capacity is the maximum quantity of a product or service that ----------------------
the market could use regardless of price.
----------------------

----------------------
5.5 SALES FORECASTING APPROACHES
----------------------
There are four categories of sales forecasting approaches. Forecasting
techniques can also be grouped into quantitative and non-quantitative ----------------------
approaches. ----------------------
1) Judgement Methods
----------------------
2) Counting Methods
----------------------
3) Time-Series Analysis
4) Causal Association Methods ----------------------
Forecasting techniques can also be grouped into quantitative and non- ----------------------
quantitative approaches
----------------------
1. Non-quantitative Forecasting Techniques
A. Judgement Methods include ----------------------

a) The jury of executive opinion ----------------------

b) The Delphi Method and ----------------------
c) The sales force composite
----------------------
B. Counting Methods include
----------------------
a) Surveys of customer’s buying intentions and
b) Test marketing. ----------------------

2. Quantitative Techniques ----------------------

C. Time-series techniques include ----------------------
a) Decomposition ----------------------
b) Moving averages
----------------------
c) Exponential smoothing and
----------------------
d) Box-Jenkins
D. Finally, Causal Methods include ----------------------
a) Correlation – Regressional Analysis ----------------------

Sales Forecasting 89
 Notes b) Econometric Models and

---------------------- c) Input-Output Models

---------------------- 5.6 NON-QUANTITATIVE FORECASTING TECHNIQUES

---------------------- Relatively non-quantitative forecasting techniques rely on executive
---------------------- experience, judgement, an intuitive feel for the market, and market surveys.
Results can range from very good to very poor. Two major categories of non-
---------------------- quantitative approaches to forecasting are

---------------------- (A) Judgement Methods

The three most common forecasting methods that use judgment are
----------------------
1) The jury of executive opinion
----------------------
2) The Delphi Method, and
---------------------- 3) The Sales Force Composite
----------------------  he simplest forecasting technique of all is called the naïve forecast. It
T
assumes, usually naively, that next period’s sales will be the same as they
---------------------- were in the past period or that mere extrapolation of last period’s sales
will give the best estimate of next period’s sales.
----------------------
1. The Jury of executive opinion
----------------------
It involves a poll of executive opinion. With this method the
---------------------- collective views of top company executives are pooled to develop
the sales forecast. A jury may consist of the company president and
---------------------- several executives from different functional areas.
---------------------- Advantages
---------------------- a. A forecast can be developed easily and quickly.
b. Information can be gathered with less expense than with other
----------------------
forecasting techniques.
---------------------- c. In industries characterised by rapid change, executive opinion
may be the best method available because it is so flexible and
----------------------
fast.
---------------------- Disadvantages
---------------------- a. As it is highly subjective and relies on personal opinion often
not backed up with facts, it may be viewed as unscientific and
---------------------- mere guess work.
---------------------- b. This technique may suffer from problems in their functional
areas.
----------------------
c. Also, many times these key executives are from functional
---------------------- areas that are not closely attuned to the market place. For
example, what could a production manager or financial
---------------------- executive be expected to know about future sales?

90 Sales and Distribution Management

 d. As the sales forecasts based on executive opinions typically are Notes
not based on facts about products, customers or territories, it
is difficult to break down the forecast for operating, budgeting ----------------------
and controlling purpose in sub-units of the organisation.
----------------------
For this reason, some executives say that this technique should be used
only when there is no external or internal data available on which to base the ----------------------
forecast.
----------------------
In such cases, executive opinions may be the only feasible way of
forecasting sales. The executive-opinion approach is the most frequently used ----------------------
forecasting technique among small and medium sized companies. Often, the
----------------------
owner-president and the sales manager get together, examine all the facts
available to them, and come up with next year’s sales forecast solely on the ----------------------
basis of their judgments’, which are tempered by long experience.
----------------------
2. The Delphi Method
Is a modified version of the executive-opinion approach to forecasting ----------------------
developed during the late 1940’s by the Rand Corporation; it ----------------------
depends on the advice of a group of experts. Results from experts
in face-to-face panel discussions are often unsatisfactory because ----------------------
group opinion is highly influenced by dominant individuals, such
as the higher ranking executives. The Delphi Method attempts to ----------------------
overcome this bias by asking expert panelists to make their forecasts ----------------------
anonymously and then send them to a group coordinator. The group
coordinator analyzes all the forecasts and sends each member an ----------------------
averaged forecast. Opinions, beliefs, expectations and forecasts can
be re-evaluated and changed but without the dominant influence of ----------------------
any one participant. Each expert is asked to submit another forecast ----------------------
and again receives feedback from the coordinator. This process
continues until a near-consensus is reached. ----------------------
Advantages ----------------------
a. Such a procedure rests on the belief that an unpressured
----------------------
consensus forecast by experts will develop a good estimate of
future sales. ----------------------
b. The Delphi Method depends on executive views instead of
----------------------
direct market factors.
Disadvantages ----------------------
a. Its major disadvantage is the length of time needed to develop ----------------------
the consensus sales-forecast, sometimes two methods or
more. ----------------------
3. The Sales Force Composite Approach ----------------------
The most popular sales forecasting technique is the sales force ----------------------
composite. This approach to forecasting combines each sales
person’s estimate of future sales in his or her territory into a total ----------------------

Sales Forecasting 91
 Notes company sales forecast. The total forecast is then analyzed, adjusted
and compared with forecasts from other sources.
----------------------
Advantages
---------------------- a. Sales forecasting responsibility is assigned to those held
responsible for making the sales.
----------------------
b. Specialised knowledge of sales-people in the market place is
---------------------- utilised.
---------------------- c. Sales people have greater confidence in the individual
sales quotes assigned to them because they participated in
---------------------- developing the sales forecast.
---------------------- d. Results tend to have greater reliability and accuracy because
of the size of the sample.
----------------------
e. Estimates are developed by products, by customers and by
---------------------- territories, so a final detailed forecast is readily available.
---------------------- f. Sales by individual territory and individual sales persons are
emphasised.
----------------------
Disadvantages
---------------------- a. Sales people are not trained in forecasting so forecasts are
---------------------- often too optimistic or too pessimistic.
b. If estimates are used for setting sales quotas, sales people
---------------------- often deliberately underestimate their forecast so that they
---------------------- can reach their quotas more easily.
c. Sales people often lack the perspective for future planning, so
---------------------- their forecasts are usually based on present rather than future
---------------------- conditions.
d. Forecasting requires a considerable amount of sales force
----------------------
time that could be spent in the field attracting new customers.
---------------------- e. A sales person, by nature, tends to be optimistic and tends to
forecast higher sales than are possible.
----------------------
f. Most sales people are not interested in forecasting, so they
---------------------- put little effort into their sales projections. Since sales
people know that sales forecasts are used to determine their
----------------------
individual sales quotas, they have a tendency to overestimate
---------------------- or underestimate sales in their territories.

---------------------- Comparing forecasts of individual sales people with actual results

over the years may indicate the need to use a weighting factor for
---------------------- those sales people who are chronically wrong in one direction. A
sales person whose forecast is consistently 10% over actual sales
---------------------- should be assigned a 0.9 forecast weight, while someone who
---------------------- consistently forecasts 10% under should have a 1.1 weight.

92 Sales and Distribution Management

(B) Counting Methods Notes
Forecasting approaches that require little more than tabulating responses
----------------------
to questions on surveys or counting the number of buyers or purchases are
called counting methods. ----------------------
1. Survey of consumer or industrial buyer intentions
----------------------
A sample set of consumers are identified and asked about their
intentions to buy various products over a specified period. A forecast ----------------------
is then made by combining all the responses. The final forecast
thus made could be broken down into different sub forecasts on ----------------------
the basis of product, customer, or territory. Companies selling ----------------------
industrial goods would find such methods valuable since they have
a well-defined set of customers who would be able to project their ----------------------
requirements well in advance.
----------------------
Advantages
The most important advantage of this method is that the forecast ----------------------
is determined by actual users of the product. Moreover when the ----------------------
number of customers is low the forecast would be rather inexpensive
and fast, with more accuracy. ----------------------
Disadvantages
----------------------
This method can be highly expensive and slow and when there are
many users who cannot be easily located. ----------------------
Since it involves subjective judgement of the buyers, inaccuracies ----------------------
can creep in if the buyer’s intentions are proved wrong.
----------------------
2. Test Marketing
Used for estimating sales for a new product since no historical ----------------------
sales data is available. This is one of the most popular forecasting
----------------------
techniques for consumer packaged products is a counting method
called test-marketing. It is conducted in a limited market area to ----------------------
obtain consumer reaction prior to expanding to the regional or
national market. By carefully selecting a few representative market ----------------------
areas (microcosms of the larger markets), marketing managers can
----------------------
observe the impact on sales of various combinations of the marketing
mix. Measures of market share (based on trial and repeat purchase ----------------------
rates) in these small markets can be scaled up for forecasting sales in
the total market. For example, if a company wins a market share of ----------------------
10% in the small test market it may be assumed that approximately
----------------------
this share can be achieved in the expanded markets. To minimize
forecasting risks in introducing new products, many companies ----------------------
start in a small market and “roll out” gradually to the larger market
as sales increase. ----------------------
Some managers feel that ----------------------
i) Test marketing takes too long (often a year or more depending
on consumer repurchase cycles for the product), ----------------------

Sales Forecasting 93
 Notes ii) Costs too much, and
iii) Reveals too much to competitors, who often monitor the test
----------------------
markets and may even attempt to distort results. To avoid this
---------------------- visibility, some companies utilize their own “Laboratory”
methods. The laboratory methods usually involve exposing a
---------------------- panel of consumers to different combinations of the marketing
mix, then in a mock up of the real- world buying environment;
----------------------
the panelists are free to choose among alternative products
---------------------- and brands, including the one being tested. Laboratory
Experiments provide (1) more privacy (2) cost less and
---------------------- (3) result in quicker answers, thus they have gained increasing
acceptance.
----------------------

---------------------- Check your Progress 3

----------------------
State True or False.
---------------------- 1. The advantage of ______________ developed is that a forecast can
---------------------- be easily and quickly.
2. ______________ is used for estimating sales for a new product since
---------------------- no historical sales data is available.
----------------------

---------------------- 5.7 QUANTITATIVE FORECASTING TECHNIQUES

---------------------- Statistical techniques are increasingly being used by forecasters. They

can be divided into two broad categories
---------------------- 1) Time-Series Analysis
---------------------- a) Decomposition

---------------------- b) Moving average

c) Exponential smoothing and
----------------------
d) Box-Jenkins
---------------------- 2) Causal and Association Methods
---------------------- a) Correlation or regression analysis
b) Econometric models and
----------------------
c) Input-Output models
---------------------- (1) Time Series Analysis
---------------------- Time Series Techniques focus on historical data, while causal models are
based on the relationships among various factors, both past and present within
---------------------- the marketing environment.
---------------------- Time-series forecasting depends on analyzing past sales data to predict
future sales. When any time-series analysis is used to forecast sales, there are
---------------------- four basic factors or types of movements to be taken into consideration.

94 Sales and Distribution Management

TREND (T) Notes
Upward or downward movements in a time series as a result of basic development
----------------------
in population, technologies or capital formation.
PERIODIC (P) ----------------------

Consistent pattern of sales movement within a given period such as a year ----------------------
generally called seasonal variations. Snow skis are an example of a product that
----------------------
has a seasonal sales pattern.
CLINICAL (C) ----------------------

Wave like movement of sales that are longer than a year and often irregular in ----------------------
occurrence such as during business recessions. The housing market is especially
----------------------
affected by cyclical fluctuation
ERRATIC (E) ----------------------

One-time specific events such as wars, strikes, snowstorms, fires or fads that are ----------------------
not predictable. A sales forecaster needs to keep in mind that all four types of
----------------------
movements have an impact on sales that is,
Y (SALES) = f (T, P, C, E) – and that their effects must be differentiated from ----------------------
random variation in forecasting to identify true trends in the data. ----------------------
(a) Decomposition Methods
----------------------
When the forecaster makes a sale Forecast for each month or quarter of
the year, he or she needs to use decomposition sales forecasting methods ----------------------
to isolate the four components of time-series data. First, the seasonal ----------------------
pattern is removed. Then, the cyclical element, if any, is estimated and
removed. Finally the forecaster considers the impact of erratic-events ----------------------
before isolating any developing trends in the data.
----------------------
(b) Moving Averages
----------------------
This statistical approach is based on an average of several month’s sales
so that the high and low values are made less extreme. As each new ----------------------
period’s sales data are added to the average data from the oldest period
are removed from the total. For each period a new average is computed ----------------------
and this new average is in essence, the moving average sales managers ----------------------
using this method technique will have to decide the optimal number of
periods to include. ----------------------
Advantages ----------------------
i) Seasonal variations in the data are reduced; the moving-average ----------------------
approach tends to tone down the most recent sales figures, thereby
leading to conservative forecasts dividing times of increasing ----------------------
sales.
----------------------
ii) It can often minimize the large random elements that frequently
occur during short forecasting periods. ----------------------

Sales Forecasting 95
 Notes Disadvantages
i) A drawback of this method is that when a strong trend exists in the
----------------------
data, moving average lag behind.
---------------------- ii) The moving-average approach makes the assumption that the
factors affecting past sales will also affect future sales.
----------------------
iii) This technique used to be expensive since it requires that all past
---------------------- data be stored for ready retrieval.
---------------------- Many firms now use desk top PC-based system to develop moving
average. The formula for computing a moving average is
----------------------
Ft + 1 = S1 +St-1…St-n+1 =Ft +1
---------------------- n
---------------------- where Ft+1 = forecast for the next period
---------------------- St = sales in the current period

---------------------- St – 1 = sales in the previous period

n = number of periods in the moving average
----------------------
(c) Exponential Smoothing
---------------------- Exponential Smoothing is often used for short range sales forecasting. It
---------------------- has gained increasing acceptance in recent years. Exponential smoothing
overcomes one significant disadvantage of the moving sufficiently
---------------------- responsible to the most recent sales trends. Exponential smoothing
modifies the moving – average method by systematically stressing recent
---------------------- sales results while de-emphasizing old sales data. Exponential smoothing
---------------------- is a type of moving average that represents a weighted sum of all past
number in a time services with the heaviest weight placed on the most
---------------------- recent data. To illustrate, consider one of the most popular exponential
smoothing formulae
----------------------
Ft + 1 = a St + ( 1 - a ) Ft
----------------------
where Ft + 1 = time period that is to be forecast
---------------------- a = alpha, or the smoothing constant
---------------------- St = current period’s actual sales
Ft = current period’s forecasted sales
----------------------
The weight applied to the current period’s actual sales represents the
---------------------- forecaster’s estimate of their relative importance and is termed alpha, the
smoothing constant. It is set at a value between 0.0 and 1.0. A limitation
----------------------
of sales forecasts using exponential smoothing is that
---------------------- Disadvantages
---------------------- i) The estimates will lag behind trend movements. This is primarily
due to the reliance on past data as the only factors considered in the
---------------------- forecast.

96 Sales and Distribution Management

 ii) The smoothing constant is usually selected subjectively. As Notes
the smoothing constant is the basic of this technique, some
experimentation may be required before the forecaster selects a ----------------------
reliable constant.
----------------------
Representative sales figures can be used to measure errors with
smoothing constants of different sizes. ----------------------
iii) Finally, exponential smoothing, like moving averages, should be ----------------------
limited to short-run forecasts in industries characterized by mature
and stable markets. ----------------------
(d) Box-Jenkins ----------------------
A mathematical technique that uses computer analysis to select the model
----------------------
that best fits the time-series data
Advantages ----------------------
i) Box Jenkins can provide an excellent forecast over a short-run ----------------------
period of 3 months or so.
----------------------
ii) The results of this technique are generally fair in identifying
significant turning points. ----------------------
Disadvantages
----------------------
i) It can be a very experience procedure because of the high degree of
expertise required. ----------------------
ii) It requires a large number of historical data points for effective use. ----------------------
iii) It has proved to be no better than other, less mathematical forecasting ----------------------
methods.
Applications ----------------------
Its most successful application have been in Production, Inventory Control ----------------------
and Financial Forecasts.
----------------------
(2) Causal or Association Methods
Instead of predicting directly on the basis of judgment or historical or ----------------------
historical data, causal – forecasting methods attempt to find the factors ----------------------
that affect sales and to determine – regression method is one type of
causal method. ----------------------
(a) Correlation - Regression Analysis ----------------------
In correlation analysis, variables are studied simultaneously to see
whether they are interrelated or move together in some way. This ----------------------
technique tries to find correlations without implying cause and ----------------------
effect. Regression analysis, on the other hand, attempts to predict
how one variable, such as advertising expenditures, on Sales ----------------------
Both correlation and regression analysis usually start with a graph ----------------------
of paired data values, or a scatter diagram. When scatter diagrams
are being constructed, the variable that is used to predict, referred to ----------------------

Sales Forecasting 97
 Notes as the independent (X) variable, is scaled along the horizontal axis
of the graph, the variable to be predicted called the dependent (Y)
---------------------- variable, is scaled along the vertical axis.
---------------------- The scatter diagram is then plotted placing a mark at the intersection of
each pair of X patterns as shown in the Exhibit below
----------------------

----------------------
Source
----------------------

----------------------
(i) Positive (ii) Negative
---------------------- relationship relationship

----------------------

----------------------
----------------------

----------------------
(iii) No relationship (iv) Curvilinear
---------------------- relationship

---------------------- Fig. 5.1: Scatter Diagram

---------------------- The exhibit illustrates a linear – positive relationship (a) a linear – negative
relationship (b) no relationship (c) and a curvilinear relationship
----------------------
To show the relationship between the paired data (X,Y) of the scattered
---------------------- diagram, the simplest and most widely used technique is to fit a straight line to
the plotted points. This line might be drawn with a ruler from visual inspection
----------------------
and individual judgment, but differing judgment could result in several such
---------------------- lines. To find the “best-fitting line”, one needs to use the least squares formula
for a straight line, Y = a + bX, where a is the intercept (intersecting with the
---------------------- vertical axis) and b is the slope or trend of the line. Least squares estimates
of the coefficient (a, b) minimize the squared differences between the actual
----------------------
plotted sales and the values predicted by the regression line. Exhibit shows how
---------------------- a sales forecast can be developed by simple regression analysis.
Exhibit Simple Regression
----------------------
Year X Sales (Units) XY X2
----------------------
1 43 43 1
----------------------
2 52 104 4
---------------------- 3 73 219 9
---------------------- 4 71 284 16

---------------------- Sum 10 239 650

98 Sales and Distribution Management

 Y = a+bX Notes
b = n ΣXY- ΣXY ----------------------
n (ΣX ) - (ΣX)
2 2
----------------------
4 (650) - 10 (239)
4 (30) - (10)2 ----------------------
a = Y– b X ----------------------
= 59.75 - 10.5 (2.Σ) = 33.5
----------------------
Y = 33.5 + 10.5X
----------------------
= 33.5 + 10.5 (5) = 86 Units
----------------------
The regression equation Y = 33.5 + 10.5 X can be used to predict sales for
5th year by multiplying the trend of 10.5 by 5 and adding the constant term 33.5, ----------------------
yielding a forecast of 86. Simple regression describes the relationship between a
single independent variable and a dependent variable. In our example, we have ----------------------
used time as the independent variable and sales as the dependent variable. More ----------------------
realistically, sales are probably associated with several independent variables.
(e.g., advertising expenditures, number of sales calls, prices, or interest rates). ----------------------
Multiple regressions is a tool that can be employed to forecast the effect on sales
of several independent variables… “such as advertising expenditures, number ----------------------
of sales calls, prices, or interest rates.” ----------------------
Advantages of Multiple – Regression Analysis
----------------------
i) One of the most objective methods used in sales forecasting is that it
forces the forecaster to consider multiple factors influencing sales and to ----------------------
quantify any assumptions being made.
----------------------
ii) Causal relationships are determined between a company’s sales and
various independent factors influencing those sales. ----------------------
iii) The method specifies the degree of reliability of relationships between the
----------------------
dependent and independent variables.
iv) When good leading indicators are used as independent variables, turning ----------------------
points for a company’s sales can be estimated.
----------------------
Disadvantages of Multiple – Regression Analysis
----------------------
i) The sales forecast is often based on information that is derived from other
estimates which may be of questionable validity. ----------------------
ii) Some forecasters tend to readily accept results from sophisticated
----------------------
techniques without thinking about current market development and
trends. ----------------------
iii) The complexity of this technique often leaves some managers skeptical
----------------------
and reluctant to accept the sales forecast.
iv) Multiple regression analysis can be time consuming and expensive, since ----------------------
it requires technical skill that is often not available within many smaller
----------------------
firms, outside consultant may be needed.

Sales Forecasting 99
 Notes (b) Econometric Models (Econometric Model building and Simulation)
Econometric models can be thought of as a series of regression equations,
----------------------
often 1000 or more. The major goal in using econometric models is to
---------------------- capture the complex interrelationships among the factors that effect
either the total economy or an industry’s or a company’s sales. Building
---------------------- an econometric model is somewhat similar to building correlation –
regression models. The sequential steps used in building an econometric
----------------------
model are as follows:
---------------------- 1. Identify factors that affect future sales.
---------------------- 2. Determine the correlation between sales and the causal factors.

---------------------- 3. Develop a series of equations that show the relationships between

sales and the causal factors as well as the interrelationships of the
---------------------- causal factors.

---------------------- 4. Solve all the equations simultaneously by running them through a

computer. On the basis of the results, a new forecast can be created.
---------------------- Advantages
---------------------- i) Utilization of all the interrelated equations yields causal
relationships that can be expressed accurately.
----------------------
ii) Uncertainties in the economy and the industry can be predicted.
----------------------
iii) Econometric models can be used as a simulation of the entire
---------------------- economy. This can aid the sales forecasting in considering
alternatives and in answering “what if” questions.
----------------------
iv) Simple econometric models are increasingly possible because of
---------------------- the spread of low-cost PC-based systems to many firms that could
not afford them in the past.
----------------------
Disadvantages
----------------------
i) Forecasting with large, complex models can be expensive because
---------------------- much computer time is required and the forecaster needs great
expertise.
----------------------
ii) Econometric models are incapable of measuring all the impacts of
---------------------- all the possible forces affecting sales.
iii) A large amount of historical data is needed because of the great
----------------------
number of variables included in the model. Econometric Models
---------------------- are often used in conjunction with other forecasting techniques to
project industry sales or general economic conditions. Perhaps, the
---------------------- greatest value of econometric models is their potential for estimating
future events.
----------------------
Input-Output Models
----------------------
More appropriate for forecasting sales of industrial goods than consumer
---------------------- goods, input-output models are matrices that show the amount of input required

100 Sales and Distribution Management

from each industry for a specified output of another industry. Input-output Notes
models are very tedious and expensive to develop, but they can provide good
intermediate and long-range forecasts for industries such as metals power ----------------------
utilities and automobiles. Due to the difficulty in constructing large input-output
models, companies usually turn to external experts for help. ----------------------

----------------------
5.8 EVALUATING QUANTITATIVE AND QUALITATIVE
TECHNIQUES ----------------------

----------------------
Quantitative sales forecasting techniques employ sophisticated
mathematics and statistics usually analyzed through high-speed computers. ----------------------
Many of these techniques especially econometric models and multiple
regression are expensive and time-consuming and demand considerable ----------------------
forecaster expertise. Moreover, companies characterized by limited
----------------------
historical data or by a rapidly changing environment often must resort to
less sophisticated techniques. The complexity of a forecast is no promise of ----------------------
predictive accuracy. On the other hand, the non-quantitative techniques have
been heavily criticized, particularly in regard to their inconsistency. ----------------------
In selecting a forecasting method, several criteria ought to be considered ----------------------
a) Comprehensibility – Managers must understand the basic methods by ----------------------
which the forecast are developed if they are to have sufficient confidence
in the estimates to use them. Highly complicated quantitative techniques ----------------------
that only statisticians understand may not have credibility among sales
----------------------
executives and other decision makers.
b) Accuracy – The forecasting method must provide results that are ----------------------
sufficiently accurate for the purpose desired. Most forecasts contain ----------------------
inaccuracies but still furnish valuable information for managerial
decision making. A projection within 10% accuracy would be considered ----------------------
acceptable by most sales forecasters.
----------------------
c) Timeliness – The forecasting method must generate forecasts in time
to be useful to managers. Complex quantitative techniques or surveys ----------------------
can take weeks before good forecasts can be prepared. Thus, the sales
----------------------
manager who needs answers quickly may resort to quicker, perhaps less
accurate estimates. ----------------------
d) Availability of information – Any forecasting method is restricted by the ----------------------
amount and quality of information available to the organisation.
----------------------
e) Qualified Personnel – It takes highly skilled people to develop an accurate
forecast. Experts are needed to give their opinions in the qualitative ----------------------
methods like the jury of executive specialists is essential in forecasting
with such techniques as multiple regression, Box Jenkins, or econometric ----------------------
models. Sales managers who will be hiring people to participate in any
----------------------
aspect of the sales forecast must take great care that the prospects are
fully qualified for the job. ----------------------

Sales Forecasting 101

 Notes f) Flexibility – The sales forecasting process should be flexible enough to
adopt to changing conditions. Forecasting flexibility can be achieved by
---------------------- continually monitoring actual sales compared with forecasted sales for
deviations that may indicate the need for revised sales forecasting tools
---------------------- and procedures.
---------------------- g) Costs and Benefits – Benefits derived from the forecasting method must
offset the costs of generating the sales forecast. It is senseless to design
----------------------
an elaborate forecasting method that yields little information of value to
---------------------- management decision making.
In short, any sales forecasting methods used should be comprehensible
----------------------
to managerial decision makers timely, flexible, sufficiently accurate and
---------------------- appropriate to the available data base, they should be developed by qualified
people and evaluated on a cost-benefit basis.
----------------------
Organisational Involvement
----------------------
All functional areas of an organisation should be involved in the
---------------------- forecasting and planning process. The sales force needs to be involved
because it contributes directly to sales and is closest to the market. A lack
---------------------- of involvement in the forecasting process may negatively affect the overall
direction and motivation of the company. For instance, if a functional area
----------------------
is left-out of the process, the people working in that area may feel ignored
---------------------- causing morale problems. When everyone participates and is involved in the
forecasting process, each individual may take more interest in his or her job
---------------------- and in the direction of the organisation.
---------------------- Further more, any forecast ought to be reinforced by the general
convergence of several estimates made with different forecasting techniques.
---------------------- If several methods are used in forecasting sales, then most functional areas of
the organisation will probably participate.
----------------------

---------------------- 5.9 PERSONALCOMPUTERSAND SALES FORECASTING

---------------------- Computers are playing an increasingly important role in sales forecasting
today. It is apparent that microcomputers are being used extensively in the
----------------------
preparation of sales forecasts. Microcomputers or PCs have gained widespread
---------------------- acceptance for sales forecasting because they are very fast and capable of storing
and processing large amounts of data. These technological advances in PC’s
---------------------- have contributed to the use of many of the quantitative forecasting techniques.
There are a number of software packages, that are currently being marketed for
----------------------
use in sales forecasting.
---------------------- Sales managers in all types and sizes of companies are increasingly
utilizing, these software packages (i) they are user-friendly, (ii) they allow the
----------------------
use of forecasting methods that could not be undertaken manually and (iii) they
---------------------- make the preparation of sales forecasts much less expensive than it would be
with mainframe computers.
----------------------

102 Sales and Distribution Management

 Notes
Activity 1
----------------------
Visit the library and study the report of FICCI on media and entertainment ----------------------
industry in India. List the methodology followed for forecasting the potential
of the industry. ----------------------

----------------------
Summary
----------------------
●● The sales forecast is a prediction of a business’s unit and dollars sales for
some future period of time, up to several years or more. These forecasts are ----------------------
generally based primarily on recent sales trends, competitive developments,
and economic trends in the industry, region, and/or nation in which the ----------------------
organisation conducts business. Sales forecasting is management’s primary
----------------------
tool for predicting the volume of attainable sales. Therefore, the whole
budget process hinges on an accurate, timely sales forecast. ----------------------
●● For the forecasting to be accurate, managers need to consider factors such
as historical perspective, business competence, market position, general ----------------------
economic conditions, price index, secular trends, trend variations, intra- ----------------------
company trends and product trends.
●● There are four categories of sales forecasting approaches. Forecasting ----------------------
techniques can also be grouped into quantitative and non-quantitative
----------------------
approaches: Judgement methods comprising the Jury of executive
opinion, the Delphi Method, the Sales Force Composite Counting method ----------------------
includes: Surveys of customer’s buying intentions and Test marketing,
Time Series Analysis method includes: Decomposition, Moving averages, ----------------------
Exponential smoothing and Box-Jenkins. Finally, Causal Methods
include: Correlation – regressional analysis, Econometric Models and ----------------------
Input-Output models. ----------------------
●● In selecting a forecasting method, several criteria ought to be considered:
comprehensibility, accuracy, timeliness, availability of information, ----------------------
qualified personnel, flexibility and costs and benefits. ----------------------
●● For the successful forecasting, the entire organisation including all the
functions should be involved, then only it will become a comprehensive ----------------------
and cohesive sales forecast with every function having ownership of the
----------------------
same and hence the commitment for its achievement. Thanks to technology
the computers with its phenomenal capability to process large data and ----------------------
application of mathematical tools have made the sales forecasting process
relatively easier. ----------------------

Keywords ----------------------

●● Box-Jenkins : A mathematical technique that uses computer analysis to ----------------------

select the model that best fits the time-series data
----------------------
●● Market Capacity : It is the maximum quantity of a product or service
that the market could use regardless of price. ----------------------

Sales Forecasting 103

 Notes ●● Market Forecast : This is the estimate of what that entire market will buy
– from all sellers – as conditions are and will be – during the coming year.
----------------------

---------------------- Self-Assessment Questions

---------------------- 1. Discuss the various criteria in selecting forecasting methods.

2. What do you understand by the term sales forecast? Discuss.
----------------------
3. Discuss the various factors to be considered while forecasting the sales?
---------------------- 4. Discuss various non-quantitative forecasting techniques.
---------------------- 5. Write notes on the following:
a. Decomposition
---------------------- b. Moving average
---------------------- c. Exponential smoothing
d. Box-Jenkins
----------------------
---------------------- Answers to Check your Progress
---------------------- Check your Progress 1
Fill in the blanks.
----------------------
1. Forecasters also trend individual products, using indexes to adjust for
---------------------- seasonal fluctuations and price changes.
---------------------- Check your Progress 2
State True or False.
----------------------
1. False
---------------------- 2. True
---------------------- Check your Progress 3
Fill in the blanks.
----------------------
1. The advantage of the jury of executive opinion is that a forecast can be
---------------------- developed easily and quickly.
2. Test Marketing is used for estimating sales for a new product since no
----------------------
historical sales data is available.
----------------------

---------------------- Suggested Reading

---------------------- 1. Bowersox, Logistical Management: The Integrated Supply Chain Process.

2. Calvin, Robert J. Sales Management.
----------------------
3. Chopra, Supply Chain Management.
---------------------- 4. Ghoshal, World Class in India. Penguin India.
---------------------- 5. Lamba, A.J. The Art of Retailing.
6. Scheuing, Kurtz, Johnson. Sales Management: Concepts, Practices and
----------------------
Cases.
104 Sales and Distribution Management
Sales Organisation
UNIT

6
Structure:

6.1 Introduction
6.2 Definitions of Sales Organisation
6.3 Characteristics of Sales Organisation
6.4 Purpose of Sales Organisation
6.5 Centralisation vs. Decentralisation
6.6 Principles of Organisational Design
6.7 Evolution of Sales Department
6.8 Types of Sales Organisations
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Sales Organisation 105

 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Define sales organisation.
----------------------
• List the characteristics of sales organisation
---------------------- • State the purpose of sales organisation
---------------------- • Explain the concepts of centralisation and decentralisation
---------------------- • Describe the evolution of sales department

---------------------- • Discuss types of sales departments

----------------------

---------------------- 6.1 INTRODUCTION

---------------------- Organisation structure plays an important role in bringing about
the success or failure in marketing or sales activities. If the organisational
---------------------- structure is flexible and adaptable to the changing environment in market,
---------------------- serves its customers satisfactorily and profitably then we can say that the
organisation structure is successful in bringing about efficient marketing of
---------------------- its products.

---------------------- A sales organisation is a place for team and cooperative efforts and a
structure of human relationships. It is a set of individuals who come together
---------------------- and jointly strive to achieve qualitative and quantitative objectives. In addition
to formal relationships they develop informational relationships too. The sales
----------------------
organisation is a means of achieving organisational objectives.
----------------------

----------------------
6.2 DEFINITIONS OF SALES ORGANISATION

---------------------- “A sales organisation is one where functions of sales departments have

been carefully planned and coordinated towards the objective of selling the
---------------------- product to the customers, the whole effort being efficiently supervised and
managed so that each function is carried out in the desired manner”.
----------------------
- C.L. Bolling
----------------------
“A sales organisation consists of human beings working together for the
---------------------- marketing of products manufactured by the firm or marketing of commodities
which have been purchased for resale”.
----------------------
- H.R. Todsal
----------------------
“A sales organisation is a group of individuals striving jointly to reach
---------------------- certain goals and bearing formal as well as informal relations to each other”.
---------------------- - Still and Cundi

106 Sales and Distribution Management

 Sales organisation is the planning, directing and coordinating the activities Notes
of sales force for increasing organisational efficiency.
----------------------
- American Marketing Association
----------------------
6.3 CHARACTERISTICS OF SALES ORGANISATION
----------------------
●● Sales organisation is a part of total enterprise.
----------------------
●● It works for the attainment of common selling objectives like maximizing
sales volume, maximizing profits, increasing market share etc. ----------------------
●● It consists of group of people engaged in selling activities like distribution, ----------------------
sales promotion, personal selling, advertising etc.
●● It defines the duties, responsibilities, and rights of people engaged in ----------------------
selling activities and coordinate their activities. ----------------------
●● It establishes formal and informal relationships among persons engaged
in selling activities. ----------------------
●● The success of sales organisation depends on the unified and coordinated ----------------------
efforts of sales personnel.
----------------------
●● The sales organisation works under the direct control of the head of the
sales function usually, the General Sales Manager. ----------------------
●● It coordinated selling activities with other functional activities of
----------------------
management, production, finance, personnel etc.
----------------------
Check your Progress 1
----------------------
State True or False . ----------------------
1. The sales organisation works under the indirect control of the head of ----------------------
the sales function.
----------------------

6.4 PURPOSE OF SALES ORGANISATION ----------------------

In any sales organisation the sales personnel are located over a wide ----------------------
geographical area away from the organisational head quarters. A well structured ----------------------
sales organisation by defining formal relationships restricts the unnecessary
movement of men and material, maximizes comreadrarie and avoids friction. ----------------------
A well thought and considered and designed sales organisation increases the
effectivity of the selling effort thereby increasing the productivity. ----------------------
Sales personnel work away from their superiors and seldom function ----------------------
all alone under difficult conditions. Though formally it is the job of the sales
manager to ensure performance of the individual members of the sales team, he ----------------------
has to stretch himself beyond the formal relationship and get the results through ----------------------
leading the team from the front in a intelligent manner and use exemplary
human and inter personal relationships to guide the team to peak performance. ----------------------

Sales Organisation 107

 Notes Development of Specialists

---------------------- As the organisations grow the sales and marketing function also grows.
In the initial stages with few sales personnel perhaps the operations would be
---------------------- centralized. However with the growth in the organisation, induction of number
of personnel spread over large geographical areas, and with increasing number
---------------------- of functions like product development, market research, advertising, selling,
---------------------- sales promotion, distribution etc. there is a need to divide the entire working
into various sub functions. Since these functions are very crucial for the success
---------------------- of the organisation, they need to be managed by skilled professionals leading to
development of the specialists within the organisation.
----------------------
Optimum use of Executive Time
----------------------
With the growth in the organisation there is simultaneous growth in the
---------------------- activities of the sales and marketing functions. This calls for adding more and
more people to man the additional tasks and positions. In the process, a hierarchy
----------------------
in the sales functions gets established. By now there are people to take care of
---------------------- the day to day operational details. This frees the top executives from the burden
of looking into the minor operational details. As a result they get ample time
---------------------- to look into broader aspect of the sales function like planning, organising and
control. The only resource which is always in scarcity is time. Therefore every
----------------------
organisation should try to optimize the effectivity in utilization of time.
---------------------- To Define and Delegate Authority
---------------------- It is known that sales personnel work away from the company headquarters
---------------------- under difficult conditions. Lot of company resources like men, material money
are at their command. They in fact act as the custodians of the company’s
---------------------- valuable resources. Since they work in vary uncertain conditions, they need
to take decisions involving company’s resources. In today’s context, speed is
---------------------- the essence of the business activity. Hence, delay in taking decisions may have
---------------------- adverse impact on the business prospects of the organisation.

---------------------- It is therefore necessary to define the framework for delegating the

authority up the sales organisation hierarchy and delegate the same and
---------------------- empower the sales personnel to take speedy decisions. For example, a sales
executive posted away from the HQ on a visit to the customer finds that there is
---------------------- a genuine claim of his customers due to breakage of the product, with the help
---------------------- of the authority delegated to him he can take immediate decision and settle the
claim. In case there is delay in taking the decision due to lack of authority, the
---------------------- customer is dissatisfied affecting the business adversely.

---------------------- 6.5 CENTRALIZATION VS DECENTRALIZATION

----------------------
Centralization refers to the union and consolidation of departments into
---------------------- one center. Within the center, standardization may occur on operations ranging
from employee policy.
----------------------

108 Sales and Distribution Management

Decentralisation Notes
General Motors and Du Pont received wide attention in the 1920s
----------------------
with the successful reorganisation through organisational decentralisation.
Decentralisation does not necessarily mean geographic separation of ----------------------
organisation units e.g., - Branches of banks. In fact organisations can retain
centralised decision-making authority and still have scattered geographic units. ----------------------
IBM was an example of one such organisation.
----------------------
It is misleading to characterize an organisation as decentralised or
centralised because different organisational functions may exhibit varying ----------------------
degrees of decentralisation. For example; a wholesale electronics chain might ----------------------
have its purchasing function centralised for economics of scale, yet the pricing
function might be decentralised to allow the sales people to meet local market ----------------------
conditions.
----------------------
Organisations ought to be viewed as falling on continuum ranging
from total decentralisation to total centralisation with all organisation being ----------------------
somewhere in between the two extremes.
----------------------
Advantages of decentralisation
----------------------
●● Decentralized structure is more flexible than a mechanistic structure.
----------------------
●● Takes into account limitations of individuals.
----------------------
●● Increases the decision-making responsibilities of lower-level manager
and employees. ----------------------
●● This freedom of action, combined with incentive plans like team-bonuses ----------------------
can motivate an entire sales organisation.
----------------------
●● It develops potential managers with experience in accepting responsibility
for decisions. ----------------------
●● Increases employee’s morale though exceptions are there to it. ----------------------
Advantages of centralisation
----------------------
●● Substantial saving is possible by centralising certain functions such as
production, purchasing, advertising etc. ----------------------

●● Ensures consistent managerial practices and similar treatment of customers ----------------------

in widely scattered units of organisation e.g., McDonalds’s chain of Fast
----------------------
Foods and Holiday Inn.
Factors determining whether to decentralise the Sales Force Organisation ----------------------

1. Sales force size: The smaller the size of the sales force, the more likely ----------------------
that it can be centralised. However, as the sales force grows, there arises
----------------------
span of control problem for field supervisors and sales managers may
be needed to recruit and train more supervisors. If the number of people ----------------------
reporting to a manager exceeds more than eight, then the question of
decentralisation should be considered. ----------------------

Sales Organisation 109

 Notes 2. Relative role of personal selling: The more important the role of
personal selling in the promotional mix, the greater the need for field
---------------------- sales supervisors with local market responsibility and authority.
---------------------- 3. Geographic dispersion of market: As market expands geographically it
becomes more and more difficult to supervise the selling force. Customer
---------------------- service may decline, sales expenses tend to increase. To ensure efficiency
decentralisation through additional branches proves to be helpful.
----------------------
4. Type of distribution channel: The more direct the channels of distribution
---------------------- used, the more likely it is that decentralised product inventories will be
required at branch locations placed near customers.
----------------------
5. Customer service requirements: The more the presale (installation) and
---------------------- post sales (repair) services required by customers, the more need there
will be for decentralized operations.
----------------------
6. Overall costs: At different stages of organisation’s growth, management
---------------------- may consider either centralisation or decentralisation of various activities
---------------------- depending on the effect on total costs. A cost-benefit approach is
necessary to determine whether benefits would be derived from further
---------------------- decentralisation or not.

----------------------
Check your Progress 2
----------------------
Fill in the blanks.
----------------------
1. _______________ refers to the union and consolidation of departments
---------------------- into one center.
----------------------

---------------------- 6.6 PRINCIPLES OF ORGANISATIONAL DESIGN

---------------------- ●● Organisational structure should reflect a marketing orientation

●● Responsibility and authority should be related properly
----------------------
●● Span of executive control should be reasonable
----------------------
●● Organisation should be stable but not flexible
---------------------- ●● Activities should be balanced and coordinated.
----------------------
6.7 EVOLUTION OF SALES DEPARTMENT
----------------------
All organisations have three functions. They could be listed as follows:
----------------------
a) They must raise and manage money (finance)
---------------------- b) Produce products or services (production)
---------------------- c) Sell these products (Sales).
----------------------

110 Sales and Distribution Management

Organisational structure has an important bearing on the success of the sales Notes
and marketing activities viz.;
----------------------
a) How well they are coordinated.
----------------------
b) How quickly they can be adapted to the changing marketing environment.
----------------------
Factors Influencing Marketing and Sales Department Structures
●● Top-management philosophy and attitude towards marketing ----------------------

●● Company objectives ----------------------

●● Resources ----------------------

●● Competitive position ----------------------

●● Existing marketing position ----------------------

Simple Sales Department: In this form of department, the selling function ----------------------
is headed by a sales Vice President or Sales Manager who directs the sales force
and does some selling too. In a small company, the sales manager normally ----------------------
has charge of all marketing activities. When the company needs some market ----------------------
research or advertisement, the sales manager handles these duties as well.
----------------------
Sales Department with ancillary functions: As an organisation begins to
grow, it begins to require market research, advertising, new product development ----------------------
and customer services on a more regular basis. Eventually the company employs
a few full time specialists who can carry out the marketing service work and ----------------------
often a permanent marketing service department is established. ----------------------
Separate Marketing Department: With sales growth, the importance and
----------------------
complexity of supporting marketing functions or services continue to increase.
Because the sales Vice President tends to focus on the management of the sales ----------------------
force and to neglect the marketing support activities, the company president will
create a separate marketing department. So the company now has both a Sales ----------------------
Vice President and a Marketing Vice President. If the sales V.P. is qualified and
----------------------
he/she has potential he/she may be promoted to the position of marketing V.P.
with assistant sales manager becoming sales manager. ----------------------
In other cases, the company will find it necessary to hire a marketing V.P. ----------------------
from outside the company to obtain the expanded perspective and skills needed
to direct the marketing functions. ----------------------

Modern Marketing Department: Unfortunately, the relationship between ----------------------

the sales vice president and the marketing.
----------------------
V.P. is one of rivalry instead of cooperation. The marketing V.P. tries to
control all marketing functions affecting customer satisfaction, and the sales ----------------------
V.P. perceives that the sales force has been downgraded until it is merely on ----------------------
important part of the company’s marketing mix.
----------------------

Sales Organisation 111

 Notes (a) Marketing Vice President
i) Takes a long-range view
----------------------
ii) Emphasizing new product development
----------------------
iii) Creative marketing strategy
---------------------- From the above, we can infer that marketing V.P. and sales V.P. tend to
---------------------- pursue things differently therefore leading to great conflicts. To resolve this
conflict, another structure evolves in which sales V.P. reports directly to the
---------------------- marketing group V.P. as depicted.

----------------------
Check your Progress 3
----------------------
State True or False.
----------------------
1. All organisations have two functions - finance and production.
----------------------
---------------------- 6.8 TYPES OF SALES ORGANISATIONS
Functional Sales Organisation
----------------------
Chief Marketing Executive
----------------------

---------------------- Advertising Marketing Credit Sales

Manager Research Manager Manager Promotion
---------------------- Manager Manager

----------------------

---------------------- Salespeople

---------------------- Line authority

Staff advisory authority
----------------------
Fig. 6.1: Functional Sales Organisation
---------------------- Source: Macgraw-Hill Companies Inc.
---------------------- The functional organisational structure is suitable when the organisation
outgrow the line organisation and begins to add specialized positions. For
----------------------
example, as the organisation grows, more number of sales persons are added
---------------------- to service the large number of customers, sell more number of products and
services and expand into multiple sales regions or national market. The design
---------------------- is useful for medium to large organisations because it allows them to take
advantage of the benefits of specialization.
----------------------
On the other hand, the functional organisational structure involves high
---------------------- overhead, since it requires creating large number of management positions that
are not directly involved generating income. Such an organisation operates
----------------------
more slowly than the line organisation and takes longer to respond to changes
---------------------- in the business environment. However, these limitations are covered by the
benefits derived.
112 Sales and Distribution Management
 Line-and-Staff Sales Organisation

Chief Marketing Executive

Notes

----------------------
Advertising Marketing Sales Sales
----------------------
Manager Research Manager Promotion Analysis
Manager Manager Manager
----------------------

----------------------
Salespeople
----------------------
Line authority ----------------------
Staff advisory authority
----------------------
Fig. 6.2: Line-and-Staff Sales Organisation
Source: Macgraw-Hill Companies Inc. ----------------------
The line and staff structure is mostly found in large and medium-size ----------------------
firms which employ a large number of sales personnel and sell large number of
product lines over a large geographical area. The line and staff organisational ----------------------
structure as indicated in the above figure extends the benefit of presence of ----------------------
various staff functional professionals like advertising, market research, sales
promotion, sales training, sales planning etc. their presence enables the top ----------------------
executives to give more time on activities in the strategic nature while the day
to day activities are handled by these specialists. ----------------------

Staff executives, however senior they are cannot issue order or directives. ----------------------
Their function is more support function and not a line function. However due
----------------------
to operational convenience the specialist and the line sales personnel do have
interactions and share a healthy rapport. ----------------------
The advantages of the line and staff organisation are ----------------------
●● it encourages specialization.
----------------------
●● the top executive can have a broader perspective of the various functions
without going into much detail. ----------------------

The disadvantage of the line and staff organisation are ----------------------

●● coordination of the staff specialists is expensive. ----------------------
●● the relationship between line and staff executives needs to be closely ----------------------
monitored lest it may lead to confrontation and ego clashes.
----------------------
●● since the line and staff executives have different orientations, there are
seldom delays in recognizing the problems and finding out the solutions. ----------------------

----------------------

----------------------

----------------------

Sales Organisation 113

 Geographical Sales Organisation
Notes Chief Marketing Executive

----------------------
Advertising Marketing Sales Sales Analyst
---------------------- Research Promotion
Manager Manager
Manager Manager
----------------------

---------------------- Western Regional Eastern Regional

Sales Manager Sales Manager
4 District Sales 4 District Sales
---------------------- Managers Managers

---------------------- Salespeople each Salespeople each

with own territory with own territory

---------------------- Fig. 6.3: Geographical Sales Organisation

---------------------- Source: Macgraw-Hill Companies Inc.

---------------------- Many large organisations are organised by geographic territory. This

type of organisation is generally used by companies with intense/widespread
---------------------- distribution over a large geographical territory; say for example the entire country,
India. Geographical organisation is so often combined with other methods of
---------------------- organisation such as product or customer. With geographic specialization, each
---------------------- territorial unit can be treated as separate profit center. The sales manager of a
given territory often has complete responsibility for achieving the units/regions
---------------------- sales responsibility. The unit can be called a division, region, zone, branch,
district etc.,
----------------------
From the above chart it can be seen that the country is divided into four
---------------------- regions (in figure shown only two). Generally in our country the companies
divide the country into 4/5 regions viz., north, East, West, South and/or coupled
---------------------- with a Central region. Each RSM is supported by four district managers, who
---------------------- in turn are supplemented a large number of area managers/sales representatives.
The sales managers feel that this type of organisation provides
---------------------- improvements in
---------------------- Control of activities
---------------------- Market coverage
Customer service
----------------------
Response to local conditions
----------------------
Direction of salespeople’s efforts in achieving unit goals.
----------------------

----------------------

----------------------

----------------------

----------------------

114 Sales and Distribution Management

 Sales Organisation with Product-Specialised Sales Force

Chief Marketing Executive Notes

----------------------
Advertising Marketing Sales Customer
Manager Research Promotion Relations ----------------------
Manager
Manager Manager Manager
----------------------
Sales Manager Sales Manager Sales Manager ----------------------
Product A Product B Product C
Salespeople Salespeople Salespeople ----------------------
Product A Product B Product C
----------------------
Fig. 6.4: Sales Organisation with Product-Specialised Sales Force
Source: Macgraw-Hill Companies Inc. ----------------------
Another common type of organisation in large companies is based on ----------------------
the firm’s product. the entire organisation may be organised by product, with
separate sales, advertising, marketing and so on with staff for each. It may ----------------------
however happen that some functional units may remain centralised for example
----------------------
advertising or market research. A separate sales force and sales management
would exist for each product group. These sales divisions are treated either ----------------------
as separate company or profit center. Large companies commonly use a
combination of product and geographic organisation. It is very rare to find a ----------------------
medium to large companies organised solely by product.
----------------------
Product specialization is necessary or at the least useful when
----------------------
●● the products are very technical or of a complex nature.
----------------------
●● a large number of similar but separate products exist.
----------------------
●● products are relatively simple but completely different.
●● product lines are distributed through entirely different trade channels. ----------------------

●● different products are sold to similar markets. ----------------------

The advantages of product specialization is that ----------------------
●● each product receives close attention from the salesperson responsible for ----------------------
selling.
----------------------
●● in the case of complex products the salesperson can master the necessary
information to sell the product effectively. ----------------------
The disadvantages of product specialisation are ----------------------
●● increased cost of executives, sales personnel and their time.
----------------------
●● different sales personal calling on the same customers trying to sell them
different products. This costs the company time for repeated calls. ----------------------

----------------------

----------------------

Sales Organisation 115

 Sales Organisation Specialised by Type of Customer

Notes Chief Marketing Executive

----------------------
Advertising Marketing Sales Customer
---------------------- Manager Research Manager Promotion Relations
Manager Manager Manager
----------------------
Sales Manager Sales Manager Steel Sales Manager
---------------------- Transportation Industry Industry Petroleum Industry

---------------------- Salespeople Salespeople Salespeople

---------------------- Fig. 6.5: Sales Organisation Specialised by Type of Customer

---------------------- Source: Macgraw-Hill Companies Inc.

Companies with several separate and distinct markets accounting for

----------------------
major portions of their sales often organise based on these markets or customers.
---------------------- Firms frequently shift form the product organisational structure to a structure
based on customers. Markets then become the major sales emphasis. This seems
---------------------- to be the best specialization method for firms today.
---------------------- Matrix organisation
It is an attempt to combine the advantages of the pure functional structure
----------------------
and the product organisational structure. This form is identically suited for
---------------------- companies, such as construction, that are “project-driven”. The figure below
shows a typical Matrix organisation.
----------------------
In a matrix organisation, each project manager reports directly to the vice
---------------------- president and the general manager. Since each project represents a potential
profit centre, the power and authority used by the project manager come directly
---------------------- from the general manager.
---------------------- Information sharing is mandatory in such an organisation, and several
people may be required for the same piece of work. However, in general, the
---------------------- project manager has the total responsibility and accountability for the success
---------------------- of the project. The functional departments, on the other hand, have functional
responsibility to maintain technical excellence on the project. Each functional
---------------------- unit is headed by a department manager whose prime responsibility is to ensure
that a unified technical base is maintained and that all available information can
---------------------- be exchanged for each project.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

116 Sales and Distribution Management

 Typical Matrix organisation
Chief Notes
Executive
----------------------

Manager of ----------------------
Manager Manager Manager Project Manager
----------------------
Staff Staff Staff Project Manager
----------------------
Staff Staff Staff Project Manager
----------------------
Staff Staff Staff Project Manager
(Black boxes represent staff engaged in project activities) Project
----------------------
Coordination
----------------------
Fig. 6.6 : Typical Matrix Organisation
----------------------
Source: Visitak Project Management Training and Resources

The basis for the matrix organisation is an endeavour to create synergism ----------------------
through shared responsibility between project and functional management. ----------------------
Other advantages of a pure matrix organisational form, to project management,
include: ----------------------
●● Because key people can be shared, the project cost is minimized ----------------------
●● Conflicts are minimal, and those requiring hierarchical referrals are more ----------------------
easily resolved
●● There is a better balance between time, cost and performance ----------------------

●● Authority and responsibility are shared ----------------------

●● Stress is distributed among the team. ----------------------

The matrix organisation is one of the recent structures. It was developed ----------------------
in the aerospace industry to deal with rapid technological change and new
product development. ----------------------

Creativity and flexibility were critical and that they could be best obtained ----------------------
in a structure designed around individual expertise instead of formal position.
----------------------
Advantages of Matrix organisation
----------------------
●● Proves to be effective in today’s rapidly changing environment
----------------------
●● Facilitates quick responses to changes in market.
●● Focuses attention on end results and goal accomplishment. ----------------------

●● Recognizes the fact that programs comprise interacting systems and ----------------------
networks.
----------------------
●● Provides flexibility, encourages interdepartmental cooperation.
----------------------
●● Develops skills as it motivates and challenges them
----------------------

Sales Organisation 117

 Notes Disadvantages of a matrix organisation
●● There is always a potential for conflict between functional and project
----------------------
manager or between professional experts.
---------------------- ●● Possible additional cost of implementation.
---------------------- ●● A matrix organisation leads to more discussion and less action.
---------------------- Despite the possible disadvantages matrix organisational structures will
become commonplace in future.
----------------------
Difference between Functional Organisation and Matrix Organisation
----------------------
Functional organisation: Even though the company markets several
---------------------- products, each functional unit makes an individual contribution, to the entire
product mix and the chain of command flows down through functions.
----------------------
Matrix organisation: A matrix organisation focuses on specific products
---------------------- or projects. The functional areas are still present but they are secondary to the
---------------------- project structure.
The project managers head a team of individuals from different functional
----------------------
areas and have responsibility for co-coordinating these functions towards
---------------------- project competition. Individual team members still have a functional superior
but they also report to the project managers.
----------------------
Violation of Unity of Command
----------------------
Individual having bosses
---------------------- Functional Manager Project Manager
---------------------- Example
---------------------- Matrix organisations encourage the team-work concept to maximize
individual contributions. Team leaders are seen as coordinators of efforts rather
---------------------- than as bosses.
---------------------- Committee Sales Organisation
---------------------- In a committee sales organisation the executive group is organised for
planning and policy formulation whereas individual executives take care of
---------------------- the actual operations, including implementation of policies and plans. Many
---------------------- organisations have a sales training committee which comprises the general sales
manager, assistants to the general sales manager, the sales training manager and
---------------------- divisional or regional sales managers. This committee meets at regular intervals
to formulate training plans and sales training policies.
----------------------
However, it is the responsibility of the sales training manager to implement
---------------------- these plans and policies when there is only one line or staff executive for
conducting sales training in his jurisdiction. Committees relating to customer
----------------------
relations operations, personal merchandizing and new products can be other
---------------------- such committees found in organisation.

118 Sales and Distribution Management

The advantages of committee sales organisation are as follows: Notes
●● Committee members bring out important problems and study them from
----------------------
different viewpoints before policies are formulated and implemented.
●● In committee meetings, ideas and divers opinions are discussed, which ----------------------
improves coordination among the executive team members.
----------------------
●● There is greater cooperation in case of such committees since there is
open and mutual discussion of ideas and problems amongst its members. ----------------------
However, many precautions have to be taken for the effective operation ----------------------
of committees.
●● Agenda must be planned and controlled to avoid wastage of time. ----------------------

●● The chairperson should ensure that the discussion focused upon should be ----------------------
relevant to the subject.
----------------------
●● However the chairperson should not dominate the proceedings but should
play the role of facilitator. ----------------------
----------------------
Check your Progress 4
----------------------
Fill in the blanks. ----------------------
1. The _____________ structure is suitable when the organisation
----------------------
outgrows the line organisation and begins to add specialised positions.
2. In a _______________, each project manager reports directly to the ----------------------
vice president and the general manager.
----------------------

----------------------
Activity 1
----------------------
Study the organisation structure of companies in the following industries: ----------------------
Telecom, Automobile, Banking.
List the types of organisation structure in each of them. ----------------------

----------------------
Summary ----------------------
●● Sales organisation is a place for team efforts. It is a structure of human ----------------------
relationships. It is a set of different individuals who come together and try
to achieve quantitative and qualitative objectives. ----------------------
●● The evolution of sales and marketing department has passed through five ----------------------
stages. Simple sales department, sales department with ancillary functions,
separate marketing department and modern marketing department. ----------------------
●● There are four basic types of sales organisations. Line, line and staff, ----------------------
functional and committee. The classification of activities and the charting
of relationships among positions give organisation its structural form. ----------------------

Sales Organisation 119

 Notes ●● The sales organisation can be centralized or decentralized. In a centralized
sales organisation the sales force is controlled from the company head
---------------------- office. In case of decentralized the sales organisation, the field sales
executives viz., Regional sales manger, Area/Zonal sales managers
---------------------- control the sales operations.
----------------------
Keywords
----------------------
●● Geographic Dispersion: They spread over a geographical area.
----------------------
●● Span of Executive Control: Refers to number of people working under
---------------------- the executive.
----------------------
Self-Assessment Questions
----------------------
1. Define sales organisation.
----------------------
2. Discuss the characteristics of sales organisation.
----------------------
3. What is centralization and decentralization? Discuss their advantages and
---------------------- disadvantages.
---------------------- 4. State the principles of organisational design.

---------------------- 5. Draw any two organisational structures given in this unit.

---------------------- Answers to Check your Progress

----------------------
Check your Progress 1
---------------------- State True or False.
---------------------- 1. False
---------------------- Check your Progress 2
---------------------- Fill in the blanks.
---------------------- 1. Centralisation refers to the union and consolidation of departments into
one center.
----------------------
Check your Progress 3
----------------------
State True or False.
----------------------
1. False
----------------------

----------------------

----------------------

----------------------

120 Sales and Distribution Management

Check your Progress 4 Notes
Fill in the blanks. ----------------------
1. The functional organisational structure is suitable when the organisation
----------------------
outgrows the line organisation and begins to add specialised positions.
----------------------
2. In a matrix organisation, each project manager reports directly to the vice
president and the general manager. ----------------------

----------------------
Suggested Reading
----------------------
1. Bowersox, Logistical Management: The Integrated Supply Chain Process.
2. Calvin, Robert J. Sales Management. ----------------------

3. Chopra, Supply Chain Management. ----------------------

4. Ghoshal, World Class in India. Penguin India. ----------------------
5. Lamba, A.J. The Art of Retailing. ----------------------
6. Scheuing, Kurtz, Johnson. Sales Management: Concepts, Practices and
Cases. ----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

Sales Organisation 121

 Notes

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

122 Sales and Distribution Management

Recruitment and Selection of Sales Force
UNIT

7
Structure:

7.1 Introduction
7.2 Definition of Recruitment
7.3 Importance of Recruitment
7.4 The Recruitment Process
7.5 Selection Process
7.6 Sales Force Selection in Multinational Companies
7.7 Sales Force Socialisation
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Recruitment and Selection of Sales Force 123

 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Define recruitment
----------------------
• State the importance of recruitment
---------------------- • Describe the recruitment process
---------------------- • Explain the selection process
---------------------- • Discuss sales force socialisation

----------------------
7.1 INTRODUCTION
----------------------
Recruitment has been regarded as the most important function in any
----------------------
organisation because unless the right type of sales force are hired; even the best
---------------------- plans and marketing strategies fail.
Recruitment is finding potential job applicants, telling them about the
----------------------
company and getting them to apply. Recruiting efforts should not simply
---------------------- generate applicants: rather it should find applicants who are potentially good
employees. The entire sales organisation ultimately depends on a successful
---------------------- recruiting approach. Thus, recruiting is the discovering of potential applicants
for actual or anticipated organisational vacancies and it is a ‘linking activity’
----------------------
bringing together those with jobs and those seeking jobs.
----------------------
7.2 DEFINITION OF RECRUITMENT
----------------------
According to Flippo “It is a process of searching and encouraging them to
----------------------
apply for jobs in an organisation”.
---------------------- As Yoder and others point out:
---------------------- “Recruiting is a process to discover the sources of manpower to meet
the requirements of the staffing schedule and to employ effective measures for
---------------------- attracting that manpower in adequate number to facilitate effective selection of
---------------------- an efficient working force”.
Accordingly, the purpose of recruitment is to locate sources of manpower
---------------------- to meet job requirements and job specifications.
----------------------
7.3 IMPORTANCE OF RECRUITMENT
----------------------
Sales force recruitment has always been one the most important
---------------------- responsibilities of the sales manager because to most customers and prospects
---------------------- the sales people are the company. What the sales people say, how they handle
themselves and how they react in face-to-face interactions with customers
---------------------- definitely influence the firm’s sales success.

124 Sales and Distribution Management

 Over the years sales force recruitment has become even more important. Notes
This is because
----------------------
●● The cost of hiring and training has increased dramatically; and because,
equal employment opportunity (EEO) legislation has made hiring and ----------------------
termination decisions more complicated and more difficult.
----------------------
So, due to the critical importance of recruiting; sales managers should
have an effective system for finding and selecting sales personnel. ----------------------

At the heart of successful sales force operation is the selection of good ----------------------
sales people. The performance levels of an average and a top sales person can
----------------------
be quite different. In a typical sales force, the top 30% of the sales people might
bring in 60% of the sales. Careful salesperson selection can thus greatly increase ----------------------
overall sales force performance.
----------------------
An effective selection program cannot exist without a well-planned
and well-operated system for recruiting applicants. A poor recruiting system ----------------------
may make an organisation to hire people who do not actually meet its needs;
because the recruiting system has not generated enough qualified applicants and ----------------------
a selection must be made immediately from the available applicants. ----------------------
The importance of planned recruiting is even more obvious when the costs
----------------------
associated with selecting and training sales people are examined. Direct costs,
such as maintaining; recruiting teams and placing recruiting advertisement are ----------------------
increasing rapidly.
----------------------
Management should view the recruitment and selection process, as a
sub-system of sales force management and evaluate it in terms of total cost. ----------------------
With this approach, the recruiting activities can be optimized to recover the
----------------------
total cost of selecting and developing new sales people to the point where their
productivity is profitable. ----------------------
An Effective Sales Team ----------------------
An effective sales team is made up of highly motivated, energetic and ----------------------
hungry individuals. These individuals
----------------------
●● know how to present themselves and represent your business
----------------------
●● establish effective relationships with customers and clients
●● know how to sell a product or service, and ----------------------

●● know how to close a sale. ----------------------

Hiring an effective sales team is accomplished through careful ----------------------

interviewing, role-playing, observing, reference-checking and selecting. Make
----------------------
sure that what you are looking for in an employee is reasonable. Is the job
you’re seeking to fill really one job? Is the mixture of education, experience and ----------------------
skills one you’re likely to find? Is it possible to have someone come in ready
to “hit the ground running,” or should you plan for some basic sales training? ----------------------

Recruitment and Selection of Sales Force 125

 Notes Setting realistic expectations up front will help ensure search and hire success.
Make sure that what you are looking for in an employee is reasonable.
----------------------
Is the job you’re seeking to fill is really one job? Is the mixture of education,
---------------------- experience and skills one you’re likely to find? Is it possible to have someone
come in ready to “hit the ground running,” or should you plan for some basic
---------------------- sales training? Setting realistic expectations up front will help ensure search
and hire success.
----------------------

---------------------- Check your Progress 1

----------------------
Fill in the blanks.
---------------------- 1. Hiring an effective ______________ is accomplished through
---------------------- careful interviewing, role-playing, observing, reference-checking and
selecting.
----------------------
---------------------- 7.4 THE RECRUITMENT PROCESS
---------------------- After the management has decided on needed traits, it must recruit.
---------------------- The personnel department looks for applicants by getting names from current
salespeople, using employment agencies, placing job ads and contacting college
---------------------- students.
---------------------- Previous research comparing the sales aptitude and job performance with
the sales recruit’s personal characteristics has not identified any single set of
---------------------- characteristics or abilities that can be used by the sales manager in determining
---------------------- which recruits to hire for sales positions.

---------------------- Different activities must be performed for different types of sales

positions. Therefore, each recruits personality characteristics and abilities must
---------------------- be assessed to determine which type of sales job, if any a particular recruit is
suited for.
----------------------
To ensure that new recruits have the aptitude necessary to be successful
---------------------- in a particular type of sales job, certain procedures should be followed in the
recruitment process.
----------------------
The steps involved in the recruiting process are as follows:
----------------------
●● Conducting Job Analysis
----------------------
●● Preparing Job Description
----------------------
●● Developing Job Specification
----------------------
●● Attracting Pool of Applicants
----------------------
●● Selection
----------------------

126 Sales and Distribution Management

A. Conducting Job Analysis Notes
Before a company can search for a particular type of salespersons, it must
----------------------
know something about the sales job to be filled. To aid in the process,
a job analysis should be conducted to identify the duties; requirements; ----------------------
responsibilities and conditions involved in the job.
----------------------
A proper Job Analysis involves these steps:
1. Analyse the environment in which the salesperson is to work. ----------------------

For example: ----------------------

a) What is the nature of the competition faced by the sales person ----------------------
in this job?
----------------------
b) What is the nature of the customers to be contacted and what
kinds of problems do they have? ----------------------
c) What degree of knowledge, skill and potential is needed for ----------------------
this particular position?
----------------------
2. determine the duties and responsibilities that one expected from
the sales-person. ----------------------
In doing so, information should be obtained from ----------------------
a) Salespeople
----------------------
b) Customer
----------------------
c) The Sales Manager and
d) Other marketing executives including the advertising ----------------------
manager; marketing service manager; distribution manager; ----------------------
marketing research director and credit manager.
----------------------
3. Observing and Recording the various tasks of the job as actually
performed. ----------------------
Spend time making calls with several sales people, observing and
----------------------
recording the various tasks as they are actually performed. This
should be done for a variety of different types of customers and ----------------------
even a representative over a period of time.
----------------------
b. Preparing Job description
The result of a formal job analysis is a job description. The job description ----------------------
should preferably be in writing so that it can be referred to frequently ----------------------
and so as to enable the prospective job applicants, as well as the current
sales personnel to know exactly what the duties and responsibilities ----------------------
of the sales position are and on what basis the new employee will be
evaluated. ----------------------

The best way to do that is to have the person currently doing the job write ----------------------
it out very specifically, what his or her job consists of. If the job you’re
planning to hire for is new to the company, make a detailed list of all that ----------------------

Recruitment and Selection of Sales Force 127

 Notes you envision it will require. For example, what duties are involved? Do
you need someone on a part-time or full-time basis? Is this a temporary
---------------------- position? Must the job be done in your office, or could salespeople be able
to work from their homes? What kind of education is required to do this
---------------------- job? What kind of experience is required? What job skills are necessary?
---------------------- What is the potential for advancement? How much supervision will the
individual doing the job need?
----------------------
Your job description will be used to communicate the job to candidates for
---------------------- employment, help set the pay rate for the position, and later, help set the
standards for and guide the performance of the employee you hire. Make
---------------------- sure your sales job description includes information in these categories:
---------------------- Planning
---------------------- This section should describe all preparatory work that should be done
before an actual sales call is made. For example, who are the established
---------------------- customers? Who are the prospective customers and where can they be
---------------------- found? How often should they be called? What are the objectives for each
call?
----------------------
The job description should outline the planning responsibilities of the
---------------------- sales rep and estimate the percentage of the job that should be devoted to
meeting these responsibilities.
----------------------
Selling
----------------------
This section outlines the sales rep’s responsibilities during the actual
---------------------- sales call. How many sales calls should be made in one day? How should
customer questions/objections be handled? How should the benefits of
---------------------- the product or service be touted? How should orders be communicated
---------------------- to the office? Again, the percentage of the job that should be devoted to
meeting these responsibilities should be stated here.
----------------------
Servicing
----------------------
This section of the job description refers to customer service skills and
---------------------- responsibilities, such as installing a product, handling questions and
complaints, making adjustments or accepting returns, processing special
---------------------- orders, and negotiating payment arrangements. The sales rep’s degree of
autonomy/authority over financial arrangements should be stated here,
----------------------
and the approximate amount of time expected to be allotted to customer
---------------------- service should also be estimated.

---------------------- Communicating
This section of the job description refers to the time the sales representative
----------------------
spends acting as a liaison between the customer and your company. For
---------------------- example, how much of the sales person’s job should be devoted to writing
sales call reports? How much time should be spent on researching the
---------------------- industry and/or competitor’s products and services?

128 Sales and Distribution Management

 Miscellaneous Notes
This section covers all responsibilities not listed elsewhere, such as
----------------------
time spent attending team meetings, attending and conducting training
sessions, etc. ----------------------
The job description is probably the most important single tool used in
----------------------
managing the sales force. It is used not only in hiring but also in managing
and sometimes as a basis for firing salespeople. ----------------------
It provides and helps
----------------------
a) in preparing description of the sales person’s duties.
----------------------
b) in developing training programs that help sales people perform their
duties better. ----------------------
c) in developing compensation plans. ----------------------
d) in supervision and motivation.
----------------------
e) management to determine whether each salesperson has a reasonable
workload. ----------------------
Since the job description is used in evaluating the salesperson’s ----------------------
performance many of the responsibilities listed in it must be stated in
quantitative terms. In addition, since there are so many tasks competing ----------------------
for the sales person’s twice, job priorities should be summarized in the ----------------------
job description.
Sales industry experts point out that many job descriptions are so brief ----------------------
and ambiguously written that they are of little sure in the hiring process. ----------------------
Thus, it is very important that firms prepare job description they can use
effectively ----------------------
Checklist for preparing a salesperson’s description ----------------------
• Make regular customer visits.
----------------------
• Estimate customer’s potential needs.
----------------------
• Sell the Product or Product line.
• Handle questions & objections. ----------------------

• Explain company policy on price, delivery and credit. ----------------------

• Check stock, identify possible product uses. ----------------------
• Get the Order.
----------------------
• Interpret sales points on products to the customer.
----------------------
Servicing Functions
• Install the product on display. ----------------------

• Handle special orders. ----------------------

• Report product weaknesses and complaints. ----------------------

Recruitment and Selection of Sales Force 129

 Notes • Establish Priorities.
• Handle adjustments, returns and allowances.
----------------------
• Analyse local conditions for customers.
----------------------
• Handle requests for credits.
---------------------- Territory Management
---------------------- • Arrange route for best coverage.
---------------------- • Balance efforts with customers against the potential value.
• Maintain sales portfolios, samples, kits, etc.
----------------------
Sales Promotion
----------------------
• Develop new prospects and accounts
---------------------- • Train personnel of wholesalers, jobbers, etc.
---------------------- • Distributes literature; catalogues, etc.
---------------------- • Present survey, reports, layouts and proposals.
• Make calls with customer’s sales people.
----------------------
Executive Activities
----------------------
• Develop monthly and weekly work plan.
---------------------- • Prepare reports on developments, trends, new objectives met and
---------------------- new ideas on meeting objectives.
• Each night make a daily work plan for next day.
----------------------
• Attend sales meetings.
----------------------
• Organise field activity for minimum travel and maximum calls.
---------------------- • Build a prospect list.
---------------------- • Prepare and submit special reports on trends and competition.

---------------------- • Collect overdue accounts, faulty accounts.

• Prepare and submit statistical data requested by field officer.
----------------------
• Collect credit information.
----------------------
• Investigate lost sales and reason for loss.
---------------------- • Analyse work plans to determine which goals were net met and
---------------------- why.
C. Developing a set of Job Specifications
----------------------
The job specification states the minimum acceptable qualifications that
---------------------- an employee must possess to perform a given job successfully. The duties
and responsibilities state in the job description are converted into a set of
---------------------- qualifications that a recruit should have in order to perform the sales job
---------------------- satisfactorily. Some of the specifications that many organisations seek in

130 Sales and Distribution Management

 a typical salesperson are ambition, enthusiasm, discipline, persuasiveness Notes
and rich sales experience.
----------------------
High performing sales people:
• demonstrate a firm commitment to customer satisfaction. ----------------------

• maintain two-way advocacy, representing the interest of their ----------------------

companies and their clients.
----------------------
• bring added value to the sales task with their enthusiasm, sensitive
inter personal skills and sense of professionalism. ----------------------

• tend to intellectualize the sales process activity planning & ----------------------

developing strategies that will maximize their impact on the
----------------------
customer’s time & provide efficient internal support relationships.
• is committed to a “sales way of life”. ----------------------

• is highly time-conscious. ----------------------

There are also some critical characteristics sought by a fortune 500 ----------------------
corporation in the health care industry. These characteristics have been
listed down as: ----------------------
• Intelligence: Evident in verbal expression, depth of response, ----------------------
analytical thought process.
----------------------
• Decisiveness: When asked, makes definite choices, lets you know
where he or she stands on issues, and is not tentative. ----------------------
• Energy and Enthusiasm: Is animated, positive, spontaneous, fast ----------------------
– paced.
----------------------
• Results Orientation: Gets to the point, emphasize achievements,
responses are relevant to interview objectives. ----------------------
• Maturity: Shows poise, Self-confidence and maturity in dress, ----------------------
general demeanor and degree of relaxation.
----------------------
• Assertiveness: Takes charge, is forceful, convening, and persuasive.
----------------------
• Sensitivity: Is sincere, friendly, tactful, responsive, not aloof.
• Openness: Responses one not canned and superficial. ----------------------

• Tough-Mindedness: Discusses persons and events critically; ----------------------

doesn’t allow emotions to cloud perceptions.
----------------------
The duties and responsibilities set forth in the job description should be
converted into a set of qualifications that a recruit should have in order ----------------------
to perform the sales job satisfactorily. Determining these qualifications
----------------------
is probably the most difficult aspect of the entire recruitment process.
However, most firms try to identify personality traits that presumably ----------------------
make better sales persons, such as self-confidence, aggressiveness and
gregariousness. ----------------------

Recruitment and Selection of Sales Force 131

 Notes D. Attracting Pool of Applicants

---------------------- The next major step in the recruitment and selection process is attracting
a pool of applicants for the sales position to be filled. The candidates
---------------------- recruited become the reserve pool of sales staff from which new sales
people can be chosen.
----------------------
The importance of starting with a large pool of applicants cannot be over-
---------------------- emphasized when a large number of applicants are processed the recruiting
program serves as an automatic screening system. Sales managers should
----------------------
however be careful not to screen out good candidates.
---------------------- Recruiting is not equally important in all firms. The quality of sales people
---------------------- needed, the rate of turnover expected and a firm’s financial position are
just a few of the factors that account for the difference.
----------------------
When high-caliber sales people are needed more applicants must be
---------------------- screened before the one meeting the hiring specifications is formed. With
firms that experience a high rate of turnover, a continuous recruiting
---------------------- program is required. Firms that are financially stable may be able to
employ travelling recruiting teams, whereas financially troubled firms
----------------------
may rely heavily on advertisement.
----------------------
Sources of Salespeople
---------------------- There are many places a sales manager can go to find recruits. Sales
---------------------- managers should analyze each potential source to determine which ones will
produce the best recruits for the sales position to be filled. Once good sources
---------------------- are identified sales manager should maintain a continuing relationship with
them even during periods when no hiring is being done. Good sources are hard
---------------------- to find, and goodwill must be established between the firm and the sources to
---------------------- ensure good recruits in the future.
Some companies use only one source; while other use several. Recruitment
----------------------
in general can however be managed in following way:
----------------------
The most frequently used sources are persons within the company,
---------------------- competitions; non-competing companies, educational institutions; advertisement
and employment agencies.
----------------------
a) Persons within the company: Companies often recruit sales people
---------------------- from other departments, such as production, engineering and from the
non-selling section of sales department. The people are already familiar
---------------------- with company policies. Besides, sales managers know the people and are
---------------------- aware of their sales potentials.
Hiring people from within can lift morale because a transfer to sales is
----------------------
often viewed as a promotion. Recommendations from the present sales
---------------------- force and sales executives usually yield better prospects than those of
other employees because the people in sales understand the needed
---------------------- qualifications.

132 Sales and Distribution Management

b) Competitors: Sales people recruited from competitors are trained, have Notes
experience in selling similar products to similar markets and should be
ready to sell almost immediately. But usually a premium must be paid in ----------------------
order to attract them from their present jobs.
----------------------
Recruiting competitor’s sales people may however bring other problems.
Although their people are highly trained and know the market and the ----------------------
product very well, it is often hard for them to unlearn old practices. They
----------------------
many not be compatible with the new organisation and management.
Often, it is almost impossible to assess accurately why someone is looking ----------------------
or another job. Good sales managers must be able to evaluate effectively
the information they get. ----------------------
c) Non-competing Companies: Non-competing firms can provide a good ----------------------
source of trained and experienced sales people, especially if they are
selling similar products or selling to the same market. Even though, some ----------------------
recruits may be unfamiliar with the recruiting firm’s product line, they do
----------------------
have selling experience and require less training.
Companies that have either vendors or customers of the recruiting firm ----------------------
can also be an excellent source of candidates. Recruitment from these ----------------------
sources already have some knowledge of the company from having sold
to or purchased from it; their familiarity reduces the time it will take to ----------------------
make them productive employees. Another advantage of recruits from
their sources is that they are already familiar with the industry. ----------------------

d) Educational Institutions: High schools; adult evening classes, business ----------------------

colleges and universities are all excellent sources of sales recruits. While
----------------------
most college graduates lack specific sales experience, they have the
education and perspective that most employers seek in potential sales ----------------------
managers. College students tend to adapt more easily than experienced
personnel. ----------------------
A major problem in recruiting from college campuses used to be the ----------------------
unfavorable image of sales, but this has been changing in recent years.
----------------------
In doing campus recruitment, the companies must
• Shortlist campuses ----------------------

• Choose recruiting team carefully ----------------------

• Pay smartly, not highly ----------------------
• Present a dear image ----------------------
• Showcase company culture
----------------------
• Get in early
----------------------
Not all companies fit the bill.
----------------------
Factors to be considered in Evaluating Sources
The recruiting efforts differ substantially from company to company. ----------------------

Recruitment and Selection of Sales Force 133

 Notes Some of the factors management should consider when deciding which
recruiting sources to use are:
----------------------
• Nature of the Product: A highly technical product requires an
---------------------- experienced, knowledgeable person. The firm may look at persons
even from production department or at experienced persons from
---------------------- other companies.
---------------------- • Nature of the Market: Experienced salespeople may be needed
to deal with well-informed purchasing agents or with high-level
---------------------- executives.
---------------------- • Policy on Promoting from within: If this policy is the rule,
recruiters know where to look first.
----------------------
• Sales training provided by the company: A company that has its
---------------------- own sales training program can recruit inexperienced people. But if
a sales person needs to be productive quickly, it may be necessary
----------------------
for the company to seek experienced recruits.
---------------------- • Personnel needs of the company: If the company is seeking career
sales people, then colleges and universities are not good sources of
----------------------
recruits, because many college graduates want to be managers.
---------------------- • Sources of successful recruits in the part: These sources can
---------------------- be used again, as long as there have been no changes in the sales
position.
---------------------- • Recruiting budgets: A small budget means a firm must limit its
---------------------- sources.
• Legal considerations: Civil rights law and other regulations must
----------------------
be considered when a firm is deciding on sources of recruits.
---------------------- E. Selection
---------------------- A successful recruitment campaign results in a good number of applicants.
The next task is to select the most suitable person from these applicants.
---------------------- The selection process involves choosing the candidates who best meet
---------------------- the qualifications and have the greatest aptitude for the job. The objective
of effective selection is to match individual characteristics with the
---------------------- requirements of the job. The ultimate goals of selection is generally to
choose the best person for the job
----------------------

---------------------- Check your Progress 2

----------------------
State True or False.
---------------------- 1. The result of a formal job analysis is a job description.
---------------------- 2. The job description is probably the most important single tool used in
managing the sales force.
----------------------

134 Sales and Distribution Management

 Notes
Activity 1
----------------------
1. State five qualities you have observed of the salesman during your ----------------------
last visit to a departmental store.
----------------------

7.5 SELECTION PROCESS ----------------------

----------------------
A successful recruitment campaign results in a good number of applicants.
The next task is to select the most suitable persons from these applicants. The ----------------------
selection process involves the following steps:
----------------------
●● Initial screening.
●● Formal application form ----------------------
●● Tests ----------------------
●● Comprehensive interview ----------------------
●● Reference checks
----------------------
●● Physical examination
●● Making the selection ----------------------

Initial Screening ----------------------

Based on the job description and job specifications some of the applicants ----------------------
can be eliminated in the initial screening interview. During the interview the
interviewer can discuss with the applicants various aspects of the job in detail, ----------------------
which facilitates the applicants to review their suitability for the job. Hence, the
----------------------
purpose of the initial screening interview is to eliminate those candidates which
are not suitable for the job as soon as possible. Initial screening assumes special ----------------------
significance when the number of applicants is large.
----------------------
It is better that the initial screening is handled by junior in the system
so that valuable executive time is not wasted in this initial screening. It is ----------------------
better that executive at the junior level like Asst. Personal Managers; junior
sales personnel handled the initial screening interview. In the initial interview ----------------------
if the interviewer is satisfied about the suitability of the candidate for the job,
----------------------
the candidate is asked to fill in the formal application form provided by the
company and it is at this stage that the appointment for the next interview is ----------------------
given to the candidate.
----------------------
Formal Application Form
Those candidates who get through successfully through the initial ----------------------
screening interview are supposed to fill in the prescribed formal application ----------------------
form. The details provided in the form serve as the basic data and record for
further use in the selection process, and in the event of the selection serve as the ----------------------
basic information about the candidate during the tenure of the employee with
the organisation. ----------------------

Recruitment and Selection of Sales Force 135

 Notes The information requested in the formal application includes name, date
of birth and age, temporary and permanent address, educational qualification,
---------------------- marital status, details about the spouse and children, educational/technical
qualification, details about any special training received by the candidates,
---------------------- details of experience in the various organisations, medical history, hobbies and
---------------------- extra curricular activities, references, salaries drawn, expected salary. With the
various details provided in the application form the interviewer is in a position
---------------------- to relate as to potential of the candidate.
---------------------- Employment Tests
Employment tests help evaluate the candidates by assessing specific
----------------------
aptitudes, psychological factors such as ability to reason, ability and capacity to
---------------------- learning, adaptability, temperament, physical ability etc. Following are the tests
which are used in the selection process of sales personnel.
----------------------
1. Intelligence Test
----------------------
These tests measure raw intelligence and trainability. A sales person’s
---------------------- cognitive of future job performance. The other reason for using tests
relates to the high cost of training and hiring the sales force. Any tool
---------------------- that will help the firms make the right selection decision is welcomed.
A selection tool that can reduce sales force turnover and increase sales
----------------------
productivity is definitely desirable. Tests also provide a basis for interview
---------------------- and may be probed more deeply during the interview.
The intelligence test is slowly regaining status as the most effective tool
----------------------
for selecting sales people.
---------------------- 2. Knowledge Test
---------------------- These tests are designed to measure what the applicant knows about a
certain product, service, market and the like.
----------------------
3. Sales Aptitude Test
----------------------
These tests measure a person’s innate or acquired social skills and selling
---------------------- know-how as well as tact and diplomacy.

---------------------- 4. Vocational Interest Test

These tests measure the applicant’s vocational interest, the assumption
----------------------
being that a person is going to be more effective and that he or she has a
---------------------- strong interest in selling.
5. Personality Test
----------------------
These tests attempt to measure the behavioural traits behind necessary for
---------------------- success in selling, such as assertiveness, initiative and extroversion.
---------------------- 6. Polygraph Test
---------------------- The polygraph test, sometimes called the “lie-detector test”, measures
blood pressure, respiration, heartbeat and skin response as indicatory of
---------------------- personal honesty.

136 Sales and Distribution Management

7. Attitude and Lifestyle Test Notes
Their primary purchase is to assess honesty and spot drug abuses.
----------------------
8. Drug Test
----------------------
Drug testing programmers are being used frequently in private industry to
screen out applicants who are drug users. ----------------------
A company should use tests designed by a professional to meet the needs ----------------------
of a particular job. So job factors related to success must be identified; then
valid and reliable tests that measure these must be designed specifically for the ----------------------
company or appropriate standardized tests must be purchased or their use must ----------------------
be continually monitored. The company should keep records showing that the
tests and questions are relevant to the job. In fact, 2/3rds of all companies used ----------------------
psychological testing as a selection tool.
----------------------
Problems in Testing
----------------------
a) A major problem involved with testing is that most tests are based on the
concept that an average person is best suited for the job. This means that ----------------------
potentially successful sales people may be screened out because they do
not fit the stereotype. ----------------------

b) Another problem is that tests may be used as the sole decision factor ----------------------
rather they should be one of several factors considered.
----------------------
Comprehensive Interview
----------------------
The interview is the most widely used selection step and in some
companies, it comprises the entire selection system. Some personnel experts ----------------------
criticize this as an irrelevant tool, but it is an effective way to obtain information.
----------------------
The interviewers review the completed application form before the interview
and refrains from asking questions already answered. The job interview can be ----------------------
a trying experience for the applicant. During the interview the employee and
the employer get an opportunity to learn and know about each other. Interviews ----------------------
enable the interviewer to judge individual’s ability in oral communication,
----------------------
Personal appearance, manners and attitude towards selling etc. The following
are the widely used methods of interview: ----------------------
Structured Interviews ----------------------
The structured interviews are based on the same set of standard questions
----------------------
which enable the interviewer to determine the candidate’s suitability for the
sales position. Structured interviews are not suitable when in-depth information ----------------------
about the candidate is required.
----------------------
Unstructured Interviews
----------------------
Such interviews are basically unstructured and informal. Questions are
not asked in planned and sequential order. The purpose of such an interview is ----------------------
to give flexibility to the interviewer to ask probing and leading questions. The
basic idea is to motivate the candidate to speak freely so that the interviewer ----------------------

Recruitment and Selection of Sales Force 137

 Notes gets maximum and in-depth information about the candidate which helps in
deciding the suitability of the candidate for the job.
----------------------
Combination of Structured and Unstructured Method
---------------------- Many sales professionals use a blend of both the types of interviews. In
---------------------- this method the interviewer uses a set of pre determined questions and also uses
interaction and discussion to find out more about the candidate.
----------------------
Reference Checks
---------------------- References provide information on the applicant not available from other
---------------------- sources. Some employers deny the value of references saying that references
hesitate to criticize personal friends or ex-employees. But, the experienced
---------------------- employer reads between the lines and sees where, for example, the weak
candidate is not praised.
----------------------
Personal contact is the best way to obtain information from since facial
---------------------- expressions and voice intonations reveal a great deal and most people are frank
orally, than in writing. When a reference is located at a distance, a telephone
---------------------- call may substitute for personal contacts.
---------------------- Applicants tend to name as references those on whom they can rely to
speak in their favour. In addition, there is a tendency for references to be biased
----------------------
in favour of the applicant. These tendencies are partially offset by contacting
---------------------- persons not listed as references, but, who know the applicant. These people are
excellent sources for careful appraisals and fall into four classifications:
----------------------
1. Present or Former employer
---------------------- 2. Former Customers
---------------------- 3. Reputation Citizens
---------------------- 4. Mutual acquaintances

---------------------- Many companies run “credit checks” on applicants for sales positions. In
analyzing the credit report, the executive looks for the danger signals – chronic
---------------------- lateness in making payments, large debts outstanding for long periods, or a
bankruptcy history – any of which signal the need for additional probing.
----------------------
Physical Examination
----------------------
Since good health is important to a salesperson’s success, most
---------------------- companies require physical examinations. Due to the relatively high cost, the
physical examination generally, is one of the last steps. Even in companies
---------------------- requiring entrance physical examinations, poor health often accounts for some
compulsory, the number is higher.
----------------------
Thus, appropriate selection procedure as described above, and their skillful
---------------------- execution, result in greater selling efficiency. A higher – grade salesperson is
---------------------- produced, and the advantages of having such employees cannot be underlined:
better work quality, improved market coverage, superior customer relations and a
---------------------- lower ratio of selling expense. Good selection fits the right person to the right job,

138 Sales and Distribution Management

thereby increasing job satisfaction and reducing the cost of personnel turnover. Notes
Making the Selection
----------------------
When all other steps have been completed in the selection process, the
company must decide whether or not to hire each applicant. The company must ----------------------
review everything known about a particular applicant. The applicant’s goal and
----------------------
ambitions must be matched against present and future opportunities, challenges
and other types of rewards that are offered by the job and the company. Seasoned ----------------------
sales executives should give consideration to intuitions as well as to facts.
----------------------
If any uneasy feelings about candidates exist, the candidate should be called
back for another interview, and additional reference checks should be done. If a ----------------------
company follows the logical sequence of a well planned recruiting and selection
system, the executive’s intuitions will soon be transformed into objective criteria ----------------------
that can be used to compare applicants and make decisions among them.
----------------------
A decision to hire is followed by a formal offer, with no unspecified
details or surprises; the terms should be in writing for the protection of both the ----------------------
recruit and the firm. If a chosen candidate has lots of reservations about the job, ----------------------
sales manager should not attempt persuasion. Such applicants are not likely to
give the company their best efforts. ----------------------

----------------------
Check your Progress 3
----------------------
Fill in the blanks.
----------------------
1. ____________ is slowly regaining status as the most effective tool
for selecting sales people. ----------------------
2. An ____________ is the most widely used selection step and in some ----------------------
companies, it comprises the entire selection system.
----------------------

----------------------
7.6 SALES FORCE SELECTION IN MULTINATIONAL
COMPANIES ----------------------

A growing concern of many U.S. corporations is selecting qualified ----------------------

salespeople for their international markets. As U.S. companies go overseas
----------------------
to sell their products, they soon realise how different the selling environment
and the markets are from those in the United State. Differences in ethnic ----------------------
compensations, religious orientations, social class and education complicate
the sales force selection process for multinational corporations. A study of ----------------------
sales force recruiters at multinational companies discovered some differences
----------------------
between the ranking of various sales person selection criteria for overseas
markets and the ranking for U.S. markets. ----------------------
For e.g., education is more important in overseas markets and selection ----------------------
criteria such as social class, religion, and ethnicity – which are seldom used in
the United States – account for as much as 25% of the sales hiring abroad. ----------------------

Recruitment and Selection of Sales Force 139

 Notes The sales force selection process in KRUPP INDUSTRIES INDIA
LIMITED, which is a multinational company, is as follows:
----------------------
a) Advertisement: At the outset, the advertisements for the job in question
---------------------- are framed. The advertisement contains the nature of the job, the
qualifications of the people required, last date for sending in résumé’s etc.
----------------------
b) Collection of Resume: In this next step, the resume of the applicants are
---------------------- collected in an orderly manner for the sake of convenience and reduce the
work load.
----------------------
c) Screening of Resume: All the applicants who apply for a particular post
---------------------- may not be called for interview, because, in some cases, the resume of the
candidate may not match the job requirement. Thus, such applications are
---------------------- screened out.
---------------------- d) Written Test: In case the job profile is such that it calls for technical
know-how, a written test is designed and conducted.
----------------------
e) Group Discussion: The next step in the selection process is the conduction
---------------------- of group discussions. Group Discussions not only give us information
about the amount of knowledge one has, but also helps the observer to pass
---------------------- a judgement on the candidates way of functioning in a group situation.
---------------------- f) Personal Interview: Candidates clearing the Group Discussions go
through a personal, face-to-face interviewing process. After all the
---------------------- processes are completed, the whole process is re-evaluated.
----------------------
7.7 SALES FORCE SOCIALISATION
----------------------
Once the process of recruiting and selecting the new salesperson is
---------------------- complete, that person must be integrated into the organisation. The proper
---------------------- introduction of the recruit to the company practices, procedures and philosophy
and to the social aspects of the job is crucial in achieving a return on the sizeable
---------------------- investment made during the selection process.
---------------------- A study of sales force socialisation suggest that the firm’s efforts in
recruiting, selecting and training, all play an important part in the socialisation
---------------------- process. 189 of the least experienced sales persons from different companies
were surveyed. The results of the survey imply that
----------------------
(a) if recruiters give the prospective employee a realistic picture of the sales
---------------------- job, the chances for job satisfaction are enhanced,
---------------------- (b) better training and initiation to the job lead to greater job satisfaction, and
(3) sales recruits whose personal needs and skills are compatible with the
---------------------- firm and the job should be selected.
---------------------- There are basically, two levels of SOCIALISATION. The first level is the
Initial Socialisation and the second level is the extended socialization.
----------------------
Initial Socialisation
---------------------- This preliminary exposure to the firm begin with the recruiting and

140 Sales and Distribution Management

selection process and ends with the initial orientation of the salesperson to Notes
the firm’s procedures and policies. It occurs during recruiting, selecting and
introductory training. ----------------------
Recruiting: Most firms begin the socialisation process by sending the ----------------------
sales candidate, recruiting literature which details the company’s philosophy
and the role of the salesperson in the organisation. ----------------------

Selection: The interview process can give both the candidate and the ----------------------
recruiter some idea of how the new salesperson will respond to the socialisation
efforts of the company. For e.g., sales force of “Electronic Data Systems” (EDS) ----------------------
is expected to dress conservatively. By conforming to this dress pattern, the ----------------------
recruiter signals the company’s expectations to the recruit. This may yield clues
about the organisations philosophy and the structure of the company. Small ----------------------
firms may not be able to afford the expense of such high-quality recruiting
materials like brochures and lengthy interview processes, thus when small ----------------------
firms recruit sales-people, a principal owner of the firm is often involved in the ----------------------
interviewing process. Thus, the candidate can get first hand information about
the owner’s philosophy of running the business and the role of the sales force. ----------------------
Introductory Training: After completing the recruiting and selection ----------------------
process, the new recruit has some notion of the firm’s corporate philosophy
and the nature of the sales position. Some companies prepare a detailed human ----------------------
resource manual, concerning the company’s history, product line, organisation
----------------------
and various compensation and benefit packages. By receiving such a manual
before they report for work, new sales people can quickly find answers to many ----------------------
of their questions concerning the company’s policies.
----------------------
Extended Socialisation
----------------------
This socialisation involves long term training, job rotation and corporate
social activities. ----------------------
a) Long-Term Training: Many large companies use long-term training ----------------------
programs to educate sales people about the firm’s products, customers and
competitors and to ensure that the new recruits are properly socialised. ----------------------
There is, however, a negative side to this type of extended socialisation.
----------------------
Some recruits may resent being asked to “fit the mould” and may leave
the firm. Through proper selection and recruitment methods and accurate ----------------------
presentation of company’s expectations, such individuals can be screened
out before company resources are invested in training them. ----------------------
b) Job Rotation: Both large and small firms use job rotation as a way to ----------------------
expose sales trainees to the corporate culture. Not only do the recruits
learn the functional aspects of how different departments work, but they ----------------------
also make social contacts and are exposed to the whole organisation. ----------------------
One firm that practices job rotation with sales recruits is Apple Computer
Inc. New sales people are first given introductory training on company ----------------------
procedures and policies. Before they are permanently assigned to a sales
territory, they are expected to spend several weeks working in all the ----------------------

Recruitment and Selection of Sales Force 141

 Notes departments. This program has been successful in helping Apple’s people
to better understand their role in the organisation.
----------------------
c) Corporate Social Activity: Many firms have started to recognize the
---------------------- value of informed ways of socialising new employers. Company picnics,
sports leaves and sales meetings, all provide an opportunity for the new
---------------------- sales people to interact with experienced sales persons, sales managers
---------------------- and company executives in a threatening environment. In these types of
settings, the new employee can ask questions and observe how everyone
---------------------- fits into the social structure of the firm. Corporate Social Activity aimed at
socialisation need not be so elaborate or expensive. Hallway conversation
---------------------- and softball teams can be effective means of socialising the new sales
---------------------- person.
Thus, selecting good applicants is an extremely important and challenging
----------------------
task for the sales manager. It is critical that the sales manager selects the
---------------------- candidates who best meet the qualifications established by the company.

----------------------
Check your Progress 4
----------------------

---------------------- State True or False.

1. A study of sales force socialisation suggests that the firm’s efforts
---------------------- in recruiting, selecting and training play an important part in the
---------------------- socialisation process.
2. Selecting good applicants is a simple task for the sales manager.
----------------------

----------------------
Summary
----------------------
●● All things being equal, it is the people who make or break the company. It
---------------------- is the personnel working for the company who through their commitment
and dedication take the organisations to glory. The sales function,
----------------------
dynamic that it is, assumes critical significance. Sales function is the
---------------------- revenue generation function of the company. It is the sales personnel who
bring the sales revenues to the organisation. Hence right man for the right
---------------------- job becomes critical and calls for judicious recruitment and selection
of the sales personnel. In addition other factors like increased cost of
----------------------
hiring and training, government legislations, high turnover and increasing
---------------------- responsibilities of sales personnel make recruiting and selection of the
right sales personnel all the more important.
----------------------
●● There are a wide variety of sources from which the firms can recruitment
---------------------- its sales personnel which include firms present employees, competitors
personnel, non-competing companies, educational institutions,
---------------------- advertisements, employment agencies, etc.
----------------------

142 Sales and Distribution Management

●● There are various steps in the recruitment process which include performing Notes
job analysis, creating job descriptions, developing job specifications, and
attracting pool of recruits. The aim of the recruitment process is to select ----------------------
the right man for the right job from the applicants.
----------------------
●● The steps in the selection process are initial screening, filling formal
application form, facing various tests, comprehensive interviews, ----------------------
reference checks, physician examinations and final selection. With
globalisation there is an increase in lateral movement of companies from ----------------------
various countries. Due to variations in culture, religious complexities, ----------------------
income inequalities the recruitment and selection is becoming increasingly
challenging. ----------------------

----------------------
Keywords
----------------------
●● Polygraph Test: The polygraph test, sometimes called the “lie-detector
test”, measures blood pressure, respiration, heartbeat and skin response as ----------------------
indicatory of personal honesty
----------------------
●● Unstructured Interview: Also called a non-directed interview. This
method has no set format or plan. It involves discussion in which the ----------------------
interviewee is encouraged to talk.
----------------------
●● Tough-Mindedness: Discusses persons and events critically; doesn’t
allow emotions to cloud perceptions. ----------------------
●● Equal Employment Opportunity: A government legislation which ----------------------
makes the hiring and termination decisions more complicated.
----------------------
Self-Assessment Questions ----------------------
1. Define Recruitment. ----------------------
2. Discuss the importance of recruitment.
----------------------
3. Discuss in brief various steps in recruitment process.
----------------------
4. What are the various steps in the selection process?
5. Describe the various types of tests conducted in the selection process. ----------------------

6. State the various qualities of successful sales people. ----------------------

----------------------
Answers to Check your Progress
----------------------
Check your Progress 1
----------------------
Fill in the blanks.
1. Hiring an effective sales team is accomplished through careful ----------------------
interviewing, role-playing, observing, reference-checking and selecting. ----------------------

----------------------

Recruitment and Selection of Sales Force 143

 Notes Check your Progress 2
State True or False.
----------------------
1. True
----------------------
2. True
---------------------- Check your Progress 3
---------------------- Fill in the blanks.

---------------------- 1. Intelligence test is slowly regaining status as the most effective tool for
selecting sales people.
----------------------
2. An interview is the most widely used selection step and in some companies,
---------------------- it comprises the entire selection system.
Check your Progress 4
----------------------
State True or False.
----------------------
1. True
---------------------- 2. False
----------------------
Suggested Reading
----------------------
1. Bowersox, Logistical Management: The Integrated Supply Chain Process.
----------------------
2. Calvin, Robert J. Sales Management.
----------------------
3. Chopra, Supply Chain Management.
----------------------
4. Ghoshal, World Class in India. Penguin India.
---------------------- 5. Lamba, A.J. The Art of Retailing.
---------------------- 6. Scheuing, Kurtz, Johnson. Sales Management: Concepts, Practices and
Cases.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

144 Sales and Distribution Management

Sales Training
UNIT

8
Structure:

8.1 Introduction
8.2 The Purpose of Sales Training
8.3 The Benefits of Sales Training
8.4 Effects of Lack of Training
8.5 Sales Training Program
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Sales Training 145

 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• State the purpose of sales training
----------------------
• List the benefits of sales training
---------------------- • Enumerate the effects of lack of training
---------------------- • Discuss various steps involved in a sales training programme
----------------------

----------------------
8.1 INTRODUCTION

---------------------- With increasingly more and more players entering the market place
across all product and service categories, the competition is intensifying by
---------------------- the day. The market place is looking like a battle field. The mantra in today’s
context is “perform or perish”, or “survival of the fittest”. To survive and grow
---------------------- the organisations need to continuously increase the sales. Due to the intense
---------------------- competitive situation every organisation is finding it increasingly difficult to
achieve the required sales volumes.
---------------------- Therefore, unless the companies have products or services which are
---------------------- unique which gives them an advantage, the organisations needs to have something
which makes them stand apart from their competitors. Other things being equal,
---------------------- a vibrant, dynamic, committed and well trained sales force definitely makes
difference to the organisations in their quest to achieve the numbers and keep
---------------------- growing. Therefore, training and retraining of the sales personnel on a on going
---------------------- basis definitely gives a competitive edge to the organisations.

---------------------- 8.2 THE PURPOSE OF SALES TRAINING

---------------------- The purpose of training is to develop the abilities of an individual, to
satisfy current and future manpower needs, supplement education for higher
----------------------
responsibilities.
---------------------- The pressure for better trained executives combined with the need to full
the gap in executive shortage causes an emphasis for executive development
----------------------
programs.
---------------------- The shift to mechanization and computerization has led to an additional
requirement to develop multi-disciplinary interdependence. With the essentiality
----------------------
of meeting specific targets, a certain standard of performance is required.
---------------------- However performance level may turn out to be inadequate.

---------------------- These performance problems may arise due to

●● introduction of new, advanced, technical or other systems.
----------------------
●● lack of identification, communication or agreement of standards.
---------------------- ●● uncertainty regarding level of authority and responsibility.

146 Sales and Distribution Management

 The adaptation to meet such situations is by training and retraining. Notes
Training is a critical activity since it helps in improving skills, attitudes and
knowledge. The only area of possible differential advantage for an organisation ----------------------
over the others is the quality of human inputs - people’s skills, capabilities,
accomplishments and activities. ----------------------

●● Training is the process by which individuals acquire these - through ----------------------

practical experience, knowledge, skills and attitudes.
----------------------
●● Learning is a psychological process in humans, which definitely affects
their behaviour. Learning implies a conscious attempt towards imbibing ----------------------
knowledge.
----------------------
One of the principles of learning is ‘reinforcement’ which is defined as
anything that increases the strength of behaviour through training. ----------------------
Training is a planned process to modify attitudes, knowledge, skills and ----------------------
behaviour through learning experience to achieve performance in any activity
or range of activities. Its purpose in the work situation is to develop the abilities ----------------------
of an individual and to supplement education. It is a means of upgrading
----------------------
performance.
Sales training may be defined as those things which are done to help ----------------------
salespeople gain mastery in the skills, concepts, behaviours, and attitudes that
----------------------
will enhance their expertise in influencing prospects to make positive purchasing
decisions. Sales training concentrates on how prospective sellers and buyers ----------------------
interact. It provides tools and techniques that help salespeople learn what they
must know in order to persuasively present their goods or services to buyers in ----------------------
terms that buyers will understand and ultimately respond to.
----------------------
Effects of Lack of Training
----------------------
When sales training is deficient, several negative outcomes are likely to
personnel working toward different goals. ----------------------
Next, sales people can lack confidence in their ability to market the ----------------------
company’s products or services. They may experience frustration and low
morale. They may also fall back to the old tried-and-true ways of selling. ----------------------
These are the methods that didn’t work very well back in the good old days and
haven’t gotten any more effective in the interim. When this happens, chances ----------------------
are excellent that sales quotas will not be met and revenue goals will not be ----------------------
achieved.
Finally, support personnel may be ill prepared to perform their jobs. For ----------------------
example, install the product; respond to customer service calls, etc. When this ----------------------
happens, customer satisfaction falls below acceptable levels and a loss of profit
is the likely result. ----------------------

----------------------

----------------------

----------------------

Sales Training 147

 Notes
Check your Progress 1
----------------------

---------------------- State True or False.

1. Training is a means of upgrading performance.
----------------------

----------------------
8.3 THE BENEFITS OF SALES TRAINING
----------------------
The sales training function will be most deeply rooted in companies that
---------------------- are marketing-driven. These organisations recognize intuitively and explicitly
that their goal is to sell profitably.
----------------------
When marketing occupies a preeminent position in the hierarchy of
---------------------- company values, sales training usually holds a position of commensurate
---------------------- significance. This is basically true whether a company’s sales force is comprised
of only a few salespeople who report to a single sales/product manager or many
---------------------- hundreds of salespeople organized among cross-functional teams.

---------------------- Sales training increases the performance of sales people, resulting in

increased sales, by:
---------------------- ●● preparing salespeople to maximize the effectiveness of each customer
---------------------- encounter.
●● teaching salespeople a systematic selling process which makes it easier
---------------------- for them to apply specific selling techniques based on customer-initiated
---------------------- buying signals.
●● improving the ability of salespeople to carry out corporate-endorsed
---------------------- selling strategies.
---------------------- Sales training improves customer relations by:

---------------------- ●● helping salespeople understand their customers’ underlying buying

motivations.
---------------------- ●● enabling salespeople to deal more effectively with customer concerns and
---------------------- objections.
Sales training improves the cost effectiveness of selling activities by
---------------------- training salespeople to qualify and prioritize genuine opportunities more
---------------------- quickly.
Sales training can reduce turnover for sales personnel by:
----------------------
●● getting new hires up-to-speed more quickly.
---------------------- ●● helping experienced salespeople become more successful with existing
---------------------- opportunities.
Sales training reduces overall training costs by making more effective use of:
----------------------
●● sales peoples’ training time
---------------------- ●● current training resources

148 Sales and Distribution Management

 Sales training improves the overall effectiveness of training by applying it Notes
universally throughout the company’s entire sales, sales support, and marketing
organisation. ----------------------

----------------------
8.4 EFFECTS OF LACK OF TRAINING
----------------------
When sales training is deficient, several negative outcomes are likely to
personnel working toward different goals. ----------------------
Next, salespeople can lack confidence in their ability to market the ----------------------
company’s products or services. They may experience frustration and low morale.
They may also fall back to the old tried-and-true ways of selling. These are the ----------------------
methods that didn’t work very well back in the good old days and haven’t gotten
any more effective in the interim. When this happens, chances are excellent that ----------------------
sales quotas will not be met and revenue goals will not be achieved. ----------------------
Finally, support personnel may be ill prepared to perform their jobs. For
----------------------
example, install the product; respond to customer service calls, etc. When this
happens, customer satisfaction falls below acceptable levels and a loss of profit ----------------------
is the likely result.
----------------------
8.5 SALES TRAINING PROGRAM ----------------------
The purpose of a sales training program is to achieve improved job ----------------------
performance. In the absence of training, job performance improves with
experience. Training substitutes for or supplements experience; so sales ----------------------
personnel given training reach higher job performance levels.
----------------------
Considerable opportunity exists for improving sales force effectiveness
through training. Usually, managements tend to devote attention to developing ----------------------
reasonably effective systems for recruiting and selecting sales personnel, the
----------------------
training of both new and experienced sales personnel often gets neglected.
Thus sales training program for newly recruited sales personnel, accelerate ----------------------
the process of learning through experience; while for the already experienced,
----------------------
older generation of sales personnel, continued training further improves job
performance. The training program in an organisation will have different ----------------------
content and objectives depending on whether they are directed towards the
existing sales force or towards the newly hired sales representatives. ----------------------
A sales training program is usually built on the basis of five major ----------------------
decisions.
----------------------
They are
A - Aim ----------------------
C - Content ----------------------
M - Methods
----------------------
E - Execution
E - Evaluation ----------------------

Sales Training 149

 Notes Aim
Specific and not general training aims are to be defined. For this purpose,
----------------------
the first step is to determine the initial and the continuing training needs.
----------------------
The initial training needs are based on
---------------------- ●● Job Specification
---------------------- ●● Background and Experience of Trainees
---------------------- ●● Sales related marketing policies
---------------------- The continuing training needs usually arise due to - Change in products and
markets
----------------------
●● Change in sales related marketing policies
----------------------
●● Change in procedures and organisation
----------------------
●● Change in work of sales personnel.
---------------------- Content of the Training Program
---------------------- The scope of initial sales training programs is usually broader than that
of refresher training programs because initial training must cover all aspects
----------------------
of the new sales person’s job. The content of sales person training programs is
---------------------- primarily product process, and market and industry knowledge. Sales people are
trained to sell effectively and sales managers are trained to manage effectively.
----------------------
For a continuing training program, the concentration is on specific aspects
---------------------- of the job where the experienced persons have deficiencies. For an initial training
program, to contribute maximally towards preparing new sales personnel, it
----------------------
must cover all key aspects of a sales person’s job.
---------------------- Company Knowledge
---------------------- New recruits should be taught about the organisation policies in general
as well as the company’s specific selling policies. Some of the basics to be
----------------------
learned involve parking privileges, eating facilities, office practices, paycheck,
---------------------- the expense account and channels of communication. Organisation’s specific
policies include selling practices, such as how many sales calls to make per day,
---------------------- how to handle returns and how to write up orders.
---------------------- Product Knowledge
---------------------- A major portion of the initial sales training program should be devoted to
teaching the new trainee about the products or services that the company offers
---------------------- for sale. The trainees should learn about the products, how they are used by
customers, believe in products’ merits and the products’ usefulness in solving
----------------------
customer’s problems. After trainees are told about the products and their uses,
---------------------- they should be allowed to see or use the products in order to gain as much
technical understanding of them as possible. This also helps them to learn about
---------------------- and use products.

150 Sales and Distribution Management

Knowledge of Competitors and Industry Notes
Sales trainees need to be made aware of industry trends and competitive
----------------------
tactics and must understand how these may affect the demand for the company’s
products. Trainees should know almost as much about competitor’s products ----------------------
as they know about their own, so that sales people can compare brands and
overcome customer objections concerning the purchase of one brand over ----------------------
another.
----------------------
Customer and Market Knowledge
----------------------
Sales trainers today are emphasising the customer more than ever in their
training programs. In the new selling environment of the 1990s, customers are ----------------------
highly knowledgeable and professional, and they have greater demands and
expectations than they did in the past. Consequently, an effective sales training ----------------------
program must go beyond the basics. It is no longer enough merely to teach sales
----------------------
people to overcome customer objections; sales people must be trained to create
cooperative partnerships with their customers. ----------------------
Knowledge of the Selling Process
----------------------
Sales trainees must learn the steps involved in selling as well as various
selling techniques that can be applied in different situations. The basic steps of ----------------------
the selling process are
----------------------
1) Prospecting: To know potential customer who has the need and ability
to buy the product some sales people can be given a prepared list of ----------------------
prospects or acquired leads from customers, competitions and other
----------------------
relevant information.
2) Planning the Call: Must know how to plan the call for effective ----------------------
presentation. Trainees should learn to gather information to answer
----------------------
questions such as objectives of the sales call, customer’s needs, how do
competitors’ products satisfy the customer’s need, what objections might ----------------------
be raised and how these objections can be handled, what materials will be
needed? ----------------------
3) Approaching the Prospect: Trainee can approach prospect through ----------------------
mutual acquaintance or by sending a gift, approach must offer some
incentive or provide reassurance that it will be useful for customer. ----------------------
4) Making the Sales Presentation: It consists of two phases opening ----------------------
and actual presentation. Opening means to secure prospect’s interest
and attention within 30 seconds (begin with a casual chit chat). Actual ----------------------
presentation involves appraising the customer about the advertisement ----------------------
and features of the product. A forceful demonstration can arouse the
prospect’s interest and desire to purchase. ----------------------
5) Overcoming Objections: Objections raised by prospect can lead to ----------------------
purchase. Trainees must learn to face objections successfully. These
could be stated or hidden objections, or related to product, price or time ----------------------
of purchase. Trainees should be able to minimize disadvantage of product
by highlighting advantages. ----------------------

Sales Training 151

 Notes 6) Closing the Sale: Closing occurs when sales person asks for the final
order. It is of different types such as:
----------------------
• Assumption Close: Prospect purchases by asking question such as
---------------------- where can this be delivered? etc.
• Physical Action Close: Sales person suggests through a physical
----------------------
action such as giving pen to sign the contract, that it is the time to
---------------------- place order.

---------------------- • Special Offer Close: Immediate purchase discount can be offered

etc.
----------------------
7) Follow Up: This is essential to improve the service and good will of
---------------------- company and sales person. Customer must be satisfied in terms of product
and service. He should be assured that his was a wise decision to purchase
---------------------- the product. As is the saying “A satisfied customer brings 1 more customer
but dissatisfied customer takes away 11 prospective customers.”
----------------------
Methods
----------------------
The training methods can be divided into three broad categories
---------------------- ●● Group Training Methods
---------------------- ●● Individual Training Methods
---------------------- ●● Combination Training Methods

---------------------- Group Training Methods

1. Lecture
----------------------
The trainee mainly watches and listens with a few permitted questions. It
---------------------- is basically providing knowledge through one way communication.
---------------------- Merits
---------------------- i) An effective method if lecturer is able and enthusiastic and makes
use of examples, demonstrations and audio-visual aids.
----------------------
ii) Economical in terms of time required to cover a given topic.
---------------------- iii) More accurate communication.
---------------------- iv) Groupe spirit de corps can be built due to interaction on informal
basis.
----------------------
v) Convenient, in case initial sales training program is brief.
----------------------
vi) Appropriate for introductory and orientation sessions.
---------------------- vii) Useful in continuing sales programs for providing new information
---------------------- regarding company’s policies, new products, markets and selling
programs.
----------------------
Demerits
---------------------- i) Teaching emphasised more than learning.

152 Sales and Distribution Management

 ii) Information overload. Notes
iii) Can never substitute for field training.
----------------------
2. Case Discussion
----------------------
Trainees are provided with cases relating real selling situations and these
are then discussed in a group. ----------------------
Merits ----------------------
i) Two way communication, hence, enhanced involvement and ----------------------
participation.
----------------------
ii) Partial substitute for learning by experience.
3. Role Playing ----------------------

In this method, trainees are assigned different roles, like sales person, ----------------------
customer etc. and a contrived problem situation is described in which the
----------------------
trainees have to act out their parts.
Merits ----------------------

i) Trainees learn to accept criticism and suggestions from others. ----------------------

ii) They practice introspection through participation in self appraisal ----------------------
of their performance, making self criticism beneficial and objective.
----------------------
iii) Free wheeling nature of role playing is conducive to new ideas and
approaches. ----------------------
iv) In a mixed group, interaction between juniors and experienced ----------------------
personnel is a valuable learning experience for both.
----------------------
v) Puts learning into practice and trainees learn to understand buyer’s
perceptions. ----------------------
Demerits ----------------------
i) Need for emotional and active identification of the characters being ----------------------
portrayed.
----------------------
ii) A receptive and interested audience required.
iii) Can be used for small groups only. Larger groups could mean ----------------------
non-participants who could distract players.
----------------------
4. Impromptu Discussion
----------------------
Also called sales seminar or buzz session, it involves the trainer/leader
making a brief oral presentation on an everyday problem followed by a ----------------------
give and take discussion.
----------------------
Merits
----------------------
i) Understanding of problems which could otherwise be acquired only
through long personal experience. ----------------------

Sales Training 153

 Notes ii) Learn the importance of analysis and ability to handle specific
situations rather than fixed selling rules and principles.
----------------------
iii) Active participation of all trainees.
---------------------- Demerits
---------------------- i) Requires considerable time.

---------------------- ii) Discussion could drift to extraneous subjects unless there is an

effective leader.
---------------------- 5. Gaming
---------------------- Also known as simulation it resembles role playing using highly
structured contrived situations based on reality. The unique feature is that
---------------------- participants receive immediate feedback.
---------------------- Merits
---------------------- i) Easy learning due to involvement in game play.

---------------------- ii) Develop skills of identifying key factors influencing decisions.

iii) Games lend themselves readily to demonstrations of the uses and
---------------------- values of analytical techniques like inventory and other planning
---------------------- models.
iv) Effective emphasis on dynamic nature of problems and their
---------------------- interrelationships due to built in information feedback.
---------------------- Demerits
---------------------- i) A lot of research to obtain facts, incorporation into game model and
detailed instructions required.
----------------------
ii) Some minimum time required to generate successful decision and
---------------------- to provide the desired learning experience.

---------------------- iii) Game designs based on ordinary decision making processes so

unusual/novel approaches may be stiffed.
---------------------- iv) Poorly designed programs may teach trainees something’s which
---------------------- they shouldn’t.
All the above mentioned methods are group oriented or classroom training.
---------------------- There are some individual training methods designed for appropriate
---------------------- conditions. They are
6. On-The-Job-Training
----------------------
This method is one-on-one, face to face coaching involving showing,
---------------------- practicing and evaluating. This form of Training is continuously given
during the entire service.
----------------------
Merits
----------------------
i) Develops trainee’s skills in making sales presentations, answering
---------------------- objections and closing sales.

154 Sales and Distribution Management

 ii) If individualized for each trainee’s ability and skill, immediate Notes
improvement in performance can be obtained.
----------------------
Demerits
i) Unqualified coaches could develop not just skills but bad habits in ----------------------
trainees.
----------------------
ii) Requires a lot of time and effort and money.
----------------------
7. Correspondence Course
This can be used for initial and continuing training and is basically self ----------------------
study. ----------------------
Merits
----------------------
i) Cost effective
----------------------
ii) Acquaints sales people with new product development and
applications especially in case of technical products. ----------------------
Demerits ----------------------
i) Preparation of standardized correspondence course covering
technical product data, general company information, selling ----------------------
techniques can be complicated. ----------------------
ii) Not enough time devoted by trainees to studying.
----------------------
Training Tools Examples
----------------------
Words Lectures, books, letters, etc.
Graphics Charts, diagrams ----------------------
More Auditory aids Audio cassettes
Direct ----------------------
Still pictures Photographs, slides
----------------------
Motion pictures Documentaries, animations
Television Dramatic presentation ----------------------
Exhibits Models etc. ----------------------
More
Indirect Field trips Sales visits, tours
----------------------
Demonstrations ‘Show and tell’ presentations
Contrived experience Role plays ----------------------
Direct experience On-the-job or performing the actual work ----------------------
Fig. 8.1: The Training Ladder ----------------------
Individual Training Methods
----------------------
On-the-Job Training: In on-the-job, or buddy-goes along on sales calls
the trainer makes call after the trainee’s presentation. The experienced sales ----------------------
person and the trainee evaluate and analyze the call. Advantage is that trainees ----------------------
can learn firsthand how actual sales calls are conducted.
----------------------

Sales Training 155

 Notes Disadvantage is that it is costly and time consuming
Sales Conferences: Training can take place in sales conferences in
---------------------- which the trainer and the trainee discuss and analyze problems in selling. Often
---------------------- managers and trainers hesitate to use conferences because they assume that
learning cannot take place in an unstructured situation like sales meeting.
---------------------- Correspondence Courses: These, when combined with other training
methods, can be a helpful learning tool. They can effectively explain the basic
----------------------
duties of the sales job and teach selling concepts, but they do not necessarily
---------------------- teach how to sell. Disadvantage is that it is hard for management to motivate
trainees to get their course work completed on schedule.
----------------------
Interactive Videodiscs: This method of sales training allows the trainee
---------------------- to control a videodisc learning program by using a computer. The interactive
videodisc combines the technologies of a videodisc player with a microcomputer,
---------------------- so that video segments may be mixed with computer menus and programs. One
useful application is that it teaches sales people how to use a personal computer.
----------------------
Combination Methods
---------------------- In order to achieve an optimal level of effectiveness in teaching,
combinations of both group and individual training are needed. Most firms want
----------------------
trainees to go through comprehensive training before they are allowed into the
---------------------- field.
Refresher Training
----------------------
Refresher training is the training program directed towards upgrading the
---------------------- existing sales force and it is used periodically.
---------------------- Change is inherent in selling. Hence, there is a constant need to train the
sales force, keeping it abreast of the change in products, markets and company
---------------------- objectives. With emphasis on productivity, there is a further need to upgrade the
sales force and maximize the value of each salesperson.
----------------------
The purpose of continuous training is to help sales people do their jobs
---------------------- better. Since the sales person, in such cases, have been in the field for a while,
the deficiencies in knowledge, skills and work habits usually become evident.
---------------------- These deficiencies can be identified through observations of sales supervisor
or manager; sales results, customer complaints. Training programs can then be
----------------------
designed accordingly.
---------------------- Retraining is needed when
---------------------- i) Job requirements of sales person change. This can be due to addition of
new products in the company, new services, revised sales territories or
---------------------- new policies.
ii) Change in customer market.
----------------------
iii) Promotion to a management or supervisory position.
---------------------- Retraining sales programs are designed usually through the following
---------------------- steps,
1. Determine the most essential and important aspects of the job and teach
---------------------- them first.

156 Sales and Distribution Management

2. Determine the most difficult aspects and devote more time and Notes
responsibility to these difficult areas.
----------------------
3. Determine the most prevalent aspects and emphasize on them.
Continuous training may be done either individually or in groups, similar ----------------------
to initial training programs.
----------------------
One major aspect to be kept in mind in retraining programs is the attitude
of the sales persons. Often there is a resistance to change due to emotional ----------------------
barriers of the individual. This is greater in case of outside trainers.
----------------------
Therefore, the challenge facing those involved in retraining the sales
force is not only to design the right kind of retraining program but to anticipate ----------------------
and dissolve any type of resistance.
----------------------
Implementing Training Program
----------------------
Designing the Sales Training Program
It involves identifying gaps between sales force’s skills and firm’s ----------------------
objectives and then developing the program to fill the gaps taking into ----------------------
consideration skills and experience of sales persons. Unfit sales persons are
weeded out in this process. ----------------------
There are two types of sales training programs. Initial sales training ----------------------
program for new recruits is comprehensive, lasting from 3-6 months. Continuing
sales training program or “Refresher Training’ is for experienced sales person ----------------------
and is shorter and more intensive in its coverage of specialized topics.
----------------------
Example: At Delta Airlines Sales persons, are first made familiar with
company’s functions like air freight, ticketing and computer operations and ----------------------
full range of travel functions offered by Delta. Second level training involves
continuing reinforcement of selling skills by Delta Managers at regular intervals. ----------------------
Planning cover the following areas: ----------------------
Training objectives
----------------------
Content of Program
----------------------
Methods of training
Implementation and evaluation ----------------------
Training Objectives ----------------------
To design an effective sales training program, one should know what
----------------------
is to be accomplished with the program. Objectives should be realistic,
quantifiable terms with respect to specific time period and stated in written ----------------------
form for evaluating programs’ effectiveness at a later stage. Specific aim for
these programs varies. E.g. objective of initial sales training program is usually ----------------------
to assimilate new sales people into organisation and develop them into top
----------------------
sales producers. Refresher training programs are designed to inform changes
in products, markets, competition company policies etc. Overall objective is to ----------------------
increase sale force’s performance, say to achieve a target of 75% through new
sales force as that achieved by trained people within a year. ----------------------

Sales Training 157

 Notes Primary objective for many program is to increase productivity through
substitution of needed experience by a training program in a shorter time and
---------------------- to reduce sales force turnover rates, thus reducing hiring and training costs.
Another objective is to instill pride, and to show the importance of selling
---------------------- function to the individual, the firm and the economy as a whole. In addition
---------------------- to instilling pride in sales trainers, training programs must stress the idea that
a professional sales person can never achieve perfection. They must be taught
---------------------- continuously to seek self-improvement.
---------------------- Initial Sales Training
Objectives of initial sales training programs should be determined by
----------------------
examining the requirements of the sales job, the trainer’s backgrounds and past
---------------------- experiences, and the company’’ marketing policies. Management should first
study the formal job description to determine areas in which the new trainees are
---------------------- most likely to require training. In addition, other elements should be considered,
such as how sales people allocate their time, the sales duties that require the
----------------------
greatest proportion of selling time, the duties that are often neglected by sales
---------------------- people, and why they are neglected. The main point is that all organisations,
large and small, must first determine the new trainee’s actual training program.
---------------------- For selling technical products, product knowledge and customer application
with selling techniques should be given. For non-technical products only selling
----------------------
techniques is required.
---------------------- Refresher Training
---------------------- Objectives of refresher, or continuing sales training programs also should
be based on the needs of the sales force, as seen by management. Refresher
----------------------
training courses are needed to convey to the sales force complex information
---------------------- about changes in the company’s policies, products, marketing strategies and the
like. Refresher training can help the sales force understand and adapt to changes
---------------------- quickly, thereby increasing the sales force’s overall selling effectiveness.
---------------------- Several common mistakes can occur in implementing training programs.
The greatest mistake is not giving enough time and attention to planning.
---------------------- Often sales managers feel they only need to visit briefly and informally with
trainees in order to pass along their knowledge and experiences of selling.
----------------------
Other mistakes are using unrealistic demonstrations that oversimplify the
---------------------- selling situation. Implementation of sales training programs requires extensive
planning concerning.
----------------------
Who shall impart the Training
---------------------- Line Sales Executives
---------------------- Line Sales Executives (sales managers, senior sales representatives, field
supervisors and division managers) are people best suited to train trainees, since
----------------------
they are usually highly respected by sales trainees and carry more authority in
---------------------- name ‘executive’. Trainees look up to line sales executives and try harder to
determine exactly what is expected from them and more easily learn the art of
---------------------- selling the way line sales executives want them to. A rapport is created between

158 Sales and Distribution Management

them creating a positive learning environment and line sales executives are in a Notes
better position to judge the performance of their own trainees.
----------------------
Using line sales executives to train does have some disadvantages. One of
the major disadvantages is the line executives’ lack of time. The responsibilities ----------------------
sales executives and managers have often do not allow them to play enough
attention to the training function, and this can be harmful to trainee morale and ----------------------
enthusiasm. To overcome the problem of time, the training function should be
----------------------
a specific duty with a proper time allotment.
Another major disadvantage of using line sales executives is that ----------------------
they may know a great deal of selling and be very successful at it, yet be
----------------------
unable to teach others about it. The lack of teaching skills can be overcome,
however, since line executives can be trained to teach just as sales trainees ----------------------
can be taught to sell. Nabisco Brands’ Biscuit group has set up a system for
teaching managers How Are You? to implement sales training into regular ----------------------
sales strategy meetings.
----------------------
Even though sales executives may not be entirely responsible for training,
they should always be used in planning sales training programs and in selecting ----------------------
the training situations. Sales executives are most familiar with the needs of the ----------------------
entire sales force and the selling resources of the firm, and they can effectively
design such programs. In small organisations, which often cannot afford to hire ----------------------
outside training specialists, the line sales executives usually perform the entire
training function, if there is one. ----------------------

Staff Trainers ----------------------

Staff trainers are personnel from different departments of the company ----------------------
or people specially employed for sales training program and they are used
in combination with Line Sales Executives or outside specialists for training ----------------------
programs.
----------------------
Their expertise and good teaching skills are found lacking in support
because they are usually not directly involved in front selling. Time is limited ----------------------
for them due to other responsibilities they shoulder, in the organisation, as such ----------------------
training gets affected.
For company to effectively use staff trainers a training department ----------------------
should be set up where these people have time and teaching skills required for ----------------------
training. These trainers can get total attention from staff trainers who are good
communicators and understand problem of educating people. Their support ----------------------
can be lent to dealers and distributors for effective selling of firm’s product.
Staff trainers can lend a helping hand to other training personnel for preparing ----------------------
training material and designing training programs. ----------------------
Some disadvantages by hiring staff trainers include high cost of
----------------------
maintaining the staff and attitude of indifference shown by trainees to staff
trainers as against line sales executive. This can be overcome with support from ----------------------
the boss. Another problem is overdoing training programs by scheduling more
than that is required. For example, C.M.C. corporation reduced this problem ----------------------

Sales Training 159

 Notes by recruiting top sales person as company’s director in charge of developing a
structured training program.
----------------------
Outside Training Specialists
---------------------- These include firms that specialise in sales training and individual expert
---------------------- such as college professor who consult on training programs and problems. Small
businesses not able to afford own training departments can benefit from these
---------------------- specialists. Large companies are helped by implementing refresher training
programs. One has flexibility as they can handle entire training program or part
---------------------- training programs that may be required. Outside trainers are knowledgeable,
---------------------- interesting and inspiring in conducting sales training programs because they
earn their livelihood from these programs.
---------------------- Location
---------------------- The location of the training program is determined by the extent to
which it should be centralized. Centralized training programs usually involve
----------------------
organized training schools periodic conversions of seminars held in a central
---------------------- location such as the home office.

---------------------- Centralized programs have advantages in that trainees can quickly get
acquainted with each other, top managers, and key home-office personnel.
---------------------- Major disadvantage of centralized training is that it is usually expensive and
requires a great deal of organisational effort.
----------------------
Decentralized training can involve one or more different types of training
---------------------- such as office instruction, use of experienced sales people. On-the-job training
usually takes place while the trainee is actually working in the field; this gives
----------------------
trainees the chance to learn and be productive at the same time.
---------------------- Timing of Training Program
---------------------- Although training should be a continual process, management must decide
when training should be stressed. There are two philosophies concerning the
---------------------- timing of sales training programs. Some executives believe that no one should
---------------------- be placed in the selling field until he or she is thoroughly trained to sell. The
other philosophy suggests evaluating the new sales person’s desire and ability
---------------------- to sell before spending money and time on actual training. Thus, recruits are
placed in the field with minimum information concerning selling and are then
---------------------- evaluated on the basis of how well they do, considering their lack of actual
---------------------- training.
Training Aids and Instructional Material
----------------------
To successfully carry out a sales training program, trainers should give
---------------------- much consideration to training aids and instructional materials. Training aids
are manuals, other printed materials and sight or sound equipment. Manuals or
----------------------
workbooks are used most in formal training programs for groups, supplements
---------------------- the training program by being a study guide for the trainee. Other printed
materials used are company bulletins, sales and product handbooks, standard
---------------------- texts, and technical and trade publications. Any or all of these can be used to

160 Sales and Distribution Management

supplement the training methods and content. Training aids are blackboards, Notes
posters, motion-picture projectors, tape recorders, video tape recorders and
other playback equipment. ----------------------
Evaluating Training Program ----------------------
Once a sales training program has been carried out, it is essential that ----------------------
the programs effectiveness be evaluated. That is, the sales manager must
determine how well overall objectives and specific goals have been met. As ----------------------
companies spend more and more money on sales training each year, they are
more interested in evaluating their training programs. Large companies are ----------------------
relatively more interested in assessing reaction and knowledge during sales ----------------------
training, while small companies put more emphasis on results and attitudes in
evaluating their training programs. ----------------------
The three general methods employed in evaluating training programs are: ----------------------
1. Interviewing the trainees ----------------------
2. Interviewing sales managers
----------------------
3. Interviewing customers
----------------------
New entrants can be asked whether they found the training interesting
and whether they could understand the contents. Sales managers can give an ----------------------
insight into the extent of assimilation by the trainees. While working in the
----------------------
field, the sales supervisors can assess the impact of the sales training which
should have bearing on the sales trainee. By interviewing the customers the ----------------------
overall change in the profile of the sales personnel before and after the training
can be assessed ----------------------

----------------------
Check your Progress 2
----------------------
Fill in the blanks. ----------------------
1. The purpose of a sales training programme is to achieve improved
_________________. ----------------------

2. _________________ are appropriate for introductory and orientation ----------------------

sessions.
----------------------

----------------------
Activity 1
----------------------
Suppose you are a sales manager for a company manufacturing Television ----------------------
sets. You want to recruit a fresh management graduate as a sales executive.
You want to train him and prepare him for field sales job. Identify 1) four ----------------------
training needs, 2) two training objectives.
----------------------

----------------------

Sales Training 161

 Notes Summary
---------------------- ●● Sales training increases the performance of salespeople, resulting in
increased sales, by preparing salespeople to maximize the effectiveness of
----------------------
each customer encounter. Sales training teaches salespeople a systematic
---------------------- selling process which makes it easier for them to apply specific selling
techniques based on customer-initiated buying signals. Sales training
---------------------- improves the cost effectiveness of selling activities by training salespeople
to qualify and prioritize genuine opportunities more quickly. Sales training
----------------------
can reduce turnover for sales personnel by getting new hires up-to-speed
---------------------- more quickly. Helping experienced salespeople become more successful
with existing opportunities. Sales training leads to faster development
---------------------- and high morale of the sales personnel. This results in building better
customer relationship leading a cadre of loyal customers.
----------------------
●● Training methods are broadly categorized into group methods and
---------------------- individual methods. The sequel to the decision of conducting a sales
training program the sales manager has to decide upon the content of
----------------------
the program, who to be trained, when to be trained, where to be trained
---------------------- and by whom to be trained. The sales training program can be given into
any of the areas impacting the sales personnel like product knowledge,
---------------------- company knowledge, selling techniques, communication skills, key
account management, leadership skills, supervisory skills etc. successful
----------------------
implementation of the sales training program calls for meticulous planning
---------------------- and implementation.
●● The sales function operates in a highly dynamic marketing environment.
----------------------
Hence, to keep constantly updated with the changing skills sales training
---------------------- program becomes crucial in keeping the sales force fighting fit to take
on the challenges enforced by the increasingly intense competition in
---------------------- the market-place.
----------------------
Keywords
----------------------
●● Impromptu Discussion: Also called sales seminar or buzz session, it
---------------------- involves the trainer/leader making a brief oral presentation on an everyday
problem followed by a give and take discussion.
----------------------
●● Perform or Perish: A phrase commonly used as a caution since it is only
---------------------- those who perform would survive or would get thrown out of the highly
competitive market.
----------------------
●● Role Playing: A method training in which the trainees are assigned
---------------------- different roles, like sales person, customer etc. and a contrived problem
situation is described in which the trainees have to act out their parts.
----------------------
●● Survival of the Fittest : A phrase commonly used to denote the toughest,
---------------------- intense and war like situation in the market place and hence only such
organisations or sales personnel would survive who are the fittest.
----------------------

162 Sales and Distribution Management

 Notes
Self-Assessment Questions
----------------------
1. Discuss various steps of selling process.
2. State the various benefits of sales training program. ----------------------
3. Explain the purpose of training. ----------------------
4. Discuss various individual training methods. ----------------------
5. Discuss various group training methods.
----------------------
Answers to Check your Progress ----------------------

Check your Progress 1 ----------------------

State True or False. ----------------------
1. True
----------------------
Check your Progress 2
----------------------
Fill in the blanks.
1. The purpose of a sales training program is to achieve improved job ----------------------
performance. ----------------------
2. Group Training methods are appropriate for introductory and orientation
sessions. ----------------------

----------------------
Suggested Reading
----------------------
1. Bowersox, Logistical Management: The Integrated Supply Chain Process. ----------------------
2. Calvin, Robert J. Sales Management.
----------------------
3. Chopra, Supply Chain Management.
----------------------
4. Ghoshal, World Class in India. Penguin India.
5. Lamba, A.J. The Art of Retailing. ----------------------
6. Scheuing, Kurtz, Johnson. Sales Management: Concepts, Practices and ----------------------
Cases.
----------------------
7. Smith, Homer B. Selling Through Negotiation.
8. Stewart, Grant. Successful Sales Management. ----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

Sales Training 163

 Notes

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

164 Sales and Distribution Management

Sales Quota and Compensating Sales Personnel
UNIT

9
Structure:

9.1 Introduction
9.2 Definitions of Sales Quota
9.3 Features of Sales Quota
9.4 Objectives/Importance of Sales Quota
9.5 Types of Quotas
9.6 Characteristics of Sales Jobs
9.7 Requirements of a Good Sales Compensation Plan
9.8 Devising a Sales Compensation Plan
9.9 Types of Compensation Plans
9.10 Fringe Benefits
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Sales Quota and Compensating Sales Personnel 165

 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Define sales quotas
----------------------
• Explain the features of sales quota
---------------------- • State types of quotas
---------------------- • Elaborate on the characteristics of sales jobs
---------------------- • Name the types of compensation plans

---------------------- • Identify the various fringe benefits

----------------------
9.1 INTRODUCTION
----------------------
Sales Quota is quantitative sales objective assigned to salesman or sales
---------------------- territories. Quota always has time dimension. Quota specifies sales goals in
quantitative terms, to be achieved in specified time period. Quota can be in
---------------------- the form of sales volume in units, expense quota, gross margin quota, quota
for selling activities or any combination thereof. Quotas are decided for each
----------------------
territory, each product and for each sales personnel. After deciding on the sales
---------------------- budget, management decides how much of estimated sales should come from
each territory, how much expenses should be incurred in each territory.
----------------------
For each territory and each sales personnel management decides
---------------------- quantitative objectives known as quota. Quotas are also used for developing
effective compensation plans, motivating the sales force and evaluating
---------------------- performance of different sales personnel. Quotas identify strong and weak
---------------------- points of various territories and sales personnel. Quotas are used for evaluating
the performance of different sales personnel and territories, quotas set goals
---------------------- for each salesman, territory and product. The sales quotas assigned to sales
personnel are the building blocks of the organisations sales plan.
----------------------
A sales quota is a goal; it is a target you expect your sales staff to meet
---------------------- with. It must be a target they expect to meet as well. Each must understand the
importance of their target and how it fits in as part of your total business plan.
---------------------- To succeed you must have a set of attainable objectives. When you wrote your
---------------------- business plan, it is to be hoped you established specific sales and profit targets.
To meet these objectives, you do it the way you build a brick wall, one brick at
---------------------- a time; you reach your income goals one sale at a time. The sales quotas you
assign to your sales staff are the building blocks of your business plan.
----------------------
●● Don’t make the time period longer than a month or it will invite
---------------------- procrastination and lose its effectiveness.
---------------------- ●● A quota, to be effective, must be achievable. Otherwise, don’t use them.
Quotas that are impossible to meet are ignored. Unrealistic quotas will
---------------------- make you look foolish.

166 Sales and Distribution Management

●● To stimulate all your sales staff, report everyone’s progress during the Notes
month (time period) in percentages for all to see. It is a strong motivator;
no one wants to appear on the bottom of the list. ----------------------
●● Don’t penalise success by pushing the top performer’s quota out of reach. ----------------------
They may retaliate by selling less.
----------------------
●● Don’t use a quota system as a weapon to threaten poor performers. It
will not solve the problem. Nothing is better than a goal as stimulation to ----------------------
success. Try it!
----------------------

9.2 DEFINITIONS OF SALES QUOTA ----------------------

“A sales quota is the sales goal set for a product, geographical area or sales ----------------------
representative. It is primarily a managerial device for defining and stimulating ----------------------
sales efforts”.
----------------------
- Philips Kotler
“Sales quota is a quantitative goal assigned to a specific marketing unit ----------------------
such as to a salesman or to a sales territory.”
----------------------
- Cundiff and Still
----------------------
9.3 FEATURES OF SALES QUOTA ----------------------
●● Sales quotas can be of various types. ----------------------
●● Sales quota serves as standards with which the actual sales/selling ----------------------
expenses can be compared.
----------------------
●● Sales quota can be set for different products, salesman or different
geographical territory. ----------------------
●● It is a motivational tool for salesman/dealers. If they achieve the quota ----------------------
fixed for them they feel motivated and are entitled to various financial and
non-financial incentives. ----------------------
●● Quota setting requires study of market conditions in the sales territory. ----------------------
These market conditions refer to level of competition, sales potential,
income of customers, fashion, tastes and preferences of customers etc. ----------------------
●● Setting sales quota requires sales forecasting. ----------------------
●● Sales quota can be fixed for statistical and non-statistical techniques. It is ----------------------
a complex task.
----------------------
●● Sales quota is a managerial tool for directing and controlling sales
activities in a desired direction. It helps to administer compensation plans ----------------------
and identify efficient and inefficient salesman/dealers.
----------------------
●● Sales quota is set for a specific time period. The time period is usually
one year. ----------------------

Sales Quota and Compensating Sales Personnel 167

 Notes 9.4 OBJECTIVES/IMPORTANCE OF SALES QUOTA
---------------------- Sales quota is a effective tool for directing, controlling and motivating the
---------------------- sales force. The main objectives of using sales quotas are as follows:
1. To set standards for Performance evaluation of Sales Force: Sales
---------------------- quota is fixed in quantitative terms for each salesman. These quotas serve
---------------------- as standard with which actual performance can be compared to evaluate
performance of individual salesman. By comparing actual performance
---------------------- with predetermined quotas, efficient and inefficient salesman is identified.

---------------------- 2. To control Selling Expenses: Expense quotas are also fixed for different
marketing areas and sales force. Expense quota can be decided in terms
---------------------- of amount or as a percentage of sales. Sales personnel who incur selling
expenses within the quota are given incentives. Expense quota help to
---------------------- improve selling efficiency and to control wasteful selling expenses. It
---------------------- leads to optimum utilization of selling expenses.
3. Act as standards for Measuring Performance: With the help of quotas
----------------------
organisations are in a position to compare the performance of various
---------------------- marketing units, sales personnel, dealers, distributors, area, zone, region
or a territory. By comparing the actual performance with the quota,
---------------------- the organisations come to know about the under performance or over
performance of various territories, personnel etc. This comparison
----------------------
enables the organisations find out weak performers and takes corrective
---------------------- action on time. Organisations use these figures also to compare the
current performance with the corresponding period in the previous year,
---------------------- to ascertain the extent of growth achieved.
---------------------- 4. Serves as a basis for Sales Compensation Plan: Quotas by enabling
the comparison with the actual performance brings out the extent of
---------------------- achievement of various sales personnel, regions, zones, territories, dealers,
distributors etc. create a base for awarding the performers. In companies
----------------------
where the incentives are decided on the basis of performance, calculation
---------------------- of achievements helps reward those who have achieved over and above
the quota and penalize those who have not achieved. It therefore serves
---------------------- as a motivating tool both for those achieving and those who have not
achieved.
----------------------
5. Acts as a Control Tool: By deciding upon the quantum of expenditure
---------------------- to be incurred by each sales personnel and the sales units like the region,
branch, territory, zone etc. the quotas act as a deterrent for spending
----------------------
more. Again in many organisations, economizing in the expenses and
---------------------- optimizing the sales efforts special incentives/rewards are given the
sales personnel. Thus, the quotas go a long way in controlling the sales
---------------------- personnel’s activities.
----------------------

----------------------

168 Sales and Distribution Management

 Notes
Check your Progress 1
----------------------
Fill in the blanks. ----------------------
1. _____________ is an effective tool for directing, controlling and
----------------------
motivating the sales force.
----------------------

9.5 TYPES OF QUOTAS ----------------------

Sales Quota ----------------------

A sales goal or objective that is assigned to a marketing unit. The ----------------------

marketing unit in question might be an individual salesperson, a sales territory,
a branch office, a region, a dealer or distributor, or a district. Sales quotas apply ----------------------
to specific periods and may be expressed in rupees or physical units. Thus, ----------------------
management can specify quarterly, annual, and longer term quotas for each of
the company’s field representatives in both dollars and physical units. It might ----------------------
even specify these goals for individual products and customers.
----------------------
Sales Volume Quota
----------------------
A quota that emphasizes sales or some aspect of sales volume. Sales
volume quotas can be expressed in rupees, physical units, or points (a certain ----------------------
number of points is given for each rupee or unit sales of particular products.)
The point system is typically used when a firm wants to give selective emphasis ----------------------
to certain products in the line. ----------------------
Expense Quotas
----------------------
Selling activity calls for expenses under different heads like travelling,
food, lodging/accommodation, petrol, telephone, stationery etc. inflation takes ----------------------
its toll and the expenses keep on mounting. Companies adopt expense quotas to ----------------------
control these expenses.
----------------------
By controlling the expense quotas align the selling expenses with the
sales volume. ----------------------
Gross Margin and Net Profit Quotas ----------------------
The purpose of these quotas is to make the sales personnel understand the
----------------------
basic fact that though the sales volume is important, much more important is
the profits generated by them. Large sales with only less contributing products ----------------------
will not help the organisation since it will not generate required profits. Hence
optimum sales mix with high contributing products ensures better gross margins ----------------------
and net profit. This quota keeps the employees channeling their efforts towards
----------------------
achieving better profits for the organisation.
Activity/Combination Quota ----------------------

A Quota that focuses on the activities in which sales representatives are ----------------------

Sales Quota and Compensating Sales Personnel 169

 Notes supposed to engage in addition to their routine selling activities. Activity quotas
focus on a salesperson’s efforts rather than the sales volume outcomes of these
---------------------- activities. Examples of activity quotas include number of letters to potential
accounts, number of product demonstrations, number of calls on new accounts,
---------------------- and number of submitted proposals.
---------------------- The activity/combination quotas can take the following forms:
---------------------- ●● Number of calls made on retailers/customers.
●● Number of displays arranged.
----------------------
●● Number of new retailers/customers identified and established.
----------------------
●● Number of demonstrations made.
---------------------- ●● Taking stocks of the retailers/ dealers/ distributors.
---------------------- ●● Verification of the age of the stock.
---------------------- Parameters Weight quota Actual % %
age Achievement Achievement Weight
----------------------
to quota age
---------------------- Sales Volume 2 1,20,000 1,32,000 110 220
---------------------- Gross Margin 4 48,000 40,000 83 332
New Customers 2 20 12 60 120
----------------------
Displays 1 30 40 133 133
----------------------
No. of Sales calls 1 30 36 120 120
---------------------- Total 10 925
---------------------- Fig. 9.1: Illustration of Activity/Combination Quota
---------------------- Compensating Sales Personnel

---------------------- In most organisations the compensation program for sales personnel is

different and separate from that of other employees. This different treatment
---------------------- has to do with the nature of the job, the importance of the job, and the nature
of sales personnel. The dominant feature of sales compensation is the use of
---------------------- incentives. Whereas incentive plans are becoming more popular for a wide
---------------------- range of employee groups, the sales group has always been paid on incentive
due to the nature of the job.
----------------------
Check your Progress 2
----------------------

---------------------- State True or False.

---------------------- 1. Sales quotas apply to specific periods and may be expressed in rupees
or physical units.
----------------------

----------------------

170 Sales and Distribution Management

9.6 CHARACTERISTICS OF SALES JOBS Notes

Despite these complexities, there are a number of dimensions of sales ----------------------

jobs that make establishing incentive programs useful and perhaps necessary. ----------------------
The first of these, importance of the function, has already been discussed. The
others are independence, boundary spanning and measurability. ----------------------
Independence: As indicated, the typical picture of the salesperson is of ----------------------
someone working one-on-one with a customer outside the organisation. For
many sales positions this is still an accurate picture. Direct supervision and ----------------------
control of the salesperson in this circumstance is therefore very difficult. The
traditional reliance on tools such as performance appraisal does not work as ----------------------
well since the supervisor does not see the salesperson in action. ----------------------
This makes reliance on the outcomes of the job more attractive. It should
be noted, however, that the degree of independence of salespeople varies with ----------------------
the job situation. There is a great deal of difference between a salesperson who ----------------------
is on the road and one who operates in a store where the supervisor is present.
Boundary spanning: The salesperson represents the organisation to ----------------------
the customer. Often it is the salesperson that is the organisation to people ----------------------
outside the organisation. This makes the sales position an important one for the
organisation’s reputation. ----------------------
Likewise he or she represents the customer to the organisation. This creates ----------------------
a situation within the organisation of split loyalties, some to the organisation
and some to the customer. ----------------------
Boundary spanners must be able to see both groups’ point of view and to ----------------------
collect and transmit information between groups. The salesperson is often seen
as giving trouble to other employees inside the organisation in order to serve ----------------------
the customer. Thus, the loyalty of the salesperson to the organisation is likely
to be perceived as less than that of other employees. This puts pressure on the ----------------------
compensation program, since it is compensation that is the major method of ----------------------
maintaining a positive membership decision.
Measurability: These characteristics of sales jobs make incentive ----------------------
programs an attractive way to compensate salespeople. That the results of sales ----------------------
work are highly measured makes the incentive idea possible. Sales volume,
either in units or monetary, is easily measurable and is connected with the ----------------------
efforts and ability of the salesperson. There is also considerable variation among
salespeople in volume of sales – an important consideration in establishing an ----------------------
incentive program. Further, the salesperson expects to be rewarded by the use ----------------------
of an incentive program.
Using sales volume alone, though, can be a problem in rewarding ----------------------
salespeople. Connecting performance with reward focuses the person on ----------------------
the chosen performance factor to the exclusion of other job activities. If the
organisation wants results other than sales volume, it is not likely to get them ----------------------
if only sales volume is rewarded. Thus, salespeople have a reputation for not
doing their paperwork correctly or not doing other things, such as making cold ----------------------

Sales Quota and Compensating Sales Personnel 171

 Notes calls or giving product presentations, which do not in the salesperson’s eyes,
clearly lead to more sales volume. So most sales compensation programs need
---------------------- to reward more than just sales volume.
---------------------- Last, there is the problem of connecting performance with effort. Sales
jobs differ greatly in the degree to which the effort of the individual salesperson
---------------------- influences the measured output. If the sales effort is a group affair or the sale
takes the efforts of other jobs in the organisation, then using simple output
----------------------
measures may not be appropriate.
---------------------- Therefore, looking into the crucial role of the sales personnel as revenue
earners, complexities of jobs and the vast opportunities present around, it is
----------------------
very essential that the organisations create a sales compensating plan which is
---------------------- realistic and keeps the sales personnel motivated to perform better and better. A
sales compensation plan, properly designed has three motivational roles:
----------------------
i) pays living wages,
---------------------- ii) adjust pay level to performance, thereby
---------------------- iii) relate job performance and rewards and provide a mechanism for
demonstrating the congruency between attaining company goals and
---------------------- individual goal.
---------------------- A properly designed sales compensation plan fits a company’s special
needs and problems and from it flow attractive returns for both the company and
---------------------- its sales personnel, sales and growth goals are reached at low cost and profits
---------------------- are satisfactory. Sales personnel receive high pay as a reward for effective job
performance, and espirit de corps is high.
----------------------

----------------------
Check your Progress 3

---------------------- State True or False.

---------------------- 1. Boundary spanners must be able to see both groups’ point of view and
to collect and transmit information between groups.
----------------------

----------------------
9.7 REQUIREMENTS OF A GOOD SALES
---------------------- COMPENSATION PLAN
---------------------- A good sales compensation plan meets seven requirements.
---------------------- ●● First, it provides a living wage, preferably in the form of a secure income.
Individuals worried about money matters do not concentrate on doing
---------------------- their jobs well.
---------------------- ●● Second, the plan fits with the rest of the motivational program – it does
not conflict with other motivational factors, such as the intangible feeling
---------------------- of belonging to the sales team.
---------------------- ●● Third, the plan is fair – it does not penalize sales personnel because of

172 Sales and Distribution Management

 factors beyond their control – within the limits of seniority and other Notes
special circumstances, sales personnel receive equal pay for equal
performance. ----------------------
●● Fourth, it is easy for sales personnel to understand – they are able to ----------------------
calculate their own earning.
●● Fifth, the plan adjusts pay to change in performance. ----------------------
●● Sixth, the plan is economical to administer. ----------------------
●● Seventh, the plan helps in attaining the objectives of the sales
----------------------
organisation.
----------------------
9.8 DEVISING A SALES COMPENSATION PLAN
----------------------
Whether contemplating major or minor changes or drafting a completely
new sales compensation plan, the sales executives approach the project ----------------------
systematically, Good compensation plans are built on solid foundations. A ----------------------
systematic approach assures that no essential step is overlooked.
----------------------
Define the Sales Job
Sales work involves working with customers, people outside the ----------------------
organisation, to convince them to order the products or services of the
----------------------
organisation. The importance of this activity is well known since it is the efforts
of the sales personnel that bring in business to the organisation. Furthermore, ----------------------
this importance of the job is highly visible in the organisation, making the
impact of the job even clearer. But an in-depth analysis shows two things about ----------------------
sales work that should be kept in mind: not all of the salesperson’s activities
----------------------
are sales work, and not all sales activity is carried out by staff labelled sales
personnel. ----------------------
Most sales jobs include activities such as soliciting orders, servicing ----------------------
customers, seeking out buyers, obtaining information, and performing
missionary work such as cold calls and product promotion. Some sales personnel ----------------------
also engage in credit-information collection and analysis, product modification,
customer-personnel training, and technical advice and assistance. All sales jobs ----------------------
require that the salesperson perform some administrative work, such as making ----------------------
reports and keeping records. Depending upon the market, the products, and the
organisation, various aspects of these activities are more or less important in ----------------------
particular sales jobs. Further, although some of these activities are important
and necessary, they may not really be sales work, indicating that sales personnel ----------------------
do more than just sell. ----------------------
This variety of sales activities suggests that it is necessary to develop
job descriptions for sales jobs that describe clearly the contributions required ----------------------
of the employee. When the salesperson is paid on an incentive basis the ----------------------
non-selling activities can often be neglected unless they are clearly spelled out
as a part of the job. These descriptions are most useful where there are a number ----------------------
of different types of sales positions in the organisation. Sales job descriptions
typically include not only information about activities but also information ----------------------

Sales Quota and Compensating Sales Personnel 173

 Notes about number of customers, volume of sales, diversity of products sold and
geographical area covered.
----------------------
Determine Specific Objectives
---------------------- Organisational objectives form the basis for deciding on the compensation
structure. The organisational objectives should be very clear. Objectives such
----------------------
as increase the sales over the last year or to increase sale are ambiguous and
---------------------- do not bring clarity. They should be spelled in as clear terms as possible like
“to increase the sales by 10%”, or “to increase the market share by 5%” or “to
---------------------- increase the distribution coverage to additional 100 towns” or reducing selling
costs, increasing of number of new customers etc.
----------------------
Consider the Company’s general Compensation Structure
----------------------
Most large companies and many smaller ones, use job evaluation systems
---------------------- to determine the relative value of individual jobs. It focuses on the job, without
considering the ability or personality of individuals who do the work. Its purpose
---------------------- is to arrive at fair compensation relationships, among jobs. There are generally
four job evaluation methods.
----------------------
Simple Ranking
----------------------
This method is widely used by small businesses; executive committee
---------------------- sorts job descriptions in the order of worth. This is done without considering the
compensation levels. No attempt is made to determine critical factors inherent
---------------------- in the jobs, only overall appraisals of the relative worth of different jobs are
---------------------- made.
Classification and Grading
----------------------
This approach utilises a system of grades and grade descriptions, against
---------------------- which individuals are compared. These grades and classes are described in
terms of job responsibility, skills required, supervision given and received,
---------------------- and exposure to favourable and hazardous working conditions and similar
---------------------- characteristics. All jobs within a grade are treated alike with respect to base
compensation.
---------------------- Point System
---------------------- The point system is the most widely used job evaluation method. It involves
establishing and defining the factors common to most jobs that represent the
----------------------
chief components of value inherent in all jobs. The specific factors generally
---------------------- include mental and physical skills, responsibility requirements and minimum
qualification required. Each factor is assigned a minimum and maximum no.
---------------------- of points. The use of point values makes it possible to determine the gap, or
distance, between job classes.
----------------------
Factor Comparison Method
----------------------
This method resembles the point system but is more complex. It utilizes
---------------------- a scheme of ranking and cross comparisons to minimize error from faulty
judgement. In a process similar to that used in the point system, the factor-
---------------------- comparison method employs selected factors and evaluation scales.

174 Sales and Distribution Management

Consider Compensation Patterns in Community and Industry Notes
Since compensation levels for sales personnel are related to external
----------------------
supply and demand factors, it is important to consider prevailing compensation
patterns in the community of industry. Management needs answers to four ----------------------
questions:
----------------------
●● What compensation systems are being used?
----------------------
●● What is the average compensation for similar positions?
●● How are other companies doing with their plans? ----------------------

●● What are the pros and cons of departing from industry or community ----------------------
patterns?
----------------------
If there is a company wide format for evaluation program, it should
take into account the current rates for sales positions in the community and ----------------------
industry. A program for setting compensation of sales personnel is sound only ----------------------
if it considers the relation of external compensation practices to those of the
company. ----------------------
Determine Compensation Level ----------------------
Management must determine the amount of compensation a sales person ----------------------
should receive on a average. Although the compensation level might be set
through individual bargaining or on an arbitrary judgement basis, neither ----------------------
expedient is recommended. Management should be certain whether the caliber
of the present sales force measures up to what the company would like to have. ----------------------
Another compensation consideration is the compensation amount the company ----------------------
can afford to pay.
----------------------
In some companies, company wide formal job evaluation programs are
used to decide compensation levels for sales position. ----------------------
Provide for the Various Compensation Components ----------------------
A sales compensation plan has as many as four basic components:
----------------------
●● A fixed component, either a salary or a drawing account, to provide some
stability of income; ----------------------

●● A variable component (for e.g. a commission, bonus or profit sharing) to ----------------------

serve as an incentive.
----------------------
●● A component covering the fringe or “plus factor” such as paid vacations,
sickness and accident benefits, life insurance, pensions, and the like; and ----------------------

●● A component providing for reimbursement of expenses or payment of ----------------------

expense allowances. Not every company includes all 4 components.
----------------------
Management selects the combination of these components that best fits
the selling situation. The proportions that different components bear to ----------------------
each other vary. However, most companies split the fixed and variable
components on a 60:40 to an 80:20 basis. ----------------------

Sales Quota and Compensating Sales Personnel 175

 Notes Consult the Present Sales Force
Management should consult the present sales personnel because many
----------------------
grievances have roots in the compensation plan. Management should encourage
---------------------- sales personnel to articulate their likes and dislikes about the current plan and
to suggest changes in it. But at this point, management compares the caliber of
---------------------- the present sales force with that of the people it would like to have since, nearly
every sales force has some people of the desired caliber, more weight can be
----------------------
attached to their opinions than to those of others.
---------------------- Revise the Plan
---------------------- The plan is then revised to remove trouble spots or deficiencies. If
alterations are extensive, the revised plan goes through further pretests and
----------------------
perhaps another pilot test. But if changes have been only minor, further testing
---------------------- is not necessary.

---------------------- Implementation of the Plan and provide for follow-up

At the time the new plan is implemented, it is explained to sales personnel.
---------------------- Management should convince them of its basic fairness and logic. The sales
---------------------- personnel are made to understand what management hopes to accomplish
through the new plan and how this is to be done. If the plan is at all complex,
---------------------- special training sessions are held and aimed at teaching sales personnel how to
compute their own earning. No effort is spared to make certain that everyone
---------------------- on the sales force fully comprehends the compensation plan and its working.
---------------------- Provisions for follow up are made from periodic checkups, need for
a further adjustment is detected. Periodic checks provide evidence of the
----------------------
effectiveness of plan and they uncover weakness needing correction.
----------------------
Check your Progress 4
----------------------

---------------------- Fill in the blanks.

---------------------- 1. involves working with customers, people outside the organisation, to
convince them to order the products or services of the organisation.
----------------------
2. must determine the amount of compensation a sales person should
---------------------- receive on an average.

----------------------
9.9 TYPES OF COMPENSATION PLANS
----------------------
There are three basic patterns: straight salary, straight commission and
----------------------
salary plus incentive. In all three patterns are there and income is entirely
---------------------- separate from expense allowances or reimbursement.
Straight Salary
----------------------
Here the sales manager buys a unit of the salesman’s working time,
---------------------- regardless of sales volume and regardless of performance. This is fixed

176 Sales and Distribution Management

compensation with regard to the firm’s expenses and the salesman’s income (It Notes
is variable obviously, when thought of as a % of net sales). About 20% of the
sales managers pay their salesmen straight salaries. ----------------------
Advantages: The straight salary method has many benefits, the greatest ----------------------
of which is that of control. Straight salary does give the sales manager more
power to control, to direct and to guide. It is clear, simple, specific, economical ----------------------
to administer and stability of income gives the salesman security. Straight salary
----------------------
is appropriate when the sales manager wants the salesman to do a well balanced
sales job. The salesman’s income does not suffer when his sales manager assigns ----------------------
educational, public relations, service or missionary tasks. When the trainee is
new, or when the product is new and its initial potential is low, or when the firm ----------------------
is entering a new market, straight salaries are logical.
----------------------
Disadvantages: Straight salary ranks first for the benefit of control,
but it ranks last as to incentive. The sales manager must be responsible for ----------------------
stimulating and motivating his men. He must occasionally check up. There is ----------------------
a problem of fitting salaries to salesmen, old salesmen may be overpaid, new
salesmen underpaid. Unless reviewed and revised frequently, the said structure ----------------------
can become out of date.
----------------------
Straight Commission
----------------------
Under this arrangement, the sales manager pays the salesman for the
performance of a job. Under straight salary, sales manager buys salesmen’s time. ----------------------
Now we say pay them according to productivity, which is usually measured
in sales volume. This is variable compensation with regard to how much the ----------------------
firm pays out and how much the salesman gets. (It is fixed with relationship to
----------------------
each Rupee worth of sales the salesman makes). The commission rate can be
constant or it can be a sliding scale, the sliding scale can be either progressive or ----------------------
regressive. About 20% of the sales managers are believed to pay their salesmen
straight commission. ----------------------
Advantages: The great asset of the straight commission pattern is its ----------------------
powerful incentive; the more a salesman sells, the greater his income. Under
this method, the salesman enjoys considerable freedom of operation. Straight ----------------------
commission may attract the better salesman. It can be as simple as 5% on net
----------------------
sales or it can be quite flexible and tailored. Different rates can be assigned to
different product, for different types of buyers, for in season and out of season ----------------------
sales and to different salesmen and sales territories.
----------------------
Disadvantages: It provides little financial control over sales people’s,
activities; a weakness further compounded when they pay their own expenses. ----------------------
They are careless about transmitting reports, neglect to follow up leads, resent
reduction in the size of sales territories, consider individual accounts as private ----------------------
property, use wrong methods to make sales and may use high-pressure tactics ----------------------
with consequent loss of good will of customers. Finally, some sales person’s
efficiency may decline because of income uncertainties. If a sales force has many ----------------------
financially worried sales people, management may have to invest considerable
time, effort and money to improve their spirits. ----------------------

Sales Quota and Compensating Sales Personnel 177

 Notes Salary Plus Incentive
This calls for a merging of fixed compensation with variable compensation.
----------------------
These compensation plans try to provide adequate control along with adequate
---------------------- incentives. Sixty percent of our sales managers are believed to use some salary
plus incentive method of compensation.
----------------------
Salary Plus Commission
----------------------
Of the combination methods, salary plus commission is probably the most
---------------------- common. This plan may be quite appropriate for the salesman responsible for
selling and servicing. Sometimes the salary figure is set to cover the minimum
---------------------- living costs of the salesman and his family. The commission may be on all sales,
---------------------- for e.g. Rs.2000 monthly salary plus 2% on all sales or the commission may
apply only to volume over a certain amount per month.
----------------------
Drawing Account Plus Commission
----------------------
A drawing account is an advance of money to the salesman to be repaid
---------------------- from commissions earned and owed by the salesman to his company. The
amount is fixed, for e.g. a salesman may be authorised to draw Rs. 100 a week
---------------------- or Rs. 500 a month. Guaranteed draws do not have to be repaid if the salesman’s
commissions for the drawing period are less than the draw. Periodically, such
----------------------
balances owed to the company are written off, thus, making the draw the same
---------------------- as salary. The non guaranteed draw works as a short-term loan against future
commissions. The salesman owes the company the difference between what he
---------------------- has drawn and his commission when the commission figure is the smaller of the
two amounts. Drawing accounts must be settled each quarter regularly.
----------------------
Use of Bonuses
----------------------
Bonuses are different from commissions – a bonus is an amount paid for
---------------------- accomplishing a specific sales task, a commission varies in amount with sales
---------------------- volume or other commission base. Bonuses are paid for reaching a sales quota
performing promotional activities, obtaining new accounts, following up leads,
---------------------- setting up displays, or carrying out assigned tasks. Thus, bonus is as additional
financial reward to the salesperson for achieving results beyond a predetermined
---------------------- minimum. Bonuses are never used alone – they always appear with one of the
---------------------- three main sales compensation methods. If used with the straight salary the plan
resembles the combination plan. If used with the straight commission the result
---------------------- is a commission plan to which a component of managerial control and direction
has been added. If used with the combination salary and commission plan the
---------------------- bonus becomes a portion of the incentive income that is calculated differently
---------------------- from the commission.
Fringe Benefits
----------------------
Fringe benefits, which do not bear direct relationship to job performance,
----------------------
range from 25 to 40 percent of the total sales compensation package. Some
---------------------- are required by central and state laws – for e.g. payments for social security

178 Sales and Distribution Management

premium, unemployment compensation, and workers compensation. Most Notes
companies provide benefits to be competitive with other companies in the
industry or community to furnish reasons for employees to remain in the ----------------------
company’s service and to comply with what employees expect as fringe benefit.
----------------------
Fringe benefits, like monetary compensation are not motivating factors.
e.g. fulfillment of safety and security needs, some contribute to fulfillment of ----------------------
esteem and other higher order needs. Since fringe benefits are given to all in
----------------------
the company’s employees and do not vary with job performance, they help to
prevent job dissatisfaction but do not add to job satisfaction. ----------------------
An increasing number of companies offer a “cafeteria” approach to fringe
----------------------
benefits. In this approach, the company offers a core of basic benefits – the
benefits required by law plus other: e.g. educational benefits, paid vacations, ----------------------
medical, disability and death benefits and a retirement program. Employees
then use credits (based on age, pay, family status and year of company service) ----------------------
to obtain optional benefits not included in the core, this lets employees select
----------------------
those benefits that best fit their needs. As need for benefits change, employees
are given opportunities to change their selection of those benefits that best fit ----------------------
their needs.
----------------------
Check your Progress 5 ----------------------

Fill in the blanks. ----------------------

1. Straight salary, straight commission and salary plus incentive are the ----------------------
types of _______________.
----------------------

----------------------
Activity 1
----------------------

Compare the compensation plan for the following industries and list the ----------------------
ratio of the components of fixed/variable/fringe benefits in each of them:
Telecom, Automobile, Banking, Trading ----------------------

----------------------
9.10 FRINGE BENEFITS ----------------------
Types of fringe benefits are ----------------------
●● Company car ----------------------
●● Supplemental life insurance and medical insurance
----------------------
●● Tax-return preparation
----------------------
●● Personal tax and financial planning
●● Low or no interest loans ----------------------

●● Deferred compensation ----------------------

Sales Quota and Compensating Sales Personnel 179

 Notes ●● Supplemental retirement benefits
●● Air Travel and First-Class A.C. for Train Travel
----------------------
●● Relocation allowance
----------------------
●● Stationary facilities
----------------------
●● Laundry benefits, while on the tour
---------------------- ●● Special perquisites for out standing performance by getting travel – prizes
recognition for outstanding performance.
----------------------
●● Medical expenses
----------------------
●● Special business association’s membership
----------------------
Summary
----------------------
●● The sales compensation plan is an essential part of the total program
----------------------
for motivating sales personnel. Sales compensation plans play three
---------------------- motivational roles:
n To provide a “living wage” (thereby contributing-in line with
----------------------
Herzberg’s motivation hygiene theory – to the lack of job
---------------------- dissatisfaction if not to job satisfaction)
n To relate pay to job performance (in line with the expectancy theory
----------------------
of motivation) and
---------------------- n To demonstrate the congruency between attainment of company
---------------------- goals and goals of individual sales personnel (also in line with
expectancy theory).
---------------------- ●● The basic sales compensation components (salary, commissions, bonuses)
---------------------- or some combination thereof should be in amounts large enough to
provide the living wage and sufficiently flexible to adjust for changes
---------------------- in job performance and generally not payable in cash, need to be chosen
and administered carefully – sales personnel, like other employees
---------------------- increasingly look upon the fringes as customary and expected.
---------------------- ●● Appropriately chosen and skillfully administered sales compensation
policies facilitate sales force management. They attract promising recruits
---------------------- and encourage satisfactory performers to remain on the job. This helps
---------------------- to hold down the sales personnel turnover rate, which in turn, increases
the return from sales training. In short, effective implementation of
---------------------- appropriate sales compensation policies and practices reduce time and
effort devoted to other aspects of sales force management.
----------------------

----------------------

----------------------

----------------------

180 Sales and Distribution Management

 Keywords Notes

----------------------
●● Fringe Benefit: An employment benefit given in addition to one’s wage
or salary. ----------------------
●● Industry: Concerns primarily engaged in the same kind of economic
activity are classified in the same industry regardless of their types of ----------------------
ownership (such as sole proprietorship, partnership or corporation). ----------------------
●● Procrastination: To put off doing something especially out of carelessness
or laziness. ----------------------
●● Sales Territory: A segment of firm’s market assigned to a sales person or ----------------------
a group of sale people.
----------------------
Self-Assessment Questions ----------------------

1. Define sales quota. ----------------------

2. Discuss features of sales quota. ----------------------
3. What are the requirements of a good sales compensation plan? ----------------------
4. Discuss the various steps in devising sales compensation plan?
----------------------
5. Describe in detail various sales quotas?
----------------------
6. What do you understand by the term Fringe Benefits? State the various
types of fringe benefits. ----------------------

----------------------
Answers to Check your Progress
----------------------
Check your Progress 1
Fill in the blanks. ----------------------

1. Sales quota is an effective tool for directing, controlling and motivating ----------------------
the sales force.
----------------------
Check your Progress 2
----------------------
State True or False.
----------------------
1. True
----------------------
Check your Progress 3
State True or False. ----------------------

1. True ----------------------

----------------------

----------------------

----------------------

Sales Quota and Compensating Sales Personnel 181

 Notes Check your Progress 4
Fill in the blanks.
----------------------
1. Sales work involves working with customers, people outside the
---------------------- organisation, to convince them to order the products or services of the
---------------------- organisation.
2. Management must determine the amount of compensation a sales person
----------------------
should receive on an average.
---------------------- Check your Progress 5
---------------------- Fill in the blanks.
---------------------- 1. Straight salary, straight commission and salary plus incentive are the
types of compensation plans.
----------------------

---------------------- Suggested Reading

---------------------- 1. Bowersox, Logistical Management: The Integrated Supply Chain Process.
---------------------- 2. Calvin, Robert J. Sales Management.

---------------------- 3. Chopra, Supply Chain Management.

4. Ghoshal, World Class in India. Penguin India.
----------------------
5. Lamba, A.J. The Art of Retailing.
----------------------
6. Scheuing, Kurtz, Johnson. Sales Management: Concepts, Practices and
---------------------- Cases.

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

182 Sales and Distribution Management

Leading and Motivating the Sales Personnel
UNIT

10
Structure:

10.1 Introduction
10.2 What is Leadership
10.3 Leadership and Management
10.4 Differences between a Manager and a Leader
10.5 Functions of a Leader
10.6 Leader Influence and Power
10.7 Principles of Leadership
10.8 Characteristics of an Effective Leader
10.9 Theories of Motivation
10.10 Motivating the Sales Force
10.11 Motivational Techniques
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Leading and Motivating the Sales Personnel 183

 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Explain what leadership is
----------------------
• Differentiate between leaders and managers
---------------------- • State the characteristics of effective leader
---------------------- • List the functions of a leader
---------------------- • Elaborate on the theories of motivation

---------------------- • Discuss the motivational techniques

----------------------
10.1 INTRODUCTION
----------------------
Successful sales organisations usually have one critical asset that
---------------------- significantly differentiates them from unsuccessful organizations. That asset
is effective leadership. Leadership occurs in a sales organisation when the
---------------------- sales manager attempts to influence the sales force’s behaviour towards the
accomplishment of the organisation’s goals. Much research has been conducted
----------------------
in an effort to find out what makes a person an effective leader. The major
---------------------- categories of research have focused on trait theory, behavioural theory and
contingency theory.
----------------------
Each of these theories use a different set of characteristics to assess
---------------------- leadership styles. One of the basic elements of leadership is communication.
At its most basic level leadership is two – way communication between people.
---------------------- Communication is a way of transferring ideas, facts, thoughts and values from
---------------------- one person to another. Thus, it is an essential component of leadership. People
including sales people and sales managers, communicate both verbally and
---------------------- non-verbally. Sales managers and sales people must understand the dimensions
of both verbal and non-verbal expression and work to overcome barriers to
---------------------- communication. Effective sales managers will skillfully use the linkage
---------------------- between motivation, communication and leadership to increase the sales force
productivity.
----------------------

---------------------- 10.2 WHAT IS LEADERSHIP

---------------------- There is not a single definition of Leadership which is universally accepted.

Although many specific definitions could be cited, most would depend on the
---------------------- theoretical orientation taken. Beside influence leadership has been defined
in terms of group processes, personality, compliance, particular behaviour.
---------------------- Persuasion, power, goal achievement, interaction, role differentiation, initiation
---------------------- of structure and combinations of two or more of these. Different people/author
has given different definitions of leadership.
----------------------

184 Sales and Distribution Management

 According to some author effective leader is one who motivates, influences, Notes
provides good examples and gives direction. A person who has leadership
qualities is also one who is achievement oriented, assertive and decisive. ----------------------
According to Tannenbaum and his co-authors “leadership is a behavioural ----------------------
process in which one person attempts to influence other peoples behaviour
towards the accomplishment of goals.” ----------------------
“Leadership is the activity of influencing people to strive willingly for ----------------------
group objectives.”
----------------------
- George Terry
“It is not making friends and influencing people, i.e., salesmanship. ----------------------
Leadership is the lifting of man’s vision to higher sights, the raising of mans ----------------------
performance to higher standards, the building up of man’s personality beyond
its normal limitations.” ----------------------
- Peter Drucker ----------------------
“Leadership is the ability to secure desired actions from a group of
followers voluntarily, without the use of coercion.” ----------------------

- Alford and Beatty ----------------------

In sales management context, leadership focuses mainly on the qualities ----------------------
of the sales manager and organisation situation. Leadership deals with the sales
managers or sales supervision and sales people. ----------------------

----------------------
10.3 LEADERSHIP AND MANAGEMENT
----------------------
Management is a learned process where as leadership is an emotional
process. In management process sub-ordinates are guided in the performance ----------------------
of formally prescribed duties towards the achievement of organisational goal.
----------------------
In leadership process, the people are moved in some direction through
non-coercive means. Thus a person can be a leader, manager both or none. ----------------------
A sales organisation is a reflection of its leader. Deficiency in sales people ----------------------
or in their performance can usually be traced to inadequacy in sales management,
while superior performance is generally the result of outstanding leadership. ----------------------

----------------------
10.4 DIFFERENCES BETWEEN A MANAGER AND
A LEADER ----------------------

Nowadays the majority of modern companies are more administrated ----------------------

(managed) than leaded. According to some of the different characteristics we ----------------------
can create the following list:
----------------------

----------------------

----------------------

Leading and Motivating the Sales Personnel 185

 Notes Table 10.1
---------------------- Manager Leader
---------------------- He manages wisely the resources Innovator, discovers new opportunities
Maintains the economic balance Develops new activities
----------------------
Is interested in systems and structures Interested in the human factor
----------------------
Decisions are based on control Decisions are based on trust
---------------------- Manager Leader
---------------------- Long-term vision Short-term vision
He usually asks how, when? He usually asks why?
----------------------
Aiming the result Aiming the concept, the idea
----------------------
He imitates the success stories He creates the success stories
---------------------- He accepts the destine He challenges his own destine
---------------------- Is a classic competent soldier Is his own general
---------------------- Makes things in a proper manner Makes proper things
He is using a plan He is based on intuition
----------------------
He respects the efficiency He respects the innovation
----------------------
It is clear at first sight, that two opposite attitudes can be registered.
---------------------- Firstly the manager is using the economical resources of his company aiming
for achieving the proposed goals. He is looking for efficiency and for proper
---------------------- usage of production factors in order to obtain a maximum quality with the lower
---------------------- possible costs. In this way he will maximize the overall amount of profit. A
leader is yet more interested about human factors, and he considers people the
---------------------- most valuable resource. While the manager is adopting a well planned decision,
the leader is looking for a general image regarding the phenomenon and usually
---------------------- he acts according to personal predictions.
---------------------- The leader is also an innovator that creates history while the manager is
created by history, by the strong necessity of changing things around. A leader
---------------------- is much cherished because he is capable o change the history of humanity to
---------------------- apply interesting ideas and concepts into various domains.
The manager looks for tested solutions and he doesn’t generally use his
----------------------
creativity because he is interested in obtaining a certain effect while the leader
---------------------- sometimes decides to take strange risks and actions. If a leader fails he will be
probably blamed but when he succeeds he becomes a creator of one or many
---------------------- concepts that can be applied in the future, and tested further and further until the
limit is exceeded and the concept becomes useless. We all know who invented
----------------------
the lighting bulb but we will never know all the users of that miraculous
---------------------- invention. The difference between a good manager and a leader is that hope is
endless for the last one.
----------------------

186 Sales and Distribution Management

 Notes
Check your Progress 1
----------------------
Fill in the blanks. ----------------------
1. The leader is an innovator that ____________ history, while the
----------------------
manager is ______________ history.
----------------------

10.5 FUNCTIONS OF A LEADER ----------------------

●● He has to lay down objectives for his section or group. ----------------------

●● He has to frame policies and plans to achieve the objectives. ----------------------

●● He has to ensure that there is proper implementation of plans. ----------------------
●● He must encourage initiative among his subordinates. ----------------------
●● He has to guide and train his subordinates. ----------------------
●● He has to develop good morale in his subordinates.
----------------------
●● He has to encourage team spirit among his subordinates.
----------------------
●● He has to represent on behalf of his followers to other groups.
----------------------
●● He has to solve disputes among his followers.
●● Most of all he has to get the work done from his subordinates. ----------------------

Thus, leadership is the activity of influencing people to strive willingly ----------------------

for group objectives.
----------------------

Check your Progress 2 ----------------------

----------------------
Fill in the blanks.
----------------------
1. Leadership is the activity of _______________ people to strive
willingly for group objectives. ----------------------

----------------------
Activity 1 ----------------------

Identify a close associate such as a brother, sister, friend, colleague etc. ----------------------
and list down five leadership qualities he/she has and three qualities which
----------------------
he/she needs to develop.
----------------------

----------------------

----------------------

Leading and Motivating the Sales Personnel 187

 Notes 10.6 LEADER INFLUENCE AND POWER
---------------------- Leader may draw upon power from a variety of sources: Legitimate
power, Reward power, Coercive power, Referent power and Expert power.
----------------------
Legitimate Power
----------------------
Derives from formally delegated authority and is recognized by others
---------------------- as necessary in achieving organisational objectives. It is based on a person’s
position in a hierarchy.
----------------------
Reward Power
----------------------
Involves the ability to provide sub-ordinates with various benefits
---------------------- including money, praise or promotion.
Coercive Power
----------------------
Comes from the ability to punish or withhold reward. It is based on
---------------------- obtaining compliance through fear of punishment.
---------------------- Referent Power

---------------------- Depends upon the leader’s ability to inspire and to connect with other
influential people.
---------------------- Expert Power
---------------------- Is based on the leader’s skills, knowledge and special abilities.
---------------------- Sales managers can influence the behaviour of their salespeople by using
the various sources of power. The major behaviours that can be affected include
---------------------- commitment compliance and resistance.
---------------------- Commitment occurs when salespeople are enthusiastic about carrying out
the sales manager’s request and make a maximum effort to do so.
----------------------
Various sources of sales manager’s power and their effect on sales person
---------------------- behaviour.

---------------------- Power sources Commitment Compliance Resistance

---------------------- a. Legitimate Possible Likely Possible

b. Reward Possible Likely Possible
----------------------
c. Coercive Unlikely Possible Likely
---------------------- d. Referent Likely Possible Possible
---------------------- e. Expert Likely Possible Possible
---------------------- Good sales managers are likely to utilise all five sources of power at one
time or another.
----------------------
The performance of the sales force tends to be better when the sales
---------------------- managers rely on expert and referent power. These two types of power increase
the motivational level in sales force.
----------------------

188 Sales and Distribution Management

Types of leadership Notes
a) Formal ----------------------
b) Informal
----------------------
Formal leadership is the exercise of influence over others by some one in
----------------------
an official position of authority.
Informal leadership is the unofficial exercise of influence over others. ----------------------
Informal leadership is the unofficial exercise of influence over others through ----------------------
competence, trust and respect. Informal leaders are of people’s choice and can
influence people’s behaviour much more than formal leadership. ----------------------

----------------------
Check your Progress 3
----------------------
State True or False. ----------------------
1. Formal leadership is the exercise of influence over others by someone
in an official position of authority. ----------------------

----------------------
10.7 PRINCIPLES OF LEADERSHIP ----------------------

1. Be technically proficient: As a leader, you must know your job and have ----------------------
a solid familiarity with your employees’ tasks.
----------------------
2. Seek responsibility and take responsibility for your actions: Search
for ways to guide your organisation to new heights. When things go ----------------------
wrong, they always do sooner or later - do not blame others. Analyse the
----------------------
situation, take corrective action, and move on to the next challenge.
3. Make sound and timely decisions: Use good problem solving, decision ----------------------
making, and planning tools. ----------------------
4. Set the example: Be a good role model for your employees. They must
----------------------
not only hear what they are expected to do, but also see. We must become
the change we want to see - Mahatma Gandhi ----------------------
5. Know your people and look out for their well-being: Know human
----------------------
nature and the importance of sincerely caring for your workers.
6. Keep your workers informed: Know how to communicate with not ----------------------
only them, but also seniors and other key people. ----------------------
7. Develop a sense of responsibility in your workers: Help to develop
good character traits that will help them carry out their professional ----------------------
responsibilities. ----------------------
8. Ensure that tasks are understood, supervised and accomplished:
----------------------
Communication is the key to this responsibility.
9. Train as a team: Although many so called leaders call their organisation, ----------------------

Leading and Motivating the Sales Personnel 189

 Notes department, section, etc. a team; they are not really teams...they are just a
group of people doing their jobs.
----------------------
10. Use the full capabilities of your organisation: By developing a team
---------------------- spirit, you will be able to employ your organisation, department, section,
etc. to its fullest capabilities.
----------------------

---------------------- Check your Progress 4

---------------------- State True or False.

---------------------- 1. Making sound and timely decisions, setting an example and keeping
the workers informed are the features of leadership
----------------------

----------------------
10.8 CHARACTERISTICS OF AN EFFECTIVE LEADER
----------------------
1. Listening
----------------------
Leaders have traditionally been valued for their communication and
---------------------- decision-making skills. Although these are also important skills for the
servant-leader, they need to be reinforced by a deep commitment to
---------------------- listening intently to others. The servant-leader seeks to identify the will
of a group and helps to clarify that will. He or she listens receptively
----------------------
to what is being said and unsaid. Listening also encompasses getting
---------------------- in touch with one’s own inner voice. Listening, coupled with periods
of reflection, are essential to the growth and well-being of the servant-
---------------------- leader.
---------------------- 2. Empathy

---------------------- The leader strives to understand and empathise with others. People need
to be accepted and recognized for their special and unique spirits. One
---------------------- assumes the good intentions of co-workers and colleagues and does not
reject them as people, even when one may be forced to refuse to accept
---------------------- certain behaviours or performance. The most successful servant-leaders
---------------------- are those who have become skilled empathetic listeners.
3. Healing
----------------------
The healing of relationships is a powerful force for transformation
---------------------- and integration. One of the great strengths of servant-leadership is the
potential for healing one’s self and one’s relationship to others. Many
----------------------
people have broken spirits and have suffered from a variety of emotional
---------------------- hurts. Although this is a part of being human, servant-leaders recognise
that they have an opportunity to help make whole those with whom they
---------------------- come in contact. In his essay, The Servant as Leader, Greenleaf writes,
“There is something subtle communicated to one who is being served
----------------------
and led if, implicit in the compact between servant-leader and led, is the
---------------------- understanding that the search for wholeness is something they share.”

190 Sales and Distribution Management

4. Awareness Notes
General awareness, and especially self-awareness, strengthens the leader.
----------------------
Awareness helps one in understanding issues involving ethics, power and
values. It lends itself to being able to view most situations from a more ----------------------
integrated, holistic position. Able leaders are usually sharply awake and
reasonably disturbed. ----------------------
5. Persuasion ----------------------
Another characteristic of leaders is reliance on persuasion, rather than on
one’s positional authority, in making decisions within an organisation. The ----------------------
servant-leader seeks to convince others, rather than coerce compliance. ----------------------
This particular element offers one of the clearest distinctions between the
traditional authoritarian model and that of servant-leadership. The leader ----------------------
is effective at building consensus within groups.
----------------------
6. Conceptualisation
Servant-leaders seek to nurture their abilities to dream great dreams. The ----------------------
ability to look at a problem or an organisation from a conceptualising ----------------------
perspective means that one must think beyond day-to-day realities. For
many leaders, this is a characteristic that requires discipline and practice. ----------------------
Within organisations, conceptualisation is, by its very nature, the proper
role of boards of trustees or directors. Unfortunately, boards can sometimes ----------------------
become involved in the day-to-day operations—something that should ----------------------
always be discouraged—and, thus, fail to provide the visionary concept
for an institution. ----------------------
Trustees need to be mostly conceptual in their orientation, staffs need to be
----------------------
mostly operational in their perspective, and the most effective executive
leaders probably need to develop both perspectives within themselves. ----------------------
Leaders are called to seek a delicate balance between conceptual thinking
and a day-to-day operational approach. ----------------------
7. Foresight ----------------------
Closely related to conceptualisation, the ability to foresee the likely
----------------------
outcome of a situation is hard to define, but easier to identify. One knows
foresight when one experiences it. Foresight is a characteristic that ----------------------
enables the leader to understand the lessons from the past, the realities of
the present, and the likely consequence of a decision for the future. It is ----------------------
also deeply rooted within the intuitive mind.
----------------------
8. Stewardship
----------------------
Peter Block has defined stewardship as “holding something in trust for
another.” Leadership, like stewardship, assumes first and foremost a ----------------------
commitment to serving the needs of others. It also emphasises the use of
openness and persuasion, rather than control. ----------------------
9. Commitment to the growth of people ----------------------
Leaders believe that people have an intrinsic value beyond their tangible
contributions as workers. As such, the leader is deeply committed to the ----------------------

Leading and Motivating the Sales Personnel 191

 Notes growth of each and every individual within his or her organisation. The
leader recognises the tremendous responsibility to do everything in his or
---------------------- her power to nurture the personal and professional growth of employees
and colleagues. In practice, this can include (but is not limited to) concrete
---------------------- actions such as making funds available for personal and professional
---------------------- development, taking a personal interest in the ideas and suggestions from
everyone, encouraging worker involvement in decision-making, and
---------------------- actively assisting laid-off employees to find other positions.
---------------------- 10. Building community
The leader senses that much has been lost in recent human history as
----------------------
a result of the shift from local communities to large institutions as the
---------------------- primary shaper of human lives. This awareness causes the leader to seek
to identify some means for building community among those who work
---------------------- within a given institution
---------------------- Sales Force Motivation

---------------------- In psychology motivation refers to the initiation, direction, intensity

and persistence of behaviour. Motivation is a temporal and dynamic state that
---------------------- should not be confused with personality or emotion. Motivation is having the
desire and willingness to do something. A motivated person can be reaching
---------------------- for a long-term goal such as becoming a professional writer or a more
---------------------- short-term goal like learning how to spell a particular word.
Personality invariably refers to more or less permanent characteristics of
---------------------- an individual’s state of being (e.g., shy, extrovert, conscientious). As opposed
---------------------- to motivation, emotion refers to temporal states that do not immediately link to
behavior (e.g., anger, grief, happiness).
---------------------- An incentive is that is offered before accomplishing a specific task with
---------------------- the intent of encouraging the behaviours necessary to accomplish that task to
occur.
----------------------
A reward is something that is given following the occurrence of a behaviour
---------------------- with the intention of acknowledging the positive nature of that behaviour and
often with the additional intent of encouraging it to happen again. The definition
---------------------- of reward is not to be confused with the definition of rein forcer, which includes
a measured increase in the rate of a desirable behavior following the addition of
----------------------
something to the environment.
---------------------- There are two kinds of motivation :
---------------------- ●● Intrinsic motivation occurs when people are internally motivated to
do something because it either brings them pleasure, they think it is
---------------------- important, or they feel that what they are learning is morally significant.
---------------------- ●● Extrinsic motivation comes into play when a student is compelled to do
something or act a certain way because of factors external to him or her
---------------------- (like money or good grades).
----------------------

192 Sales and Distribution Management

10.9 THEORIES OF MOTIVATION Notes

Maslow’s Theory of Motivation ----------------------

Abraham Maslow’s hierarchy of human needs theory is the most widely ----------------------
discussed theory of motivation.
----------------------
The theory can be summarised as:
●● Human beings have wants and desires which influence their behaviour, ----------------------
only unsatisfied needs can influence behaviour, satisfied needs cannot.
----------------------
●● Since needs are many, they are arranged in order of importance, from the
basic to the complex. ----------------------
●● The person advances to the next level of needs only after the lower level ----------------------
need is at least minimally satisfied.
●● The further the progress up the hierarchy, the more individuality, ----------------------
humanness and psychological health a person will show. ----------------------
The needs, listed from basic (lowest, earliest) to most complex (highest,
latest) are as follows: ----------------------
●● Physiological ----------------------
●● Safety and security
----------------------
●● Social
----------------------
●● Self esteem
●● Self actualisation ----------------------
Maslow’s hierarchy Salesperson’s Needs Sales Manager’s Task ----------------------
Self-actualisation needs Self-development Creativity Provide greater job control,
Self-fulfillment freedom self-development ----------------------
workshops.
Recongnition Status
Provide greater job
----------------------
Esteem needs responsibilities promotion
opportunities and public
----------------------
recognition for achievements.
----------------------
Maintain close relationships
with sales force ----------------------
Social needs
Social interaction ----------------------
Friendship Sales meetings
Acceptance among peers Provide a balanced package of ----------------------
Safety needs and superiors fringe benefits
----------------------
Freedom from worry about Be aware of general health and
security of jobs, incomes, living condition of sales force ----------------------
medical expenses, etc.
Physiological needs Food, shelter, overall health, etc. ----------------------
Fig. 10.1: Maslow in Sales ----------------------

----------------------

Leading and Motivating the Sales Personnel 193

 Notes At lower levels of Maslow’s hierarchy of needs, such as Physiological
needs, money is a motivator; however it tends to have a motivating effect on
---------------------- staff that lasts only for a short period. At higher levels of the hierarchy, praise,
respect, recognition, empowerment and a sense of belonging are far more
---------------------- powerful motivators than money.
---------------------- Maslow has money at the lowest level of the hierarchy and shows other
needs are better motivators to staff. McGregor places money in his Theory X
---------------------- category and feels it is a poor motivator. Praise and recognition are placed in the
---------------------- Theory Y category and are considered stronger motivators than money.
●● Motivated employees always look for better ways to do a job.
----------------------
●● Motivated employees are more quality oriented.
---------------------- ●● Motivated workers are more productive.
---------------------- Herzberg’s Two Factor Theory
Frederick Herzberg’s two factor theories, concludes that certain factors in
----------------------
the workplace result in job satisfaction, while others do not, but if absent lead
---------------------- to dissatisfaction.
He distinguished between: motivation and hygiene
----------------------
●● Motivators: (e.g., challenging work, recognition, responsibility) which
---------------------- give positive satisfaction, and
---------------------- ●● Hygiene factors: (e.g., status, job security, salary and fringe benefits)
which do not motivate if present, but if absent will result in de-motivation.
---------------------- The name Hygiene factors is used because, like hygiene, the presence will
---------------------- not make you healthier, but absence can cause health deterioration.
The theory is sometimes called the “Motivator-Hygiene Theory.”
----------------------
McClelland’s Achievement Motivation Theory
---------------------- David McClelland’s achievement motivation theory envisages that a
person has need for three things but people differ in degree in which the various
----------------------
needs influence their behaviour:
---------------------- ●● Need for achievement
---------------------- ●● Need for power
●● Need for affiliation
----------------------
Goal-setting theory
---------------------- Goal-setting theory is based on the notion that individuals sometimes have
---------------------- a drive to reach a clearly defined end state. Often, this end state is a reward in
itself. A goal’s efficiency is affected by three features; proximity, difficulty and
---------------------- specificity. An ideal goal should present a situation where the time between the
initiation of behaviour and the end state is close in time. This explains why some
---------------------- children are more motivated to learn how to ride a bike than mastering algebra.
---------------------- A goal should be moderate, not too hard or too easy to complete. In both cases,
most people are not optimally motivated, as many want a challenge (which
---------------------- assumes some kind of insecurity of success). At the same time people want

194 Sales and Distribution Management

to feel that there is a substantial probability that they will succeed. Specificity Notes
concerns the description of the goal. The goal should be objectively defined and
intelligible for the individual. A classic example of a poorly specified goal is to ----------------------
get the highest possible grade. Most children have no idea how much effort they
need to reach that goal. ----------------------

----------------------
Check your Progress 5
----------------------
State True or False. ----------------------
1. Praise and recognition are placed in the Theory X category and are
----------------------
considered stronger motivators than money.
----------------------

10.10 MOTIVATING THE SALES FORCE ----------------------

Motivating salespeople requires the skill of getting them to achieve their ----------------------
objectives while at the same time finding satisfaction from the job. This is the ----------------------
biggest challenge any sales manager faces. To successfully motivate the sales
force the sales managers need to understand the sales force in all respects. ----------------------
Understanding the sales force from the following perspectives facilitates
designing a appropriate motivational program: ----------------------

●● Understand what motivation is all about. ----------------------

●● Develop a high-performance sales culture. ----------------------
●● Know salespeople’s basic needs.
----------------------
●● Realise that the salespeople want to know what is in it for him.
●● Get to know the personal side of sales persons. ----------------------
●● Be realistic about motivating salespeople. ----------------------

10.11 MOTIVATIONAL TECHNIQUES ----------------------

Using Motivational Tapes, Videos and Seminars ----------------------

Motivational speakers widely make use of tapes, videos and seminars ----------------------
as a very effective motivational training tool. The purpose is to bring out the
----------------------
latent inner strengths of participants and apply to their jobs. These motivational
techniques have various benefits. ----------------------
●● Increase the productivity of sales personnel.
----------------------
●● Short and entertaining to keep the interest, so agents internalize the
behaviour. ----------------------
●● Keeps your training message consistent. ----------------------
●● Your sales people will gain the techniques, motivation and confidence to
prospect. ----------------------

●● Encourages student involvement and creates an interactive classroom. ----------------------

Leading and Motivating the Sales Personnel 195

 Notes ●● Increases retention by making training more fun.
●● Sales people can refer to the videos to “warm up” for an appointment or
----------------------
refresh a skill.
---------------------- ●● High quality, professional production helps creating impact on the
---------------------- participants.
To maximize the benefits from tapes or motivational speakers it should
---------------------- be ensured that the contents should be a blend of realistic situations with high
---------------------- energy and humour. The role plays should be shot in realistic manner without the
use of a script to give real life experience. Various selling issues communication,
---------------------- body language, selling and negotiation should be covered so that participants
can have a comprehensive learning,
----------------------
Sales Contests
----------------------
A short-term incentive program designed to motivate sales personnel to
---------------------- accomplish specific sales objectives. Comment: In general, a sales contest is
used by firms to stimulate extra effort for obtaining new customers, promoting
---------------------- the sales of specific items, generating larger orders per sales call, etc. . Although
---------------------- a contest should not be considered part of the firm’s ongoing compensation
plan, it does offer salespeople the opportunity to gain financial as well as
---------------------- non-financial rewards. Contest winners often receive prizes in cash or
merchandise or travel that have monetary value. Winners also receive non-
---------------------- financial rewards in the form of recognition and a sense of accomplishment.
---------------------- Sales organisations hold sales contests in an attempt to increase revenue
and motivate salespeople.
----------------------
There are several purposes for holding sales contests:
----------------------
●● To make people feel like winners
----------------------
●● To give recognition for good performance
---------------------- ●● To set performance standards
---------------------- ●● To provide a context for performance improvement and training
---------------------- ●● To develop team spirit

---------------------- ●● To boost morale

●● To make sales jobs more interesting and fun
----------------------
Sales contests should be designed to accomplish specific objectives over
---------------------- short periods. A contest should have only one, two, or at most three objectives.
Here are examples of some objectives that sales contests might have:
----------------------
●● To obtain new customers
----------------------
●● To secure larger orders per sales call
----------------------
●● To overcome seasonal sales slumps
---------------------- ●● To get higher rates

196 Sales and Distribution Management

●● To sell a higher percentage of retail, direct or agency business Notes
●● To sell special inventory or packages
----------------------
●● To increase the use and quality of sales presentations
----------------------
●● To secure a higher percentage of renewals
----------------------
●● To improve customer satisfaction (as determined by before-and-after
surveys) ----------------------
The underlying goal of a sales contest is to maximize revenue, which can ----------------------
be accomplished in a number of ways, as suggested in part by the nine points
above. ----------------------
There are three requirements for a successful sales contest: ----------------------
●● There must be an increased effort which leads directly to increased
----------------------
rewards for both salespeople and a company.
●● Contests in which just salespeople or a company benefits are doomed to ----------------------
failure. ----------------------
●● Contests must motivate salespeople to increase their efforts.
----------------------
●● Contests must assist salespeople in patterning their efforts along more
productive lines and encourage them to continue these good habits past ----------------------
the contest period.
----------------------
There are two types of contests: direct and novelty.
----------------------
Direct contests are straightforward, such as “achieve 15 percent higher
rates,” or “write 20 percent more direct business.” ----------------------
Novelty contests are ones that “hunt for hidden gold,” or “win the ----------------------
Super Bowl.” Novelty contests are more fun, but many sales managers feel
that they tend to insult the intelligence of more sophisticated salespeople. ----------------------
Novelty contests tend to work better with younger, less experienced, less jaded
----------------------
salespeople. Novelty contests can be fun for selling special inventory, special
events, or seasonal packages. ----------------------
Prizes
----------------------
Generally, there are four kinds of prizes for sales contests: Cash,
merchandise, travel and special honour, recognition, or privileges. Many ----------------------
organisations use a combination of prizes, such as a cash award plus a trip plus ----------------------
several extra days off to winners, and smaller prizes to other finishers.
----------------------
Cash
Cash is not the most effective prize, especially if salespeople are ----------------------
reasonably well paid. Their money and security needs are satisfied by their
----------------------
regular compensation, but their achievement needs for feedback and recognition
often go only partially satisfied. Contests are excellent ways to satisfy these ----------------------
self-esteem needs. Also, cash does not act as a motivator unless it is between
10 percent and 25 percent of salespeople’s base compensation for the period of ----------------------

Leading and Motivating the Sales Personnel 197

 Notes the contest. Well-paid salespeople will generally not go to much extra effort for
just a few hundred rupees. Cash does not fulfill any need for recognition and
---------------------- provides no tangible, permanent evidence of the achievement like a plague, a
ring, or a trophy does.
----------------------
Merchandise
----------------------
Merchandise is better than cash as a prize; it is more permanent evidence
---------------------- of achievement. Also, companies can often get merchandise through trade
deals or at wholesale prices, and thus give larger prizes than if cash were used.
---------------------- Furthermore, if people are allowed to have a choice of merchandise, rewards
can be more closely tied to individual needs and preferences, and salespeople
----------------------
and their families can express their individuality in the prizes they choose.
---------------------- Travel
---------------------- Travel is becoming more and more popular as a prize, because of the
status, prestige, glamour, and fun associated with an exotic or exciting trip.
---------------------- Trips can be promoted well too; they can be glamorised, and people love to
---------------------- fantasize about them. Also, trips can include spouses and partners, which helps
get partners involved in contests and in a frame of mind to support the extra
---------------------- work and effort necessary to win a contest.

---------------------- Special Privileges

Special privileges are a good reward, but they are often hard to get approval
---------------------- for in larger, more rigid companies (i.e., extra vacation). Special recognition,
---------------------- like being flown in to the head office to meet the company president or receiving
special recognition and publicity.
----------------------
How Many Prizes?
---------------------- How many prizes are given in a sales contest is an important consideration.
In general, it is best to make it possible for everyone to win something. The
----------------------
smaller the staff, the more important this element is in order to avoid destructive
---------------------- competition. Have several big winners (first, second and third place), but also
have a little something for everyone. Remember, in six-person sales staff, if
---------------------- there is only one winner, five people feels like losers—not a good outcome.
---------------------- Team Contests

---------------------- There is a strong evidence that team prizes are more effective than
individual prizes. For example, it is a good idea to divide a sales staff into two
---------------------- teams and give a major prize to winning team members and nice consolation
prizes to members on the second-place team.
----------------------
Full-Staff Contests
----------------------
It is also a very good idea to have a prize for all members of a sales staff
---------------------- if a sales department reaches a goal. In this manner a sales staff is competing
against itself, and everyone helps everyone else to improve the department’s
---------------------- performance. The full-staff contest is perhaps the best type of competition; it
reinforces the notion that the enemy is outside, not inside. Full-staff contests
----------------------
are being used by many companies to reward sales staffs for exceeding yearly

198 Sales and Distribution Management

revenue goals or budgets. Technically, these full-staff incentives are not contests, Notes
but they can be excellent motivators for staff cooperation and teamwork.
----------------------
Use Improvement Criteria
The criteria for awarding prizes should be based on each person’s or ----------------------
team’s current performance level. The criteria for winning should be based
----------------------
on what is excellent performance for each salesperson at his or her level of
productivity. Therefore, the rules of a sales contest and the criteria for winning ----------------------
should be based on some measurement of improvement. Give prizes to the
people or teams who come the closest to reaching or exceeding a target or goal ----------------------
on a percentage basis. If everyone improves, everyone should be rewarded and
----------------------
those that improve the most, should be rewarded the most.
Do not have sales contests merely as a device to give salespeople more ----------------------
money. Unless contests are designed to have specific improvement goals that
----------------------
reinforce a sales department’s overall sales strategy for maximizing revenue,
they will not force change or require extra effort, which is why you hold contests. ----------------------
Contest Duration ----------------------
The duration of a contest should be no shorter than four weeks and
no longer than thirteen weeks. Six weeks is a good duration for a sales ----------------------
contest— long enough to effect behavior and billing and short enough so that ----------------------
the salespeople don’t get bored with it. As contests must be relatively short
to maintain interest, it is difficult to run effective sales contests that require ----------------------
long-term, developmental selling.
----------------------
Contest Frequency
----------------------
Do not use sales contest regularly, because then they are no longer
special. In fact, salespeople come to expect the goodies they get from regularly ----------------------
scheduled contests and to see the rewards not as extras but as a normal part of
their compensation package. Also, remember, that the competition generated ----------------------
from a hyped contest can cause morale problems, especially among those who
----------------------
do not the top prize. Spread out contests to avoid too frequent post-contest lulls.
Two sales contests a year is a reasonable frequency. ----------------------
Promote Contests
----------------------
Promote contests well to keep the enthusiasm level high. Promote them
at all levels of the organisation, not just in the sales department in order to ----------------------
get everyone in the company involved and supporting the salespeople (even ----------------------
include vital support people in prizes). Promote the progress of contests on a
weekly basis. Give feedback on how the individual salespeople or teams are ----------------------
progressing. Weekly bulletins are a vital element of contests in order to give
feedback and to create both awareness and excitement. ----------------------
Fairness ----------------------
Fairness is the most important dimension in a contest. Participants must ----------------------
believe that a contest is absolutely fair and that no one has an edge at the
beginning. ----------------------

Leading and Motivating the Sales Personnel 199

 Notes Simplicity
Sales contests should be designed so that they are easy to understand.
----------------------
Objectives must be clear and progress toward them must be simple and easily
---------------------- represented graphically.
Visibility
----------------------
Contest progress must be visible to everyone in an office. Among
---------------------- salespeople there is often as strong a motivation not to lose as there is to win,
so post progress reports daily so that both those ahead and behind will be
----------------------
continually informed.
---------------------- Standard Setting
---------------------- Contests help set performance standards. It is vital that non-winners be
given clear advice on ways to improve their performance. Offer additional sales
---------------------- training so non-winners feel they have a chance to win the next contest.
---------------------- Finally, do not depend on contests alone to have an affect on long-term
performance. Contests generally provide only a short-term improvement, and
---------------------- no contest can correct inherent sales force or sales management problems—
---------------------- training is the answer to these difficulties. On the other hand, contests do
reinforce department values and good selling principles. Furthermore, sales
---------------------- contests can be fun, motivating and help build team spirit if they are well
designed to accomplish a few clear, realistic objectives. A well-designed and
---------------------- well-run contest can make salespeople feel like winners.
---------------------- Disadvantages of sales contests
---------------------- ●● Pre-contest stalling

---------------------- ●● Over-selling
●● Post-contest slump
----------------------
It’s a well known fact that if you announce a sales contest too early your
---------------------- salespeople will hold on some sales and put them into the contest orders. One
way to defeat this is to announce a contest as retroactive to a prior date. That
---------------------- way your sales team will always sell to their potential, knowing that you’ll
---------------------- never penalize them.
In their pursuit to win and earn prizes the sales personnel over sell during
----------------------
the contest period. As a result there is lot of dumping of products with the dealers/
---------------------- distributors and may result in straining the organisational relationships with
them. The immediate time period after the sales contest will face a slump in the
---------------------- sales due to excessive dumping in the sales period. To overcome this company
should choose such time for the contest that the period after the contest; say a
----------------------
month or two would in any way be a slack period for the company. This slack
---------------------- time can be used to sending the sales people to take vacation or for training etc.

----------------------

----------------------

200 Sales and Distribution Management

 Increase dollar volume Notes
Prize to salespeople who increase sales (based on percentage of dollar increase over previous period).
Two quotas with prize to salesperson who reaches first quota and prize for husband or wife if second quota is reached.
Several prizes, with top producers awarded most expensive prize. Runners-up receive less expensive prizes. Points ----------------------
for each $1 of sales. Prizes won by fixed number who have most points.
Stimulate more orders.
Prize for all salespeople who pass quota of orders.
----------------------
Points for each order, with fixed number of prizes to those with most points.
Increase sales orders. ----------------------
Prizes to those who make most demonstrations and/or complete most call reports.
Prizes to all who make quota of calls and demonstrations.
Additional prize for meeting a second quota.
----------------------
Build higher unit sales. Points for higher dollar or unit volume (based on past averages), with prizes for those who
make best showing. ----------------------
Add customers.
Reach quota of new customers to earn prizes. Sellers who add most customers earn prize. Several prizes, with best
prizes to top producers.
----------------------
Points toward prize for each new customer, with bonus points for target accounts.
Secure prospects. Points toward prize for each new prospect, with additional points for each prospect that becomes a ----------------------
customer within a specified period.
Build off-season business. Dollar or unit-volume quota to earn prize during slow months.
Two quotas: first for salesperson, second for spouse (if trip).
----------------------
Push slow items. Points awarded for sales of slow-moving stocks, with prizes for biggest point getters.
Stimulate balanced selling. Prizes to those who maintain best sales record for selling entire line during specified time. ----------------------
Introduce new product.
Points toward prize for best sales record with new product.
Prize to salespeople who reach quota of customers who buy new product.
----------------------
Increase use of displays. Prize to salespeople for placing quota of displays.
Stimulate dealer tie-ins. Prizes to salespeople who get most dealers to tie in with national advertising campaign. ----------------------
Revive dead accounts.
Prizes to salespeople who reactivate most old accounts.
Prizes for greatest sales volume from formerly dead accounts.
----------------------
Switch users to your brand. Points toward prize for salespeople who switch users or owners of competitive product
to yours. ----------------------
Improve sales abilities. Prizes to salespeople who score best when graded by professional shopper.
Intensify training. Prizes to salespeople who score best on examinations after training period.
Reduce costs. Prize to salespeople and managers who set best record of sales-to-costs ratio.
----------------------
Build multiple sales. Prizes to salespeople with best carload or multiple-sales record.
Source: Rolph E Anderson, Joseph F. Hair, Jr. and Alan J. Bush, “Professional Sales Management.” ----------------------
Fig. 10.2: Examples of Sales Contests ----------------------
Motivation through one to one relationship
----------------------
Though like any other organisation the formal relationship is defined in a
sales organisation, still the sale managers, to start with treat the sales personnel ----------------------
as an individual. Though different sales managers have different techniques to
----------------------
motivate the sales personnel, still one can not afford to have the same yardstick
of motivating the different people. Therefore, the sales people need to customize ----------------------
their approach to suit to personality profile and temperament of different sales
personnel. ----------------------
It is therefore necessary that the sales managers understand the sales ----------------------
person’s strengths and weaknesses, likes and dislikes, goals, ambitions, how
important are money, growth, and recognition to the sales person. ----------------------
It is necessary that the sales manager first understands the various ----------------------
dimension about the sales personnel and in the light of these factors visualize
situation to motivate the salesperson. ----------------------
Recognition as a tool of motivation ----------------------
It is an age old belief that monetary benefit has been only the motivator.
But it is not so. Money is one of the motivators. Non-financial rewards motivate ----------------------

Leading and Motivating the Sales Personnel 201

 Notes the sales personal to higher level of performance. Recognition has come out
to be a strong motivator for the sales force. Money gained through incentives,
---------------------- rewards etc. is spent and forgotten but recognition of good work done go down
the memory lane and is cherished through out the life.
----------------------
An appreciation letter for good job done and displayed on the notice board
---------------------- or copy circulated to other sales personnel in the sales department, a pat on the
back, a certificate, up gradation of the position, a promotion can put the sales
----------------------
person on the ninth cloud and motivated.
---------------------- Recognition brings it with power and prestige and social status. This
enhances the standing of the...
----------------------
Motivation a continuous process
----------------------
Sales people climb the career ladder. While climbing the ladder they pass
---------------------- through different milestones in the career cycle. The four stages are

---------------------- ●● Exploration
●● Establishment
----------------------
●● Maintenance
---------------------- ●● Disengagement
---------------------- The motivational needs at the different stages are different. The sales
managers need to understand these changing requirement and design appropriate
---------------------- motivators to keep the sales personal motivate through out his career. Following
exhibit illustrates how they sales personnel need to be motivated through out
----------------------
their careers.
---------------------- Motivating salespeople throughout their career
---------------------- Career State Characteristics of Salesperson Sales Force Motivator

---------------------- Exploration Is in early phase of career Use communication to

Is searching for comfortable position build self-confidence
---------------------- Is likely to change occupation and lower uncertainties
Establishment Seeks stabilization in occupation Sees Widen criteria for success
----------------------
career as very important Strives for Introduce rewards for
---------------------- professional success and promotion meeting challenges
Maintenance Is concerned with retaining current Reward creativity and
---------------------- position Shows greater commitment self-reliance. Emphasize
to firm : Is less likely to switch jobs techniques for working
---------------------- Adapts to changes to keep performance smarter
at current level
----------------------
Disengagement Exhibits declining performance Help reduce number of
---------------------- Psychologically disengages from work hours
work. Is preparing for retirement
----------------------
Fig. 10.3: Motivation throughout the career
----------------------

----------------------

202 Sales and Distribution Management

Culture as Motivator Notes
Organisational culture is a powerful motivating force: by embodying
----------------------
the values sanctioned by the organisation, the culture frames the boundaries of
acceptable attitudes and behaviour and creates a shared ethos. For instance, the ----------------------
culture helps determine the extent to which members of the organisation will —
and are expected to — extend themselves to fulfill tasks. Indeed, the culture can ----------------------
cause individuals to use or to push the very limits of organisational capacity.
----------------------
(“They said it was impossible, but we made it work!”)
Cultural values express what people believe the organisation wants to ----------------------
happen. When individuals join an organisation, besides learning about its formal ----------------------
aspects, they spend much of their time being socialized into the “informal
organisation,” namely, the culture. It takes time to absorb the organisational ----------------------
culture, for it generally cannot be spelled out in a document or directive. In
sum, an organisation’s culture is the attitudinal and behavioural representation ----------------------
of the mission. ----------------------
Culture helps define its members’ attitudes and actions regarding tasks,
----------------------
roles, people, power, and change. It provides a framework through which the
organisation can acknowledge internal problems and resolve them, and analyze ----------------------
external challenges and meet them.
----------------------
For example, the culture of an organisation could be to uphold the values
of doing business ethically and thus sets high standards of doing business. ----------------------
The culture could be to be fair to all stake holders or the culture would be
a strong customer focus. These value systems bind the sales team together, ----------------------
propels it in the desired direction and has a very high motivating impact on ----------------------
the sales people.
----------------------
Sales Organisation-a place to work
All said and done the sales organisation should be placed where sales ----------------------
people should enjoy their work. It is therefore the foremost duty of the sales ----------------------
managers to create an organisation based on strong value system, which is
free from the serious ailment of politics, transparent, empowering the sales ----------------------
people, effective delegation of responsibility coupled with accountability,
promote innovation and creativity and overall create a atmosphere which ----------------------
is highly motivating for the employees to come and work commitment and ----------------------
passion.
----------------------
Check your Progress 6
----------------------

Fill in the blanks. ----------------------

1. Sales organisations hold sales contests in an attempt to ____________ ----------------------
and motivate salespeople.
----------------------

----------------------

Leading and Motivating the Sales Personnel 203

 Notes
Activity 2
----------------------

---------------------- As a sales manager, identify five objectives which you would like to achieve
through the sales contest being developed for your sales team.
----------------------

---------------------- Summary
----------------------
●● Effective leadership to a great extent differentiates successful and
---------------------- unsuccessful organisations. It is the process of influencing and supporting
the people. The sales manager by being a effective leader should be
---------------------- guiding, supporting, evaluating and controlling the activities of the sales
force. The sales managers, as leaders may be one of the various styles like
----------------------
autocratic, paternalistic, consultative, democratic and laissez fair type.
---------------------- ●● It is generally observed that however best the efforts are people tend to fail
most of the time. This is truer especially in the sales function. Motivation
---------------------- sustains positive energy among the sales people.
---------------------- ●● There are various theories of motivation which includes Maslow’s Need
Theory, Herzberg’s Two Factor Theory, Achievement and Goal Setting
---------------------- Theory which speak differently how the people get motivated and the
---------------------- different reasons.
●● There’re are various motivational tools employed by the sales
---------------------- organisations 1) using motivational tapes, videos, and seminars 2) selling
---------------------- to sales representatives as individuals 3) sales contests 4) creating a value
based motivated organisational culture. Motivation is an ongoing process
---------------------- hence the managers need to understand the changing motivational needs
with the changes in the career growth path of the sales personnel and
---------------------- design appropriate motivational tools.
----------------------
Keywords
----------------------
●● Legitimate Power: Derives from formally delegated authority and is
---------------------- recognized by others as necessary in achieving organisational objectives.
---------------------- It is based on a person’s position in a hierarchy.
●● Reward Power: Involves the ability to provide sub-ordinates with various
---------------------- benefits including money, praise or promotion.
---------------------- ●● Coercive Power: Comes from the ability to punish or withhold reward. It
is based on obtaining compliance through fear of punishment.
----------------------
●● Referent Power: Depends upon the leader’s ability to inspire and to
---------------------- connect with other influential people.
●● Intrinsic Motivation: Occurs when people are internally motivated
----------------------
to do something because it either brings them pleasure, they think it is
---------------------- important, or they feel that what they are learning is morally significant.

204 Sales and Distribution Management

●● Extrinsic Motivation: Comes into play when a student is compelled to Notes
do something or act a certain way because of factors external to him or
her (like money or good grades). ----------------------

----------------------
Self-Assessment Questions
----------------------
1. Define leadership.
----------------------
2. Distinguish between leader and manager.
----------------------
3. Discuss various functions of a leader.
4. What types of various powers does the leader exercise? Discuss. ----------------------

5. Discuss characteristics of effective leaders. ----------------------

6. Discuss Maslow’s need hierarchy and what is its relevance to motivation? ----------------------
7. Define sales contests and state the objectives of holding sales contests. ----------------------
8. Define motivation and discuss various types of motivations. ----------------------

Answers to Check your Progress ----------------------

Check your Progress 1 ----------------------

Fill in the blanks. ----------------------

1. The leader is an innovator that creates history, while the manager is ----------------------
created by history.
----------------------
Check your Progress 2
----------------------
Fill in the blanks.
1. Leadership is the activity of influencing people to strive willingly for ----------------------
group objectives. ----------------------
Check your Progress 3
----------------------
State True or False.
----------------------
1. True
----------------------
Check your Progress 4
----------------------
State True or False.
1. False ----------------------

Check your Progress 5 ----------------------

State True or False. ----------------------
1. False ----------------------

----------------------

Leading and Motivating the Sales Personnel 205

 Notes Check your Progress 6
Fill in the blanks.
----------------------
1. Sales organisations hold sales contests in an attempt to increase revenue
---------------------- and motivate salespeople.
----------------------
Suggested Reading
----------------------
1. Bowersox, Logistical Management: The Integrated Supply Chain Process.
----------------------
2. Calvin, Robert J. Sales Management.
----------------------
3. Chopra, Supply Chain Management.
---------------------- 4. Ghoshal, World Class in India. Penguin India.
---------------------- 5. Lamba, A.J. The Art of Retailing.

---------------------- 6. Scheuing, Kurtz, Johnson. Sales Management: Concepts, Practices and

Cases.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

206 Sales and Distribution Management

Evaluation and Control of Sales Force
UNIT

11
Structure:

11.1 Introduction
11.2 Marketing Audit
11.3 The Sales Audit
11.4 The 80:20 Principle
11.5 Iceberg Principle
11.6 What is Sales Analysis
11.7 Sales Analysis Framework
11.8 Marketing Cost Analysis
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Evaluation and Control of Sales Force 207

 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Explain the meaning of marketing audit
----------------------
• List the elements of sales audit
---------------------- • State the 80:20 principle
---------------------- • Explain the iceberg principle
---------------------- • Define sales analysis and marketing cost analysis

---------------------- • Describe the sales analysis framework

----------------------

---------------------- 11.1 INTRODUCTION

---------------------- Sales personnel and all the members of the sales organisation up to the
sales manager plan and implement their sales plans and then analyse the sales
---------------------- data to determine if the sales team has reached the objectives. The past sales
and current data are used, compared to formulate their future sales plans. The
---------------------- achievement of the planned sales objective is the indication of the effectiveness
---------------------- of the sales force and the overall marketing efforts. The generation of desired
profits gives an indication that the sales have been achieved as per plan but also
---------------------- the expenses have been as per budgets. Unless the organisation earns profits in
the long run it cannot survive not withstanding how efficiently the sale force is
---------------------- managed.
---------------------- Profits for regions, zones, territories, for individual sales persons,
customers and at the aggregate level can be determined by using sales and
----------------------
marketing cost analysis. Therefore, the data on all the marketing inputs is
---------------------- of immense value to the sales managers which help them in taking rational
decisions. Such information is becoming basis for more and more organisations
---------------------- for planning their sales and marketing efforts. Sales and cost analysis will not
actually identify problems for the sales or marketing managers, but if done
----------------------
properly indicate the presence of the problems. The identification of the areas
---------------------- where the problem exists may facilitate changes resulting in improvement of
profits and sales.
----------------------

---------------------- 11.2 MARKETING AUDIT

---------------------- The marketing audit is an evaluative tool to appraise the entire marketing
operation in a systematic and comprehensive manner. It is used to evaluate
---------------------- the degree the marketing function is integrated with company operations by
examining corporate marketing objectives, procedures and methods and by
---------------------- tracing areas of responsibility for their implementation. The marketing audit is
---------------------- designed to evaluate the total marketing operation, as opposed to singling out

208 Sales and Distribution Management

individual departments and programs or breaking elements of the marketing Notes
mix.
----------------------
Marketing is not an event but is a flow. It is a continuous and on-going
process, designed to uncover opportunities for improving marketing methods ----------------------
and activities as a whole and for increasing the firm’s understanding of new
marketing concepts and how they may be applied. Six aspects of the marketing ----------------------
should be covered by the marketing audit: objectives, policies, organisation, ----------------------
methods, procedures and personnel. The organisations effectiveness in each of
these areas depends manly on how the organisation uses the marketing concept ----------------------
and how the marketing strategy is adjusted to social, cultural, legal and political
environments. ----------------------

The marketing audit needs to be performed by independent persons ----------------------

or agencies who have no direct control or the responsibility for carrying out
----------------------
marketing activities. Often a separate department within the company may
conduct the audit. Outside source, such as management consulting firms are ----------------------
sometimes employed to do the audit in order to achieve a degree of impartiality.
----------------------
11.3 THE SALES AUDIT ----------------------
The Sales Audit is an objective review of the structure, systems, style, ----------------------
staff, skills, strategy and shared values of your sales effort, with special emphasis
on people and motivation (including compensation). ----------------------

The purpose of a Sales Audit is to give sales management feedback on ----------------------

how to evaluate and coach people; how to develop effective sales strategies;
----------------------
how to design and implement appropriate departmental structures and systems;
how to teach selling skills; and how to develop an effective sales management ----------------------
style.
----------------------
In a Sales Audit, sales management asks the following questions :
----------------------
1. What is the nature of the external environment? What is the size and
growth pattern of your market, demand for the medium, advertising ----------------------
buying patterns (including the percent of direct versus agency revenue),
competition from other media, ownership patterns, and programming ----------------------
changes? ----------------------
2. What is the internal environment like? What is the organisation’s structure,
----------------------
culture, and management style?
----------------------
3. What is the competitive situation? What are the strengths and weaknesses
of major competitors in our own and other media? What are our ----------------------
competitors’ positioning strategies and advertisers’ perception of them?
How effective are our competitors’ selling efforts and how firm are their ----------------------
rates?
----------------------
4. What are your competitive advantages? Do all of our salespeople have a
clear idea of our positioning? ----------------------

Evaluation and Control of Sales Force 209

 Notes 5. What weaknesses in our competition are we going to exploit by
emphasizing which of our strengths?
---------------------- 6. What are our organisation’s goals as stated by top management? How do
---------------------- we translate and communicate these goals to our salespeople? How do we
get our sales department committed to our company’s goals?
---------------------- 7. What are our company’s policies for implementing its current strategy?
---------------------- Who makes the decisions on overall sales policy and on the following?
---------------------- a. Compensation
b. Employment contracts
----------------------
c. House accounts
---------------------- d. List allocations
---------------------- e. Collections
---------------------- f. Expense accounts
g. Rates and inventory control
----------------------
8. What are our long-term sales strategies and short-terms sales tactics for
---------------------- achieving our company’s objectives?
---------------------- 9. What sales department structure do we have for carrying out our strategy:
local, national or retail sales managers? Do we have co-op or research
---------------------- departments? Do we have a vendor sales program? How is our sales-
support staff organized: traffic, accounting, and secretaries?
----------------------
10. How do we define our salespeople’s selling functions and job criteria? Do
---------------------- we communicate these criteria clearly?
---------------------- 11. How effective are our planning, organizing, control, and evaluation
systems? Do we use management by objectives (MBO)? Do we set
---------------------- activity or billing objectives for our salespeople? Do we organize our
objectives by category, region, new business, etc.? How do we monitor
---------------------- and give feedback on sales performance; how often? How do we structure
---------------------- and manage sales meetings, and how often do we have them? How do
we assign responsibilities for monitoring the marketplace? What kind
---------------------- of reports do salespeople fill in? How often and in what manner do we
formally evaluate our salespeople?
----------------------
12. What kind of recognition procedures and contests do we have to motivate
---------------------- our staff? How do we encourage salespeople to use their own initiative
and to be innovative? Do we make them feel like winners?
----------------------
13. What kind of research and sales promotion material and support do we
---------------------- have? Is the sales promotion material addressing our selling strategy?
Is it consistent with our image? Does it clearly frame our position and
---------------------- competitive advantages?
---------------------- 14. How is the sales department’s communication and relationship with other
departments: programming, news, production, promotion, traffic and
---------------------- accounting? Is there mutual cooperation?

210 Sales and Distribution Management

15. How good are our systems that keep track of contract duration, dollar Notes
value, number of spots, time period distribution, and average rate by
salesperson by time period? ----------------------
16. How effectively do we hire salespeople? How effectively do we train ----------------------
them?
----------------------
17. What are our priorities? Do we check regularly to see that our management
has the same priorities? ----------------------
In addition to sales management asking the above questions of itself, it ----------------------
should solicit comments, complaints and problems from the sales staff in an
confidential manner. For example, have an outside consultant meet in small ----------------------
groups with salespeople to get their input (the method of getting input depends
----------------------
on the situation and the advice of sales management) and feed back information
confidentially and diplomatically to sales management. ----------------------
After the above information is gathered and analysed, then sales ----------------------
management must make design a plan on how to improve performance and
how to implement changes that are indicated by the Sales Audit. ----------------------

----------------------
Check your Progress 1
----------------------
Fill in the blanks.
----------------------
1. The purpose of a Sales Audit is to give sales management feedback
on how to ______________ and _____________ people. ----------------------
2. Sales management must design a plan on how to improve performance ----------------------
and how to implement changes that are indicated by the ___________.
----------------------

----------------------
11.4 THE 80:20 PRINCIPLE
----------------------
In 1906, Italian economist Vilfredo Pareto created a mathematical formula
to describe the unequal distribution of wealth in his country, observing that ----------------------
twenty per cent of the people owned eighty per cent of the wealth. In the late
----------------------
1940s, Dr. Joseph M. Juran inaccurately attributed the 80/20 Rule
to Pareto, calling it Pareto’s Principle. While it may be misnamed, Pareto’s ----------------------
Principle or Pareto’s Law as it is sometimes called can be a very effective tool
----------------------
to help manage effectively.
After Pareto made his observation and created his formula, many ----------------------
others observed similar phenomena in their own areas of expertise. Quality ----------------------
Management pioneer, Dr. Joseph Juran, working in the US in the 1930s and 40s
recognised a universal principle he called the “vital few and trivial many” and ----------------------
reduced it to writing.
----------------------
The 80/20 Rule means that in anything a few (20 percent) are vital and
many (80 per cent) are trivial. In Pareto’s case it meant 20 per cent of the people ----------------------

Evaluation and Control of Sales Force 211

 Notes owned 80 per cent of the wealth. In Juran’s initial work he identified 20 per cent
of the defects causing 80 per cent of the problems. Project Managers know that
---------------------- 20 per cent of the work (the first 10 per cent and the last 10 per cent) consume
80 per cent of your time and resources. You can apply the 80/20 Rule to almost
---------------------- anything, from the science of management to the physical world.
---------------------- You know 20 per cent of your stock takes up 80 per cent of your warehouse
---------------------- space and that 80 per cent of your stock comes from 20 per cent of your suppliers.
Also 80 per cent of your sales will come from 20 per cent of your sales staff.
---------------------- 20 per cent of your staff will cause 80 per cent of your problems, but another
20 per cent of your staff will provide 80 per cent of your production. It works
---------------------- both ways.
---------------------- The value of the Pareto Principle for a manager is that it reminds you to
focus on the 20 percent that matters. Of the things you do during your day, only
----------------------
20 percent really matter. Those 20 percent produce 80 percent of your results.
---------------------- Identify and focus on those things. When the fire drills of the day begin to sap
your time, remind yourself of the 20 percent you need to focus on. If something
---------------------- in the schedule has to slip, if something isn’t going to get done, make sure it’s
not part of that 20 percent.
----------------------

---------------------- 11.5 ICEBERG PRINCIPLE

---------------------- A theory that suggests that aggregated data can hide information that is
---------------------- important for the proper evaluation of a situation. Iceberg problems usually
arise when marketing and sales activities are evaluated using aggregate or very
---------------------- general sales figures. An overall favourable volume or profit picture may cover
up individual problem areas that may be overshadowed by more profitable
---------------------- segments.
---------------------- For example, a company has registered a growth of 10% over the last year
---------------------- in sales figures. This gives the overall picture for the organisation. But does this
really indicate the true performance. It may so happen that many of the markets
---------------------- have shown more than thirty percent growth and many have not achieved last
years sales or might have shown negative growth. The overall growth figure
---------------------- therefore does not bring to light the areas/markets which have contributed
---------------------- and those areas/markets which have not contributed. The same logic can be
extended to the products, personnel, zones, regions etc. It is therefore essential
---------------------- on the part of the sales managers that instead of taking the overall picture into
consideration to conclude about the health of the operation but to go down
---------------------- the line after each product, sales unit, customer, individual sales personnel and
---------------------- assess the performance which facilitate understanding where weak performance
exists and what controllable factors contribute to the problem.
----------------------

----------------------

----------------------

212 Sales and Distribution Management

11.6 WHAT IS SALES ANALYSIS Notes
Sales analysis is the detailed examination of a company’s sales data ----------------------
and involves assimilating, classifying, comparing and drawing conclusions.
Although the extent of sales analysis varies from company to company, all ----------------------
companies collect data in the form of customer sales invoices or cash register
----------------------
receipts, which are necessary to maintain their accounting records. Management
relays its requirements for sale information to the sales analyst, who collects ----------------------
data from external and internal source, records them and aids management
with interpreting the data. Managers use sales analysis to evaluate current ----------------------
performance, for future planning, and to direct the sales efforts.
----------------------
Sales are classified into many categories that serve as basis for
management’s analysis. Sales figures may be reported in rupees, shipments/ ----------------------
dispatches or sales orders and can be broken down into any of the following ----------------------
categories:
----------------------
●● Product lines
●● Geographic areas ----------------------
●● Customer classes ----------------------
●● Order sizes
●● Time periods ----------------------
●● Methods of sale ----------------------
●● Organisational units
----------------------
●● Sales people
The criteria for categorization depends on what breakdown will provide ----------------------
the management the most relevant and meaningful sales information. Categories ----------------------
are subdivided to provide enough detailed information to uncover the problem
areas. A firms aggregate net sales figure may be broken down by geographic ----------------------
region, and in turn, each region may be subdivided according to product line.
The extent of the subdivision and the amount of data generated depend largely ----------------------
on the time and the money available for the analysis. ----------------------
Benefits/Uses of Sales Analysis
----------------------
The major use of sales analysis is to detect strengths and weaknesses in
the sales effort. It shows who the largest customers are, how much is being sold ----------------------
and where sales are most likely to occur. Sales data also can alert management ----------------------
to changes in marketing environment and in the nature of the competition. Most
important, sales analysis lays the foundation for more extensive analysis of ----------------------
marketing costs, from which performance efficiency and profitability can be
determined. Several major broad applications of sales analysis are as follows: ----------------------

●● Establishment of the sales forecasting system ----------------------

●● Development of sales performance measures ----------------------
●● Evaluation of market position
●● Production planning and inventory control ----------------------

Evaluation and Control of Sales Force 213

 Notes ●● Maintaining appropriate product mixes
●● Modifying the sales territory structure
----------------------
●● Planning sales force activities
---------------------- ●● Evaluations of salespeople’s performance
---------------------- ●● Measuring the effect of advertising and other sales promotional activities

---------------------- ●● Modifying channels of distribution

●● Evaluating of channels of distribution
----------------------
Sources of Sales Information
---------------------- Depending upon the geographical coverage, the size of the organisation,
---------------------- the depth of sales analysis and the desired break down of the sales units the
requirement of the information may vary. For industrial products, a sales
---------------------- executive may be in charge of a zone however on the other hand a company
engaged in mass distribution may have far wider coverage thereby breaking
---------------------- down the territory to a town or group of small towns. A Sales Representative
---------------------- could be the in charge, required information may vary from aggregate sales
for a simple to detailed sales analysis. For in-depth analysis the company may
---------------------- require comprehensive sales records like the quotas, market potential, past sales
and industry averages etc.
----------------------
The original source of data for sales analysis is information from the sales
---------------------- invoices. A sales invoice gives various details about the product sold like size,
packing, variety, weight , name of the customer, town/ city/ territory, zone,
----------------------
region, name of the sales personnel, value of each product sold, total value of
---------------------- the invoice. this information can be used for further analysis on the basis of
product category, stock keeping unit, customer class, time period Organisational
---------------------- units or salesperson. This enables management to reallocate resources and sales
efforts constructively. With the storage of sales information the organisation
----------------------
can analyze the sales in many ways as per its requirement.
----------------------
Check your Progress 2
----------------------

---------------------- State True or False.

---------------------- 1. The major use of sales analysis is to detect strengths and weaknesses
in the sales effort
----------------------

---------------------- 11.7 SALES ANALYSIS FRAMEWORK

---------------------- The following diagram gives a clear analysis of the various ways the
---------------------- sales analysis can be carried out in an organisation. It does not happen that
all the organisations carry out the sales analysis strictly as per the following
---------------------- framework. Depending on their individual objectives the organisations may or
may not take into consideration all the parameters as indicated in the diagram.
----------------------

214 Sales and Distribution Management

 The diagram indicates a general framework encompassing all the parameters. Notes
Sales Analysis Framework
Sales Analysis ----------------------

----------------------
Organisational
Type of Sales Type of Analysis
Level of Analysis ----------------------
Sales Organisation Total Sales Comparisons
Zones Type of Product within organisation ----------------------
Regions Type of Account with forecasts
Districts Type of ----------------------
Territories Distribution with previous period
Accounts Order Size with industry competitors
----------------------
Fig. 11.1: Sales Analysis Framework ----------------------
1. Analysis on the basis of the total sales volume
----------------------
The sales analysis starts with the analysis of the total sales for the
organisation for the current year and as well as the past years. The analysis can ----------------------
be for total dollar sales or total unit sales, product wise etc. This analysis of the ----------------------
past sales and the comparison give insight into how the company’s aggregate
sales figures for different products, total sales value are growing. Further it ----------------------
also gives an insight into the growth figures over the years which bring out the
direction in which the sales are moving. ----------------------

However while analysing the sales at the aggregate level the managers ----------------------
should always keep in mind the iceberg principle. The analysis at the aggregate
----------------------
level give the health of the sales but do not give insight into the performance of
the regions, territories of which all of them might not have done well. Table 11.1 ----------------------
gives us an idea as to how the industry is growing, the share of xyz company to
the industry sales so on. ----------------------

Table 11.1 : ABC Company Sales vs Industry Sales vs. (in Crore$) ----------------------

Year Industry Sales Company Sales Company Market ----------------------

Share % ----------------------
2000 954 126 13.78
----------------------
2001 982 138 14.05
2002 1026 156 14.91 ----------------------

2003 1196 180 15.05 ----------------------

2004 1328 208 15.66 ----------------------
2005 1348 216 16.02
----------------------
2006 1478 242 16.37
----------------------
From the data given in the table below calculate the growth percentage
starting from year 1991 over 1990 and so on for both industry sales and company ----------------------
sales.
----------------------

Evaluation and Control of Sales Force 215

 Notes Year Industry sales % growth Company sales % growth
2000 954 126
----------------------
2001 982 138
---------------------- 2002 1026 156
2003 1196 180
----------------------
2004 1328 208
---------------------- 2005 1348 216
2006 1478 242
----------------------
2. Sales Analysis by Territory/Regions
---------------------- An organisation can analyse it sales performance in each of the territories
---------------------- herein mentioned as Districts/Regions. Generally the organisational sales targets
is divided between its district/regions and then sub divided into zones/territories
---------------------- and individual salespersons. The above analysis indicates the following:
---------------------- In the above example five districts/regions of the organisation have been
taken. Each district/region has been given its sales quota.
----------------------
●● Effectiveness index is the achievement % of the actual sales
---------------------- ●● Achieved compared to the quota.
---------------------- ●● Sales growth is the growth over last year sales.
●● The percentages of market share are based on the actual to industry sales
---------------------- and the market share percentages indicated thereof.
---------------------- ●● On a careful analysis it will be seen that not all regions have performed
uniformly.
----------------------
●● These figures at the aggregate level may indicate a healthy growth rate
---------------------- and achievement to aggregate targets/quotas.

---------------------- ●● But in reality district 4 at 63% has faired very poorly whereas district 1 is
very close to quota at 97%
---------------------- ●● Performance wise district 5 appears to be the best with effective ness
index at 112 and growth @ 15% and market share at 27%.
----------------------
3. Sales Analysis by Representatives
----------------------
Table11.2 : ABC Company West Region Sales Rep. Performance (000$)
----------------------
Sales Representative Quota Actual Performance index
---------------------- Actual sales/quota
SR 1. 9.50 9.44 0.99
----------------------
SR 2. 10.80 10.08 0.93
---------------------- SR 3. 9.00 8.52 0.94
SR 4. 9.80 9.50 0.97
----------------------
SR 5. 12.60 10.10 0.80
---------------------- SR 6. 10.30 10.36 1.00
---------------------- TOTAL 62.00 58.00 0.94

216 Sales and Distribution Management

 Where there are more than one representative in one district/region then Notes
it is possible to make the comparison. After a thorough analysis of the data
contained in Table 11.2 it can be seen that: ----------------------
●● Only SR 6 has achieved his quota. ----------------------
●● SR1 with performance Index 99 has almost made it to the target.
----------------------
●● SR 2, 3, and 4 has reasonably done well with performance index
above 90. ----------------------
●● The only SR who has not faired well is SR 5 with performance index at ----------------------
only 0.80.
●● From the above analysis the sales manager should look into the reasons ----------------------
for poor performance and correct the situation. ----------------------
4. Profitability Approach
----------------------
Table 11.3 : Profitability of Individual Market Segments (Figures in ‘000 $)
----------------------
Market Segment P1 P2 T1 T2 C1 C2 C3 C4
Sales 320 240 350 210 178 105 135 141 ----------------------
Variable cost -255 -185 -275 -163 -127 -73 -87 -83
----------------------
Direct Fixed costs -45 -38 -45 -28 -30 -20 -28 -29
Profit Contribution 20 17 30 19 21 12 21 29 ----------------------
Profitability of Districts/Regions ----------------------
Sales Organisation Effectiveness Evaluations ----------------------
Profitability Analysis Example
----------------------
Full Cost Contribution Approach
Approach ----------------------
Region District 1 District 2 District 3
----------------------
Sales $ 300,000,000 $ 180,000,000 $ 70,000,000 $ 50,000,000
Cost of Goods Sold $ 235,000,000 $ 168,000,000 $ 50,500,000 $ 28,000,000 ----------------------
Gross Margin $ 45,000,000 $ 11,500,000 $ 11,500,000 $ 22,000,000
District Selling Expenses Regional $ 11,000,000 $ 500,000 $ 3,500,000 $ 8,250,000 ----------------------
Direct Selling Expenses $ 11,000,000 –– –– ––
----------------------
Profit Contribution $ 24,000,000 $ 6,500,000 $ 8,000,000 $ 19,500,000
Allocated Portion of Shared Zone Costs $ 16,000,000 ----------------------
Net Profit $ 8,000,000
----------------------
Fig. 11.2 (A): Profitability Analysis Example
Analysis of the above data reveals that: ----------------------

●● The three districts comprise the region. ----------------------

●● Under the full cost approach the working has been reflected by clubbing ----------------------
the figures in three districts under the region.
●● Net profit has been arrived at after deducting the allocated portion of ----------------------
shared district costs. ----------------------

Evaluation and Control of Sales Force 217

 Notes ●● The contribution of district 3 is the highest followed by district 2 and then
the lowest being the district 1.
---------------------- Table11.4 : Profitability of Individual Market Segments (Figures in ‘000 $)
---------------------- Market Segment P1 P2 T1 T2 C1 C2 C3 C4
---------------------- Sales 320 240 350 210 178 105 135 141
Variable cost -255 -185 -275 -163 -127 -73 -87 -83
---------------------- Direct Fixed costs -45 -38 -45 -28 -30 -20 -28 -29
---------------------- Profit Contribution 20 17 30 19 21 12 21 29
5. Cost Analysis and Variance Calculations
----------------------
Regionwise Cost Analysis
----------------------
Sales Organisation Effectiveness Evaluations
---------------------- Cost Analysis Examples
---------------------- Compensation Costs Training Cost
Actual Cost Budgeted Cost Variance Actual Cost Budgeted Cost Variance
---------------------- Region 1 $ 3,660,000 $ 3,600,000 +$ 60,000 $ 985,000 $ 1,030,000 -$ 45,000
Region 2 $ 3,500,000 $ 3,700,000 – $ 200,000 $ 2,110,000 $ 2,040,000 + $ 70,000
---------------------- Region 3 $ 3,150,000 $ 3,400,000 – $ 250,000 $ 830,000 $ 1,060,000 – $ 230,000
Region 4 $ 4,200,000 $ 3,900,000 + $ 300,000 $ 2,340,000 $ 2,160,000 + $ 180,000
----------------------
Actual % Sales Budgeted % Sales Actual Sales Budgeted % Sales
---------------------- Region 1 6.1% 6% 29% 3%

---------------------- Region 2 5.8% 6% 3.1% 3%

Region 3 5.4% 6% 2.6% 3%
---------------------- Region 4 6.0% 6% 3.1% 3%

---------------------- Fig. 11.2 (B): Cost Analysis Examples

The analysis of the above data reveals that
----------------------
●● Variance analysis is a tool in calculating the actual expenses to budgeted
---------------------- expenses.
---------------------- ●● This analysis highlights those regions or sales units which have spent
more, the variance and also expressed in % terms.
----------------------
●● Under both the heads regions have shown both + as well as - variance.
---------------------- ●● In terms of percentages also it can be seen that there has been a variance
compared to the percentage figures shown in Column Actual % to sales.
----------------------
●● These figures facilitate the sales manager to take control measures in case
---------------------- of over spending.
----------------------

----------------------

----------------------

----------------------

218 Sales and Distribution Management

6. Productivity Analysis Notes
Sales Organisation Effectiveness Evaluations
----------------------
Productivity Analysis Example
District 1 District 2 District 3 District 4 ----------------------
Sales $ 20,000,000 $ 24,000,000 $ 20,000,000 $ 24,000,000
----------------------
Selling Expenses 2,000,000 2,400,000 3,000,000 3,000,000
Sales Calls 9,000 7,500 8,500 10,000 ----------------------
Proposals 200 180 260 270
Number of Salespeople 20 30 20 30 ----------------------
Sales/Salesperson $ 1,000,000 $ 800,000 $ 1,000,000 $ 800,000
----------------------
Expenses Salesperson $ 100,000 $ 80,000 $ 150,000 $ 100,000
Calls/Salesperson 450 250 425 333 ----------------------
Proposals/Salesperson 11 6 13 9
----------------------
Fig. 11.3 : Productivity Analysis Example
The analysis of the above data reveals the following: ----------------------
●● The sales calls made by the sales person in each region. ----------------------
●● The number of average sales calls made per sales person in each region.
----------------------
●● Sales per sales person in each region.
●● Total proposals in each region. ----------------------
●● Average no. of proposals in each region. ----------------------
●● Selling expenses per region. ----------------------
●● Average selling expenses per sales person in each region.
----------------------
This data by comparison amongst the regions and analyzing it further
gives an insight to the sales manager as to how different regions are performing ----------------------
better or poorer than each other on each of these parameters. If the performance
each low by comparison, reasons if any for such performance can be unearthed. ----------------------
If the performance is better, the reasons for better performance including if the
----------------------
budget allocated is fair or on the lower side. These comparisons and the insight
so gained prove to be effective tools for effective managerial decisions. ----------------------

----------------------
Check your Progress 3
----------------------
Fill in the blanks.
----------------------
1. Sales analysis starts with the __________________ for the
organisation for the current year as well as the past years. ----------------------

----------------------
11.8 MARKETING COST ANALYSIS ----------------------
Marketing Cost Analysis also called Distribution Cost Analysis goes ----------------------
beyond sales volume analysis to investigate those selling expenses (Marketing
Costs) incurred in generating sales volume and thereby, determine the relative ----------------------

Evaluation and Control of Sales Force 219

 Notes profitability of particular aspects of sales operations. The relative profitability
can be calculated by subtracting the marketing costs identified with the sales
---------------------- revenue from various market segments (territory, product line, customer and
salesperson). This enables the sales managers to determine the profit contribution
---------------------- of each segment. The specific objective of marketing cost analysis is to suggest
---------------------- answers to questions that may require managerial action, but not the nature of
the action. Questions include:
----------------------
Which sales territories are profitable and which are unprofitable?
---------------------- What are the profit margins on the various products?
---------------------- What is the profitability of the individual salespeople?
---------------------- What should be the minimum size of an order to be profitable?
---------------------- Thus, marketing cost analysis searches for ways to improve profit performance
by exposing the relative strengths and weaknesses within each segment.
----------------------
Marketing Cost Analysis Procedure
----------------------
Marketing cost analysis should be approached in logically as follows:
---------------------- Classify selling expenses
---------------------- Activity based grouping of expenses
---------------------- Allocating functional costs to segments

---------------------- Determining contribution margin of segments

---------------------- Classification of selling expenses

Marketing cost analysis requires expenses to be categorized as direct or
----------------------
indirect expenses. Direct expenses can be separately traced to individual sales
---------------------- personnel, sales territories, customers, products or marketing channels. Indirect
expenses on the other hand are inseparable and therefore cannot be traced to
---------------------- individual sales personnel, sales territories, customers, or products. Depending
upon the precise purpose of the analysis, the treatment of marketing costs will
----------------------
vary. Some costs may be direct for one segment but indirect for another.
---------------------- For example, while analyzing the profitability of sales territories, a
---------------------- salesperson’s salary is treated as a direct expense, which can be traced to the
assigned territory. However, while analyzing the profitability of product lines or
---------------------- customer classes, it is considered as indirect expenses. Thus, only by specifying
the purpose of the analysis is the sales manager able to classify expenses as
---------------------- direct or indirect.
---------------------- Activity-based grouping of expenses
---------------------- While analysing the marketing costs (profitability), all accountable
expenses are conventionally grouped under a common activity. For example,
---------------------- all expenses related to field sales operations are grouped together like salaries,
---------------------- commissions, sales travel expenses, branch sales office rent to determine total
expenses for this activity.
220 Sales and Distribution Management
Bases for allocating indirect expenses Notes
Just as machine hours are used as a single base for allocation of production
----------------------
costs, there is a need to identify a base for proper allocation of marketing costs.
Allocation bases are factors that measure variability in the activities for which ----------------------
specific indirect expenses are incurred. The expenses should be allocated
according to measurable variables that have a cause and effect relationship with ----------------------
the functional cost category. That is, the costs should change in proportion to the
----------------------
performance of the activity. For example, direct selling costs increase directly
with the number of sales calls. ----------------------
Since marketing cost analysis determines the relative profitability (not
----------------------
net profitabibility) of particular aspects of sales operations, no attempt is made
to allocate all common expenses, only those that can be allocated on logical ----------------------
basis. For example, while credit and collection expenses can be allocated on
a logical basis, salespersons can be allocated to sales territories but not to ----------------------
products.
----------------------
Determining contribution margin of segments
----------------------
Marketing cost analysis involves determination of relative profitability (or
contribution margin) designed as the dollar/rupee amount available to cover all ----------------------
fixed costs (unallocated common expenses) and profit. The analysis focuses on
separable (direct expenses) and those common expenses which can be allocated ----------------------
on logical basis. ----------------------
Contribution Margin = Net sales - cost of goods sold (separable expenses +
common expenses.) ----------------------

Profit contribution of segments have been worked out in Tables 11.3 and 11.4 ----------------------

----------------------
Check your Progress 4
----------------------
Fill in the blanks.
----------------------
1. Contribution Margin can be calculated by deducting cost of goods
sold from ______________ . ----------------------

----------------------
Activity 1 ----------------------

----------------------
Develop a sales analysis framework for a product and service company.
----------------------

----------------------

----------------------

----------------------

----------------------

Evaluation and Control of Sales Force 221

 Notes Summary
---------------------- ●● The marketing audit is an evaluative tool to appraise the entire marketing
operation in a systematic and comprehensive manner. It is used to evaluate
----------------------
the degree the marketing function is integrated with company operations
---------------------- by examining corporate marketing objectives, procedures and methods
and by tracing areas of responsibility for their implementation.
----------------------
●● The Sales Audit is an objective review of the structure, systems, style,
---------------------- staff, skills, strategy and shared values of your sales effort, with special
emphasis on people and motivation (including compensation). The
---------------------- purpose of a Sales Audit is to give sales management feedback on how
to evaluate and coach people; how to develop effective sales strategies;
----------------------
how to design and implement appropriate departmental structures and
---------------------- systems; how to teach selling skills; and how to develop an effective sales
management style. Sales audit analysis external environment, competitive
---------------------- situation, competitive advantages etc.
---------------------- ●● Sales analysis is detailed analysis of company’s data which involves
analysis of sales by regions, customers, products, sales personnel. It also
---------------------- compares budgeted figures with actual achievements, calculates variances
and brings to light invaluable information which can be effectively used
----------------------
by the sales managers in controlling the sales effort.
---------------------- ●● Marketing Cost Analysis investigates the sales expenses and determines
the relative profitability of particular aspects of sales operations. In the
---------------------- end analysis it can be said that that sales and analysis and marketing cost
---------------------- analysis by analyzing and comparing the actual with the budgets serve as
an effective tool for the sales managers in controlling the efforts of the
---------------------- sales team and take corrective actions wherever unfavourable variances
are notice.
----------------------

---------------------- Keywords
---------------------- ●● Product Line : It is a collection of products, offered by a firm, that satisfy
similar needs for different target audiences. Thus, all products within a
----------------------
product line are related, but may vary in terms of size, colour, quality etc.
---------------------- ●● Performance Index : Percentage achievement of the budget.
---------------------- ●● 80:20 Principle : The Pareto Principle, also known as the 80-20 Rule,
states that a small number of causes (20%) is responsible for a large
---------------------- percentage (80%) of the effect. Also Known As: 80-20 Rule, Pareto’s
Law, Pareto’s Principle. The Pareto Principle is generally applied to
---------------------- vendors or customers in a retail setting. This rule assumes that 20% of the
---------------------- customers generate 80% of the sales, or that 80% of merchandise comes
from 20% of the vendors.
---------------------- ●● Variance Analysis : An analysis of the variation in the outcomes of an
---------------------- experiment to assess the contribution of each variable to the variation.

222 Sales and Distribution Management

 Notes
Self-Assessment Questions
----------------------
1. Define Sales Audit. Discuss the various areas the management of a
company looks at in Sales Audit. ----------------------
2. Discuss 80:20 Principle. ----------------------
3. What is Sales Analysis? Discuss benefits and uses of Sales Analysis.
----------------------
4. Draw the diagram of Sales Analysis Framework.
----------------------
5. What is Marketing Cost Analysis? Which are the various issues covered
under Marketing Cost Analysis? ----------------------

----------------------
Answers to Check your Progress
----------------------
Check your Progress 1
----------------------
Fill in the blanks.
----------------------
1. The purpose of a Sales Audit is to give sales management feedback on
how to evaluate and coach people. ----------------------
2. Sales management must design a plan on how to improve performance ----------------------
and how to implement changes that are indicated by the Sales Audit.
----------------------
Check your Progress 2
State True or False. ----------------------

1. True ----------------------
Check your Progress 3 ----------------------
Fill in the blanks. ----------------------
1. Sales analysis starts with the analysis of the total sales for the organisation
----------------------
for the current year as well as the past years.
Check your Progress 4 ----------------------

Fill in the blanks. ----------------------

1. Contribution Margin can be calculated by deducting cost of goods sold ----------------------

from Net Sales.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

Evaluation and Control of Sales Force 223

 Notes
Suggested Reading
----------------------
1. Bowersox, Logistical Management: The Integrated Supply Chain Process.
---------------------- 2. Calvin, Robert J. Sales Management.
---------------------- 3. Chopra, Supply Chain Management.
---------------------- 4. Ghoshal, World Class in India. Penguin India.

---------------------- 5. Lamba, A.J. The Art of Retailing.

---------------------- 6. Scheuing, Kurtz, Johnson. Sales Management: Concepts, Practices and

Cases.
----------------------

----------------------

----------------------
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

224 Sales and Distribution Management

Sales Territory
UNIT

12
Structure:

12.1 Introduction
12.2 Meaning of Sales Territory
12.3 Reasons for establishing Sales Territories
12.4 Responsibility of designing Sales Territories
12.5 Reasons for not developing Sales Territories
12.6 Factors to be considered while designing Sales Territories
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Sales Territory 225

 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Explain the meaning of sales territory
----------------------
• Enumerate the reasons for establishing sales territories
---------------------- • Identify the responsibility of designing sales territories
---------------------- • Specify the reasons for not developing the sales territories
----------------------
12.1 INTRODUCTION
----------------------
Planning is a very important function of the sales manager. A sales manager
---------------------- need to plan the sales, plan the organisation, plan the recruitment, selection
and training, planning is involved in motivating which includes planning the
----------------------
compensation plans, incentive scheme, etc.
---------------------- One of the most important elements of planning in the sales management
is planning of the sales territories. Sales territory planning involves a thorough
----------------------
understanding of the geographical area in which the organisation operates
---------------------- knowledge about the marketing environment, the competition and the customers.

---------------------- Sales personnel are a very crucial resource deployed with the sales
manager. Therefore, it is his duty to ensure that he has in his team optimum
---------------------- number of people and is utilized properly. The sales manager through the territory
planning has to ensure affectivity of the sales personnel, ensure achievement
---------------------- of sales budgets and at the same time keep the sales force highly motivated.
---------------------- This calls for effective planning of the sales territories so that each of the sales
person in the team is given a well defined and balanced territory, well defined
---------------------- set of customers which the sales personnel is in a position effectively manage
in the available time.
----------------------

---------------------- 12.2 MEANING OF SALES TERRITORY

---------------------- A sales territory is composed of a group of customers or a geographic
area assigned to a salesperson. The territory may or may not have geographic
---------------------- boundaries. Typically, however, a salesperson is assigned to a geographic area
containing present and potential customers.
----------------------
Companies analyse their total markets by looking at the various market
---------------------- segments, estimating their sales potential, selecting their target markets, and
---------------------- developing a marketing mix based on the needs and desires of the marketplace.
Many of these practices also can be applied to a sales territory. In fact, the single
---------------------- sales territory should be considered as an individual market or segment of the
company’s total market.
----------------------

----------------------

226 Sales and Distribution Management

12.3REASONS FOR ESTABLISHING SALESTERRITORIES Notes

Development of sales territories is usually the responsibility of the sales ----------------------

manager overseeing the larger sales units within the organisation-for example, ----------------------
the divisional, regional or zonal sales manager. This person knows the markets,
customers, and sales personnel needed to service these accounts. The manager ----------------------
makes recommendations to corporate management on whether to increase or
decrease the number of sales territories. Often, however, the manager has the ----------------------
authority to change geographic boundaries without corporate approval. It is ----------------------
important that all field managers (for example, district, regional, divisional)
affected by territorial change have a part in seeing that the needs of the company, ----------------------
customers, and sales personnel are served.
----------------------
12.4 RESPONSIBILITY OF DESIGNING SALES ----------------------
TERRITORIES
----------------------
Companies develop and use sales territories for numerous reasons. Six of
the more important reasons are discussed here. ----------------------

1. To Obtain Thorough Coverage of the Market ----------------------

With proper coverage of its territories, the company can better achieve ----------------------
the sales potential of its markets. The salesperson can analyse the territory
and identify and classify customers. At the individual territorial level, the ----------------------
salesperson can better meet customers’ needs. Division into territories
----------------------
also allows management to realign territories easily as customers and
sales increase or decrease. ----------------------
2. To Establish a Salesperson’s Responsibility
----------------------
Salespeople act as business managers for their territories. They are
responsible for maintaining and generating sales volume. Salespeople’s ----------------------
job are clearly defined. They know where customers are located and how ----------------------
often they should be called upon. They also know what performance
goals they are expected to meet. This can have a positive effect on their ----------------------
performance and morale. Performance can be monitored for each territory.
Actual performance data can be collected, analyzed and compared with ----------------------
expected performance goals. ----------------------
Individual territorial performance can be compared with district performance,
district compared with regional performance, and regional compared with ----------------------
company performance. With computerized reporting systems, the firm can ----------------------
monitor individual territorial or area performance on a weekly, monthly, or
quarterly basis to ascertain the success of its marketing efforts ----------------------
3. To Improve Customer Relations ----------------------
Customer goodwill and increased sales can be expected when customers
----------------------
receive regular calls. From the customer’s viewpoint, the salesperson is
the company-for example, Procter & Gamble. The customer looks to the ----------------------
salesperson, not to Procter & Gamble’s corporate office, when making
Sales Territory 227
 Notes purchases. Over the years, some salespeople build up such goodwill
relations with their customers that customers will delay placing their
---------------------- orders because they know the salesperson will be at their business on a
certain day or at a specific time of the month. Some salespeople even earn
---------------------- the right to order merchandise for certain customers.
---------------------- 4. To Reduce Sales Expense
---------------------- Sales territories should be designed to avoid duplication of effort so
lower selling costs can be realised and company profits improved. Fewer
---------------------- travel miles, fewer overnight trips and contacting productive customers
regularly can improve the firm’s sales/cost ratio. In addition, by using the
----------------------
data collected, management can make decisions about the profitability
---------------------- of territories and determine whether to maintain, expand, or merge sales
territories.
----------------------
5. To Allow better Matching of Salesperson to Customer
---------------------- Salespeople can be hired and trained to meet the requirements of the
---------------------- customers in a specific territory. Indications are that the greater the
similarity between customer and salesperson, the more likely the sales
---------------------- effort will be successful.

---------------------- 6. To Benefit Salespeople and the Company

Proper territorial design must aid salespeople in carrying out the firm’s
---------------------- sales strategies. Thus, the company can maximize its sales effort, while
---------------------- the salespeople can work in territories that afford them the opportunity to
satisfy their personal needs (for example, good salary).
----------------------

----------------------
Check your Progress 1

---------------------- Fill in the blanks.

---------------------- 1. To improve _____________ is one of the responsibilities of designing
sales territories.
----------------------

---------------------- 12.5 REASONS FOR NOT DEVELOPING SALES

TERRITORIES
----------------------

---------------------- In spite of its stated advantages, developing sales territories does have
disadvantages.
---------------------- First, salespeople may be more motivated if they are not restricted by
---------------------- a particular territory and can develop customers wherever they find them. In
the chemical industry, for example, salespeople may be allowed to sell to any
---------------------- potential customer. However, after the sale is made, other company salespeople
are not allowed to contact that client.
----------------------
Second, the company may be too small to be concerned with segmenting
---------------------- the market into sales areas.

228 Sales and Distribution Management

 Third, management may not want to take the time, or may not have the Notes
know-how, for territorial development.
----------------------
Fourth, personal friendship may be the basis for attracting customers. For
example, life insurance salespeople may first sell policies to their families and friends. ----------------------
As a general rule, however, assigning people to their own sales territory is best.
----------------------
12.6 FACTORS TO BE CONSIDERED WHILE DESIGNING ----------------------
SALES TERRITORIES
----------------------
Sales force objectives
----------------------
It may be based on factors such as contribution to profits return on assets,
sales/cost ratios, market share, or customer satisfaction. The attainment of sales ----------------------
force objectives is realised at the territorial level. These broad objectives are
eventually converted into individual sales territorial goals based on factors such ----------------------
as sales increases, individual product sales, number of sales calls, and number
----------------------
of new customers obtained. Individual territorial sales are an important factor
contributing to the achievement of corporate sales goals. ----------------------
For example, for an average territory, HLL’s sales can be in the crores
----------------------
of rupees. Thus, a single territory’s sales can be greater than the total sales for
many small companies. The design of a firm’s sales territory is an important ----------------------
factor in successful selling and in servicing various markets and customers.
----------------------
1. Select the basic concept
Based on sales force objectives, sales managers can create, revise, or ----------------------
evaluate basic geographic control units and their territorial boundaries. Usually,
----------------------
territorial boundaries are based on:
● States ----------------------
● Districts ----------------------
● Cities
● Metropolitan statistical areas ----------------------
● Trading areas ----------------------
● Major accounts
----------------------
● A combination of two or more factors
Industry and the type of products a firm sells usually dictate its basic ----------------------
control unit. Many firms use several control units. No matter how a company ----------------------
divides its territories, however, it should always consider present and potential
sales of the geographic areas. Customers and prospects become the nucleus ----------------------
around which sales territories are formed. Thus, the individual sales territory
can be operated as a business or mini market. ----------------------
2. Analyse Salespeople’s Workload ----------------------
It often seems that every company has a different territorial design. Due
----------------------
to differences in salespeople’s workloads, firms in the same industry may even
have different territorial designs. ----------------------

Sales Territory 229

 Notes Workload is the quantity of work expected from sales personnel. Three
of the main influences on workload involve the nature of the job, intensity of
---------------------- market coverage and type of products sold.
---------------------- Nature of the job: The nature of the job determines the job activities of
salespeople. The salesperson who only calls on buyers and does no “missionary,”
---------------------- or service, work can be responsible for a much larger geographic area than
the salesperson who does both. Many companies selling consumer goods use
----------------------
both a senior salesperson and a service salesperson. The senior salesperson, for
---------------------- example, calls on buyers, while the service salesperson actually goes into the
stores and services the accounts. In this way, a larger area can be covered by
---------------------- two salespeople.
---------------------- Intensity of Market Coverage: A key sales force strategy involves having
the correct number of salespeople required to cover the firm’s market. Each firm
---------------------- determines which of these distribution methods works best:
---------------------- ●● Intensive distribution: Sell the product in every outlet where final
customers might reasonably look for it.
----------------------
●● Selective distribution: Use a limited number of wholesalers and retailers
---------------------- in a given market.
---------------------- ●● Exclusive distribution: Use only one wholesaler or retailer in a given
market.
----------------------
Firms using an intensive distribution strategy will require more territories
---------------------- than a firm using a selective or exclusive distribution strategy.
---------------------- Types of Products Sold: Whether the salesperson sells convenience,
shopping, or specialty goods or services has an effect on call patterns and
---------------------- the amount of territory that can be covered. The salesperson who works for
---------------------- selling snack foods to retail stores has to call on many more accounts than the
industrial salesperson who sells computer selling products to select companies
---------------------- in the geographical area under his control.
---------------------- 3. Determine Basic Territories

---------------------- Once sales managers have selected the basic control unit or units and
carefully analysed salespeople’s workload, they are ready to determine how to
---------------------- design the sales territories.
---------------------- Step One: Forecast sales and determine sales potentials. Using the
forecasting methods discussed in Unit 5, the firm forecasts sales for its total
---------------------- market and for each geographic region. Sales potentials are also considered.
---------------------- Step Two: Determine the sales volume needed for each territory. Next,
management determines the level of sales needed to support each territory.
---------------------- Consideration must be given to all costs associated with the territory, including
---------------------- the salesperson’s salary and expenses.
Step Three: Determine the number of territories. The following are
----------------------

230 Sales and Distribution Management

several ways to determine the number of territories needed to sell and service a Notes
firm’s market. The breakdown approach is the simplest. Steps 4 to 6 then will
be discussed. ----------------------
Breakdown Approach ----------------------
The breakdown approach uses factors such as sales, population, or number
----------------------
of customers. Assume a firm forecasts sales of Rs.18 crores. It feels that each
territory must generate Rs.1 crore. Using the following formula, it finds that 18 ----------------------
territories are needed:
----------------------
Forecasted Sales
Sales Force Size =
Average Sales per Salesperson ----------------------
The number of customers and population are frequently used to determine ----------------------
the number of territories. Certain FMCG companies have a guideline of one
sales person for around 750 to 1000 retailers.. The population of an area ----------------------
determines the number of retail grocery stores. Thus, sales, population trends,
----------------------
and the number of retail stores help a district manager estimate the number of
territories needed in the sales unit. ----------------------
Six steps to consider when determining firms basic territories ----------------------
●● Forecast and determine sales
----------------------
●● Determine the sales volume required for each territory
----------------------
●● Determine the number of territories
----------------------
●● Tentatively establish territories
----------------------
●● Determine the number of accounts for each territory
●● Finalize the territories and draw the boundary lines ----------------------

Equalized Workload ----------------------

This method uses the number, location, and size of customers and ----------------------
prospects. Size refers to the amount of actual sales and sales potentials of
customers and prospects. For many companies this information has already ----------------------
been collected by the time sales forecasts are made and by the time marketing
----------------------
costs and sales are analyzed.
The firm knows where present customers are located. Field sales ----------------------
managers and their salespeople can provide information on prospects and ----------------------
new companies. Data also can be collected from places such as central, state,
and local governments, trade associations, telephone directories, and business ----------------------
magazines like Business World Year book, and NCAER yearly publications on
consumer and industrial buying power and sales potentials. ----------------------

Once a firm determines the number, location, and size of customers and ----------------------
prospects, it needs to determine the frequency of sales calls and amount of time
----------------------
a call takes by using such data as:
●● Time required for each sales call. ----------------------

Sales Territory 231

 Notes ●● Frequency of sales calls per given customers.
●● Time intervals between sales calls.
----------------------
●● Travel time around territories.
----------------------
●● Non-selling time.
----------------------
Here is how a firm can use this information: Sales managers first classify
---------------------- customers to identify the profitable ones. This, in turn, determines where the
salesperson’s time will be invested. One method of doing this follows:
----------------------
Table 12.1
----------------------
Key Account Unprofitable account Regular
---------------------- Account
Buys over Rs.2 Lacs annually Buys less than Rs.10,000 All other
----------------------
customers.
---------------------- Loss of this customer would Little potential to increase
---------------------- substantially affect the purchases above

---------------------- territory’s sales and profits Rs.10,000

The unprofitable accounts would not be called on; the key accounts and
----------------------
regular accounts become target customers. Once the accounts have been broadly
---------------------- classified, categories or types of accounts can be defined in such terms as extra
large (key), large, medium and small-this will be referred to as the ELMS
---------------------- system. For example, management may divide the 3,000 accounts in the firm’s
total market into these four basic sales categories, as shown in Table 12.2. As
----------------------
can be seen from the table, although relatively few extra large or large accounts
---------------------- exist, these quite often account for 80 percent of a company’s profitable sales
even though they represent only 20 per cent of the total number of accounts.
---------------------- This is referred to as the 80/20 principle. Eighty per cent of a firm’s sales come
from 20 per cent of customers.
----------------------
Table 12.2 : Example of Account Segmentation based on yearly sales
----------------------
Customer Size Yearly Sales No. of Accounts Per cent
----------------------
Extra Large More than Rs. 5lacs 100 3.3
---------------------- Large Rs. 3 to 5 lacs 500 16.7
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

232 Sales and Distribution Management

Medium Rs. 1 to 3 lacs 1000 33.3 Notes
Small Below Rs. 1 lac 1400 46.7 ----------------------
Total 3000 100
----------------------
Table 12.3 : Determination of Total Number of Sales Calls
----------------------
Customer Call Times Number of Equals No. of calls
----------------------
Size Frequency accounts per year
----------------------
Extra Large 1 per month X 100 = 1,200
Large 1 per month X 500 = 6,000 ----------------------
Medium 1 per month X 1,000 = 12,000 ----------------------
Small 1 per quarter X 1,400 = 5,600
----------------------
Total 3,000 = 24,800
----------------------
The number of key accounts in an individual territory varies, as doe’s
responsibility for them. Even if a key account is located geographically in a ----------------------
particular salesperson’s territory, a key account salesperson may call on the
----------------------
customer. Typically this is done because of the account’s importance to the
company or the inexperience of the local salesperson. ----------------------
The accounts with the higher sales or sales potential typically will be
----------------------
assigned to a higher number of sales calls. For example, extra large, large and
medium accounts are called upon once a month; small accounts are called upon ----------------------
every three months.
----------------------
Assume the company has 3,000 real and potential customers. As shown
in Table12. 3, the number of accounts multiplied by the call frequency equals ----------------------
the total number of sales calls the sales force must make per year. Assume a
firm has determined that 24,800 calls per year must be made to service its 3,000 ----------------------
customers. It is estimated that the average salesperson works 46 out of every
----------------------
52 weeks (considering time off for vacation, holidays, and illness). Taking into
consideration travel time and non-selling time, the salesperson can make 6 calls ----------------------
per day, 30 calls per week, or 1,380 calls annually. This company needs 18 sales
territories. ----------------------
Total Sales Force Customer calls ----------------------
24,800
= –––––––––– = 18 Territories
Individual Customer calls 1,380 ----------------------
This method is simple and straightforward. Its main drawbacks are that ----------------------
salespeople are not alike in their abilities and that all customers do not have
similar characteristics and requirements. For example, all salespeople would ----------------------
not be able to average six daily calls. However, the method can be used in ----------------------
conjunction with management’s knowledge of its market.
To revise the number of existing territories, some firms use the incremental ----------------------
method. It is based on the assumption that an additional territory can be added ----------------------

Sales Territory 233

 Notes if profit contributions from sales in the territory exceed the costs of the territory.
Thus, territories are added until the incremental profit contribution from the last
---------------------- additional territory equals the territory’s incremental cost. To use this approach,
management must know (i) the sales potential of an area, (ii) the selling costs,
---------------------- and (iii) the costs of production and distribution.
---------------------- The following is an example of the incremental method applied to a sales
district that currently has nine territories.
----------------------
First, assume a firm has estimated product- and distribution-related costs
---------------------- to be 70 percent of sales. The accounting department furnishes this information.
This leaves a margin of 30 percent to cover a salesperson’s costs, such as salary,
----------------------
car expenses and profits. Management feels that sales volume is directly related
---------------------- to the number of salespeople. This method is simple and straightforward. Its
main drawbacks are that salespeople are not alike in their abilities and that all
---------------------- customers do not have similar characteristics and requirements. For example, all
salespeople would not be able to average six daily calls. However, the method
----------------------
can be used in conjunction with management’s knowledge of its market.
---------------------- To revise the number of existing territories, some firms use the incremental
method. It is based on the assumption that an additional territory can be added
----------------------
if profit contributions from sales in the territory exceed the costs of the territory.
---------------------- Thus, territories are added until the incremental profit contribution from the last
additional territory equals the territory’s incremental cost. To use this approach,
---------------------- management must know (1) the sales potential of an area, (2) the selling costs,
and (3) the costs of production and distribution.
----------------------
The following is an example of the incremental method applied to a sales
---------------------- district that currently has nine territories. First, assume a firm has estimated
---------------------- product- and distribution-related costs to be 70 percent of sales. The accounting
department furnishes this information. This leaves a margin of 30 percent to
---------------------- cover a salesperson’s costs, such as salary, car expenses and profits. Management
feels that sales volume is directly related to the number of salespeople. The
---------------------- more salespeople, the higher the district’s sales will be. The question is whether
---------------------- increasing the number of territories will produce increased profitable sales. The
data necessary to obtain an answer are presented as follows:
---------------------- Table 12.4 : Profit contribution of new territory
---------------------- Forecast sales for “proposed” 10 territories Rs.12,50,000
---------------------- Forecast sales for”present” 9 territories Rs.11,25,000
Sales from additional territory Rs. 1,25,000
----------------------
Less Costs
---------------------- Cost of additional salesperson Rs. 29,000
Production and distribution costs at 70% Rs. 87,500
----------------------
Total costs Rs. 1,16,500
---------------------- Profit contribution of additional territory Rs. 8,500
---------------------- Profit contribution of additional sales people

234 Sales and Distribution Management

 Table 12.5 : Direct Cost of Notes
Additional Sales (Minus) Selling (Minus) Goods (Equals) Net Profit
Salespeople Increase Costs Sold Contribution ----------------------
10 Rs. 1,25,000 _ Rs. 29,000 _ Rs. 87,500 _ Rs. 8,500
11 Rs. 1,00,000 _ Rs. 29,000 _ Rs. 70,000 _ Rs. 1,000 ----------------------
12 Rs. 80,000 _ Rs. 29,000 _ Rs. 56,000 _ Rs. -5,000

In this example, a territory can be added to the sales force because ----------------------
forecasted sales exceeded costs, leaving a profit contribution of Rs. 8,500. ----------------------
However, this conclusion is based on the assumptions that the increase in sales
was due to the added salesperson and that the creation of a new territory would ----------------------
not affect other territories.
----------------------
This method is particularly appropriate for the firm expanding its markets
into previously uncovered or understaffed areas. The major element to consider ----------------------
is the territory’s total incremental or marginal cost relative to its incremental
----------------------
or marginal revenue. Although it is assumed the cost of hiring an additional
salesperson will be the same as the cost of the existing salespeople, the new ----------------------
salesperson’s sales will be lower than those of other salespeople in the region.
This is true because the region’s sales potential will decrease faster than sales ----------------------
will increase as salespeople are added.
----------------------
Thus, as shown in Table 12.5, as salespeople are added, the profit
generated by each new salesperson decreases. Personnel in this sales region ----------------------
could be increased to 11 salespeople for a net profit contribution of Rs. 1,000.
----------------------
Beyond this, a loss occurs even though sales are increasing. The addition of the
12th person increases sales by Rs. 80,000 but causes a profit loss of Rs.5,000. ----------------------
The drawbacks to using the incremental method center on the difficulties of ----------------------
estimating marginal sales directly produced by the added salesperson, marginal
costs, and production and distribution costs. This method is theoretically ----------------------
attractive but sometimes impractical because of the difficulty of making these
estimates. ----------------------
Step Four: Tentatively establish territories. New territories now can ----------------------
be tentatively formed. If possible, each territory should have the same sales
potential. This helps in properly evaluating and compensating salespeople. ----------------------

The entire market can be divided into regions, regions into districts, and ----------------------
districts into sales territories. Contiguous territorial control units can be used to
form one territory. If a company selling nationally has 18 salespeople, it might ----------------------
use states to form territories. If it is a regional office-supply firm selling in ----------------------
several states, it could use countries and cities as its basic control unit.
----------------------

----------------------

----------------------

----------------------

----------------------

Sales Territory 235

 Notes Table 12.6 : determination of customer number per each territory
Customer No. of No. of calls
----------------------
Size Accounts Per Month
---------------------- Extra Large 5 5
---------------------- Large 28 28
Medium 56 56
---------------------- Small 78 26
---------------------- Total 167 115
Contacted once every three months
----------------------
Step Five: Determine the number of accounts for each territory. We
---------------------- determined earlier that using the equalized workload method, one salesperson
could make 1,380 sales calls annually or approximately 115 a month. Using
----------------------
the information in Table 12.3, we simply divide the number of account by the
---------------------- number of salespeople, or 18, to help determine the number of accounts of each
territory.
----------------------
This was done to create the information in Table12 6. Slight differences
---------------------- in the numbers occur due to rounding numbers. For example, a total of 500
accounts are classified as “large.” Divide 500 by 18 salespeople and rounded
---------------------- off you have 28 large customers. Each salesperson has a total of 167 accounts of
all four sizes. This assumes all salespeople have the same ability and customers
----------------------
are geographically clustered together. This is typically not the situation, so
---------------------- adjustments are made to finalize the territories.
Step Six: Finalise the territories, and draw boundary lines. Finally, the
----------------------
territories should be adjusted based on factors such as workload requirements,
---------------------- sales, sales potentials, number and size of customers, geographic distances
between customers, and any other aspects that may influence territorial
---------------------- boundaries. Boundaries then can be drawn using one or more of the control
units, such as states or cities.
----------------------
4. Assign to Territories
----------------------
Some salespeople can handle large territories and the travel associated
---------------------- with them; some cannot. Some territories require experienced salespeople;
some are best for new people. Some people want to live in metropolitan areas
---------------------- where as some people would like to live in their home towns away from the
---------------------- metros.
These are a few of the factors a manager needs to consider when assigning
----------------------
new and experienced people to territories. Executive judgement based on past
---------------------- experience generally guides a manager in determining who should be assigned
to a specific territory.
----------------------
This is an important decision since a territory may generate crores of
---------------------- rupees in sales. The wrong person can cost the company in lost sales and bad
relationships with customers.
----------------------

236 Sales and Distribution Management

5. Customer Contact Plan Notes
The fifth factor to consider in designing sales territories is the customer
----------------------
contact plan. This involves scheduling sales calls and routing a salesperson’s
movement around the territory. ----------------------
Table 12.7 : Weekly Route Plan
----------------------
Days City/Market Location
----------------------
Monday Andheri Home
Tuesday Borivali Home ----------------------
Wednesday Bandra Home
----------------------
Thursday Baroda Hotel Sayaji
Friday Surat Home ----------------------
Saturday Santacruz home ----------------------
Scheduling refers to establishing a fixed time (day and hour) when the
----------------------
salesperson will be at a customer’s place of business. Routing is the travel
pattern the salesperson uses in working a territory. In theory, strict formal route ----------------------
designs enable the salesperson to (1) improve territorial coverage, (2) minimize
wasted time, and (3) establish communications between management and the ----------------------
sales force in terms of the location and activities of individual salespeople.
----------------------
When developing route patterns with their manager, salespeople determine the
exact day and time of sales calls for each account; approximate waiting time; ----------------------
sales time; miscellaneous time for contacting people such as the promotional
manager, checking inventory, or handling return merchandise; and travel time ----------------------
between accounts.
----------------------
Carefully planned routes
----------------------
At times, routing can be difficult for a salesperson. Customers do not
locate themselves geographically for a salesperson’s convenience. Also, getting ----------------------
around in large cities is becoming increasingly difficult. In addition, some
accounts will see salespeople only on certain days and hours. ----------------------

In today’s complex selling situation, the absence of a well-thought-out ----------------------

daily and weekly route plan is a recipe for disaster. Salespeople cannot operate
successfully without it. Imagine you are a salesperson planning your routes. ----------------------
How would you begin? ----------------------
Start by locating your accounts on a large map. Mount the map on
----------------------
corkboard or foam board, which can be obtained from an office supply store or
picture framing shop. You can use a road map for large territories or a city map ----------------------
for densely populated areas. While you are at the office products store, pick up
a supply of map pins with different-coloured heads. Place the pins on the map, ----------------------
so you can see graphically where each account is located. For example, you
----------------------
could use:
Red pins for extra large (EL) accounts ----------------------
Yellow pins for large (L) accounts. ----------------------

Sales Territory 237

 Notes Blue pins for medium (M) accounts
Black pins for small (S) accounts
----------------------
Green pins for best prospects
----------------------
Once all the pins are in place, stand back and take a look at the map.
---------------------- Notice first where the EL accounts are located. This will help you determine
your main routes or areas where you must go most frequently.
----------------------
Now divide the map into sections, keeping about the same number of
---------------------- EL accounts in each. Of course, each section should be a natural geographic
division; the roads should be located so you can drive easily from your home
---------------------- base to each section and get around readily once you are in a section. Generally,
---------------------- your L, M, and S accounts will fall into place near your EL accounts, with a few
exceptions. For example, if you are working on a monthly or four-week call
---------------------- schedule for your ELs, then divide your territory into four sections, and work
one section each week. In this way, you will be sure to get to all your ELs and
---------------------- also have the flexibility needed to get to your other accounts on a regular basis.
---------------------- If you had 31 EL, 57 L, 120 M, and 151 S accounts, your sections might look
like this, but you would not be able to see all the accounts each week.
---------------------- Table 12.8
---------------------- Section 1 Section 2 Section 3 Section 4
---------------------- 7 ELs 9 ELs 5 ELs 10 ELs
15 Ls 12 Ls 15 Ls 15 Ls
---------------------- 35 Ms 25Ms 35 Ms 25 Ms
---------------------- 40 Ss 35 Ss 40 Ss 36 Ss
By setting up your geographic routes this way, you could call on all of
----------------------
your EL accounts every four weeks, half of your L and M accounts (making an
---------------------- 8-week call cycle), and one-quarter of your S accounts (making a
16-week call cycle). Allow time for calls on prospective customers, too. Use
----------------------
the same routing procedure as you would for your regular customers. The only
---------------------- difference might be that your prospects would be contacted on a less frequent
basis than your customers, in most cases.
----------------------
No “right number” of sections or routes is correct for all salespersons.
---------------------- The size of their territory, the geographic layout of that part of the country, and
the call frequencies they want to establish determine the number of sections or
---------------------- routes. They should lay out the travel route so they can start from their home in
---------------------- the morning and return in the evening. If, however, they have a larger territory,
they could make it a Monday to Friday route or a two-day (overnight) route.
---------------------- Remember, the critical factor is travel time, not miles. In some cases, using
major nonstop highways may increase miles, but total travel time may decrease.
----------------------
The actual route salespeople follow each day within each section can help
---------------------- maximize their use of daily prime selling hours. They should make long drives
early in the morning and in the late afternoon, if possible. For example, if most
---------------------- of their accounts are strung out more or less in a straight line from their home

238 Sales and Distribution Management

base, they should get up early and drive to the far end of the territory before Notes
making the first call. They would then work their way back, so they end up near
home at the end of the day. The following figures illustrate three basic routing ----------------------
plans, including the straight-line method just mentioned.
----------------------
Basic Routing Patterns
----------------------

----------------------

----------------------
Major city pattern 1-Downtown ----------------------

----------------------
2 3
----------------------
1
----------------------
5 4
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------
hopscotch cloverleaf
----------------------
Fig. 12.1: Major City Routing Pattern
With the example territories and focal point above, the cloverleaf routes ----------------------
would probably require less travel time if such routing is possible on existing ----------------------
roads.
The above circular area was divided into five equally sized territories ----------------------
with a focal point at the center. A route to visit customers in the territories was ----------------------
then drawn in either a circular clover leaf pattern or in a hopscotch pattern. This
way of making territories and of routing sales calls would be appropriate if, ----------------------
say, five salespeople reported to a common office in the center. It would also be
appropriate if, say, a single salesperson was assigned to a remote territory and ----------------------
must divide the territory into five daily routes to visit customers once per week. ----------------------
Territories with a Central Focal Point : The Ray Sweep Method
----------------------
In the above example, all territories met at a central point. This could be
a centralized office out of which all salespeople work. This sort of design could ----------------------
also be appropriate for a route salesperson who must visit customers once per
----------------------
week, with a Monday route, a Tuesday route, and so on.
To generate territories of approximately equal workload, divide the total ----------------------

Sales Territory 239

 Notes number of customers and prospects that must be visited by the number of
salespeople that are available to cover the area. If the area has five salespeople
---------------------- and sixty accounts which must be visited daily, then each salesperson would
be assigned twelve accounts if these accounts are evenly distributed across the
---------------------- area.
---------------------- If there are no natural boundaries, start the process of generating the five
territories by laying a strait edge through the central office pointing north. Draw
----------------------
a line directly from the central office to the edge of the circular boundary. Now
---------------------- sweep the straight edge clockwise, like the second hand on a clock, and count
the number of customer accounts that it sweeps across. When it sweeps across
---------------------- twelve accounts, draw another line from the central office to the edge of the
circular boundary. Sweep the straight edge through another twelve accounts
----------------------
and draw another line. Keep doing this until five wedge shaped territories have
---------------------- been generated. These should all be approximately equal in workload.

---------------------- 6. Evaluation and Revision of Sales Territories

Territorial control is the establishment of standards of performance for the
----------------------
individual territory in the form of qualitative and quantitative quotas or goals.
---------------------- Actual performance is compared with these goals for evaluation purposes.
The salesperson can see how well territorial plans, strategies, and tactics were
---------------------- carried out toward meeting performance quotas. If quotas were not met, then
new plans must be developed for the territory.
----------------------
Many companies routinely furnish managers and individual salespeople
---------------------- with reports on the number of times during the year their salespeople have called
---------------------- on each account and the date of the last sales call. Management can monitor the
frequency of-and time intervals between-calls for each of their salespeople.
----------------------
As an example, a national pharmaceutical company supplies its sales force
---------------------- with the “net sales by customer and call report.” The report lists each customer’s
name, address, and medical specialty. The desired number of monthly calls on
---------------------- a given customer and the actual number of calls to date are noted. Net sales are
broken down into last year’s sales, the current month’s sales, and year-to-date
----------------------
sales. Finally, the date the salesperson last called on each customer is reported.
---------------------- Using this type of information, which might include 200 to 300 customers for
each salesperson, management and salespeople can continually review sales
---------------------- call patterns and customer sales to update call frequency and scheduling.
----------------------
Check your Progress 2
----------------------

---------------------- State True or False.

1. Usually, territorial boundaries are based on wants, needs and choices.
----------------------
2. Territorial control is the establishment of standards of performance
---------------------- for the individual territory in the form of qualitative and quantitative
quotas or goals.
----------------------

240 Sales and Distribution Management

 Notes
Activity 1
----------------------
Design a sales territory for covering customers in the geographical limit of ----------------------
your city.
----------------------

Summary ----------------------

●● Managing time and territory is the most important factor to be considered ----------------------
when carrying out their selling duties. The sales territory is a group of
----------------------
customers or a geographic area assigned to a sales person. It is usually
developed by the sales manager. ----------------------
●● Developing sales territories has advantages as well as disadvantages. Sales
----------------------
people may be more motivated if they are unrestricted, or the company
may be too small to justify segmenting the market. Also, the manager ----------------------
may not want or have the knowledge to develop territories.
----------------------
●● Sales force objectives are converted into individual sales territorial goals.
The design of a territory is important to successful selling. Territorial ----------------------
boundaries are based on states, cities, metropolitan areas, trading areas or
based on major accounts. ----------------------
●● The three main influences affecting the sales personnel’s workload are ----------------------
nature of job, intensity of market coverage and products sold.
----------------------
●● Before designing the sales territories, managers must consider six factors.
First, they must forecast and determine the sales volume needed for ----------------------
each territory. Next, they must determine the number of territories. They
can use the breakdown approach or the equalized workload. Once the ----------------------
number and location of customers are determined, the key accounts must
----------------------
be established by their equal sales potentials. Managers determine the
number of accounts for each territory by dividing the number of accounts ----------------------
by the number of sales people in each territory. The last step is to finalize
territories and draw boundary lines. ----------------------
●● The customer contact plan includes scheduling sales calls and routing a ----------------------
salesperson’s movement around the territory. Routes should be planned
carefully so no time is wasted in travelling. The telephone can be used to ----------------------
save time.
----------------------
Keywords ----------------------

●● Breakdown Approach: Distribution of the company’s expected total ----------------------

sales into various territories/individuals as budgets/targets.
----------------------
●● Exclusive Distribution: Is a strategy to use only one wholesaler or
retailer in a given market. ----------------------

----------------------

Sales Territory 241

 Notes ●● Routing: Routing is the travel pattern the salesperson uses in working a
territory.
----------------------
●● Sales Territory: It is a group of customers or a geographic area assigned
---------------------- to a salesperson.
●● Scheduling: It refers to establishing a fixed time (day and hour) when the
----------------------
salesperson will be at a customer’s place of business.
----------------------
Self-Assessment Questions
----------------------

---------------------- 1. What do you understand by sales territory?

2. Discuss the reasons for establishing sales territories.
----------------------
3. What do you understand by scheduling? Discuss its importance.
----------------------
4. Discuss the reasons for not developing sales territories.
---------------------- 5. Explain the various routing patterns.
----------------------
Answers to Check your Progress
----------------------
Check your Progress 1
----------------------
Fill in the blanks.
---------------------- 1. To improve customer relations is one of the responsibilities of designing
sales territories.
----------------------
Check your Progress 2
----------------------
State True or False.
----------------------
1. False
---------------------- 2. True
----------------------
Suggested Reading
----------------------
1. Bowersox, Logistical Management: The Integrated Supply Chain Process.
----------------------
2. Calvin, Robert J. Sales Management.
----------------------
3. Chopra, Supply Chain Management.
---------------------- 4. Ghoshal, World Class in India. Penguin India.
---------------------- 5. Lamba, A.J. The Art of Retailing.

---------------------- 6. Scheuing, Kurtz, Johnson. Sales Management: Concepts, Practices and

Cases.
----------------------

----------------------

----------------------

242 Sales and Distribution Management

Key Account Management
UNIT

13
Structure:

13.1 Introduction
13.2 What is Key Account Management
13.3 Objectives of Key Account Management
13.4 Characteristics of Defining a Key Account
13.5 Traditional and Key Account Paradigms
13.6 The Stages in Key Account Management
13.7 Future Trends and Challenges of Key Account Management
13.8 Benefits of Key Account Management
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Key Account Management 243

 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Define key account management
----------------------
• State the characteristics of key accounts
---------------------- • Explain the stages in key account management.
---------------------- • State the future trends and implications of key account management.
---------------------- • Discuss the advantages and disadvantages of personal selling.

---------------------- • State the benefits of key account management.

----------------------
13.1 INTRODUCTION
----------------------
Key Account Management is the strategic marketing approach which
---------------------- provides an effective, practical and rather simple method for companies interested
---------------------- in increasing their profits by correct customer and relationship management. In
companies in which data is decentralized in business units, the implementation
---------------------- of a Key Account program passes through the accounts selection problem, and
through the implementation process, that can be understood like a Knowledge
---------------------- Discovery in Database process where the goal is to search for accounts under
---------------------- given restrictions in the marketing utility function.
Since the globalization and the maturity of business markets have
---------------------- increased the buying power of customers, one of the Strategic Marketing goals
---------------------- is to identify appropriate marketing tools to analyse customer management
and marketing operations. The concept of Key Account Management (KAM)
---------------------- emerged from the Strategic Marketing with the purpose of providing an effective,
practical and rather simple method for companies interested in increasing their
---------------------- profits by right customer and relationship management.
---------------------- Despite this approach has become usual in business-to-business marketing
relationship, most retailers and service companies have been greatly benefited
----------------------
from it, building a portfolio of Key Accounts by Key Account Management
---------------------- (KAM) is a natural development of customer focus and relationship marketing
in business-to-business markets. It can offer critical opportunities for profit
---------------------- enhancement for both the seller and the buyer, if it is managed with integrity
and imagination. The scope of KAM is widening and at the same time becoming
----------------------
more complex. This means that the skills of those involved, both at strategic
---------------------- and operational levels, need to be continuously updated and developed.
The need for Key Accounts Management (KAM) arises from the
----------------------
consolidation of buying points, in industrial and retail organisations. Within
---------------------- industrial and commercial organisations buying is becoming more professional
and concentrated, with concern for greater efficiency in supply chain
---------------------- management, improved margins, reducing costs and so on.

244 Sales and Distribution Management

13.2 WHAT IS KEY ACCOUNT MANAGEMENT Notes

Key Account Management (KAM) is one of the approaches calling ----------------------

for customer focus of such customers which are strategically important for ----------------------
the organisation. Due to the dividends accrued from the approach, KAM has
become one of the most popular and successful approaches used for customer ----------------------
retention and development.
----------------------
According to Millman, a key account can be defined as:
“A customer in a B2B market identified by a selling organisation as of ----------------------
strategic importance”. ----------------------
A customer can be a key customer to an organisation depending on
----------------------
various variables like geographic spread, size of customer, sales turnover, and
profitability. However, all the key accounts need not have large geographical ----------------------
coverage or large turnover. All customers are not equally profitable or important.
In some cases, a seller or a vendor may consider a customer key account as key ----------------------
account, not because of their profitability, which may be low, but because of
----------------------
other considerations such as reference or prestige value or because they permit
access to markets or technologies. In the end analysis it can be said that under ----------------------
different circumstances due to different considerations all the key customers are
of strategic importance to the seller. ----------------------
Key Account Management is an organisational process that assumes that ----------------------
relationships are dynamic and not static and that the relationships evolve over
period of time. Each interaction is a consequence of the relationship that exists ----------------------
between the customer and the supplier. The interaction in turn influences the
----------------------
relationship and growth. Millan and Wilson (1994) have developed a six-stage
model that is a useful tool for examining sources of competitive advantage ----------------------
and characterising managerial behaviour. The six stages of the model are given
below: ----------------------
1. Pre-KAM: In the pre-LAM stage it is essential for the firm to identify ----------------------
those accounts that have the potential of moving towards key account
status. This is important so that the firm does not waste time and money ----------------------
in those accounts that do not hold this potential. At this stage, the selling
----------------------
strategies are concerned with making basic product or service offering
available. At the same time information about the customer is gathered ----------------------
in order to determine whether they have the potential to become a key
account or not. ----------------------
2. Early-KAM: In the early KAM stage, a firm explores opportunities ----------------------
for the collaboration with its customers by examining the motives,
behaviour, culture, strengths and weaknesses of the customers. The ----------------------
firm then highlights the potential benefits that the customers may enjoy ----------------------
as ‘preferred’ customers. A detailed understanding of three aspects is
very important at this stage. These are: the decision making process, the ----------------------
nature of the decision making unit and the buyers business and problems.
Internally, the firm will have to look at promoting the importance of the ----------------------

Key Account Management 245

 Notes account to the firm as a whole. In addition, the firm will have to promote
the importance of benefits such as non-standard offerings to members of
---------------------- their own firms. The focus of the sales effort is on building trust through
consistent performance and open communication.
----------------------
3. Mid-KAM: As the relationship of a firm with the customers deepens, the
---------------------- level of trust and the range of problems that are addressed increases. The
number of contacts between the employees of the firm and the customers
----------------------
also increase to a much higher level. This implies that the sales person’s
---------------------- role in the relationship will increase. The relationship may fall short of
exclusivity and the activities of competitors within this account may
---------------------- require constant review.
---------------------- 4. Partnership KAM: This represents a mature stage of key account
development. The supplier is often viewed as an external resource of the
---------------------- customer and the sharing of sensitive commercial information becomes
very common. Joint problem solving is the main focus at this stage of
----------------------
relationship development.
---------------------- 5. Synergistic KAM: At this advanced stage, the key account management
goes beyond the partnership level and the two organisations tend to see
----------------------
each other as parts of larger entity creating joint value in the marketplace.
---------------------- 6. Uncoupling KAM: This is the final stage wherein the partnership comes
---------------------- to an end. Partnerships that are ill convinced or that have outlived their
usefulness and served their purpose should not be allowed to continue
---------------------- beyond a certain point. Sometimes short-term relationships might prove
to be more profitable than long-term relationships.
----------------------
The above model of key account relational development implies that
---------------------- fundamental changes are required in the approach to customer needs by selling
companies. In the initial stages of KAM development, the managers might seek
---------------------- to focus on product/service attributes and in the later stages they move towards
---------------------- more sophisticated offerings that solve a wide range of problems.
KAM helps sellers to attain deeper understanding of their customers and
---------------------- the strategies to be adopted at different stages of their relationship with the
---------------------- customers. Thus, KAM could be looked upon as an important strategy towards
developing long-term mutually beneficial relationships with customers.
----------------------
The principle objective of Key Account Management is to provide the
---------------------- following benefits to the sales and marketing organisation and the customer.

----------------------

----------------------

----------------------

----------------------

----------------------

246 Sales and Distribution Management

 Notes
Check your Progress 1
----------------------
Fill in the blanks. ----------------------
1. Key Account Management is _______________ that assumes that
----------------------
relationships are dynamic and not static and that the relationships
evolve over period of time. ----------------------

----------------------
13.3 OBJECTIVES OF KEY ACCOUNT MANAGEMENT
----------------------
Marketing and Sales
----------------------
●● Improved customer insight
●● Understanding of customer needs ----------------------
●● Understanding of usage patterns ----------------------
●● Better product knowledge
----------------------
●● Better access to marketing material
●● Better competitor information ----------------------
●● Improved performance information ----------------------
●● Measurable goals
----------------------
●● Link between Business Plan strategy and Customer strategy
Customer ----------------------
●● Better product information ----------------------
●● Better information on services
----------------------
●● Better understanding of reimbursement
●● Better product benefits knowledge ----------------------
●● Ability to raise individual profile ----------------------
●● Increased end users
●● Provide resource input ----------------------

----------------------
13.4 CHARACTERISTICS OF DEFININGAKEYACCOUNT
----------------------
Key account classification criteria
----------------------
●● Customers responsible for example 80% of revenue.
●● Customer with over for example Rs. 1.5 crores sales per year. ----------------------
●● Customer with potential of for example factor: Rs.2 crores sales within ----------------------
2 years.
●● Customer generating for example Rs.8,00,000 profit. ----------------------
●● Customer responsible for example 2% or more of the market in units or ----------------------
value.
●● Customer with contribution for example above 5% ----------------------

Key Account Management 247

 Notes Account screening criteria
●● Ability to sustain long term profitable relationship.
----------------------
●● Account values products and services as distinct from competition
---------------------- ●● Relationship has strategic value and can create differential advantage by
---------------------- serving the customer
●● We can create considerable barrier to entry by serving the customer
----------------------
●● Customer relationship based on more than price negotiation
---------------------- ●● Potential for growth greater than the current major clients
----------------------
13.5 TRADITIONAL AND KEY ACCOUNT PARADIGMS
----------------------
Table 13.1
----------------------
Parameters Traditional Selling Key Account Selling paradigm
---------------------- Paradigm
---------------------- Sales Volume Varies Large volume of product purchased
by the customer often across multiple
---------------------- divisions of seller.

---------------------- What is bought/ Core Product/ The core augmented product.

sold? Service
---------------------- Time Horizon Relatively short Long Term
term
----------------------
Sales force Maximize revenue Obtain position of preferred supplier,
---------------------- objectives satisfied customers lower customers’ firms total costs
enhance learning in the relationship,
----------------------
reduce uncertainty, Manage
---------------------- dependence
Traditional Selling Key Account Selling paradigm
----------------------
Paradigm
---------------------- Information Focus on price and Broader focus as firms share
---------------------- being
shared product attributes strategic intentions and longer-term
---------------------- goals.
---------------------- Selling firm Individual Many people from the selling firms
interface salesperson is
----------------------
primary, possibly interact with the customer, usually
---------------------- only,
customer interface involve multiple functional areas of
----------------------
the seller (emergence of team selling)
---------------------- Buying firms Relatively few Many people from the customer
interface contacts in
----------------------

248 Sales and Distribution Management

 the buying interact with the buying firm Notes
organisation
----------------------
Relative Varies, often Higher level of interdependence
dependence asymmetric ----------------------
in nature ----------------------
Sources: Cespedes (1995), Krapfel et al (1991), Shapiro (1988) and Shapiro and Moriarty
(1982). ----------------------

Key accounts typically purchase a very large volume from the supplier. ----------------------
Further, exchange between buyers and seller extend beyond a ‘core product,’
as sellers augment the product to provide additional services and support ----------------------
not usually available to other customers. Enhancing customer value through ----------------------
programs such as vendor managed inventory, joint production planning and
scheduling for just-in time (JIT), inventory management, and collaborative ----------------------
quality improvement efforts requires significant commitments by a seller.
----------------------
In key account relationships, the focus of exchanging parties is usually
broader than that involved in traditional sales exchanges. Whereas traditional ----------------------
sales management objectives typically concentrate on increasing revenue, key
----------------------
account relationships involve more multifaceted goals. For example, firms may
engage in closer relationships to lower total costs to both sides by reducing ----------------------
seller’s selling and servicing costs and the buyers acquisition costs. Other
benefits of KAM include the management of uncertainty and/or dependence ----------------------
and the establishment of control over the direction of an industry.
----------------------
In order to deliver a broader base of value effectively to large and important
customers, the interpersonal contact between the buying and selling firms must ----------------------
extend beyond the salesperson-purchasing agent/decision maker relationship.
----------------------
Key account relationships are typically long-term, involve high
interdependence and demand high levels of commitment from both parties. ----------------------
The seller’s dependence may initially emerge from the high purchase volume
----------------------
and demands placed by the customer. But if the seller learns more about the
customer’s operations, provides extra services and effectively delivers a higher ----------------------
level of role performance, the buyer’s switching cost and dependence are raised.
One of the primary objectives of many key account management programs is ----------------------
to provide value and thus keep a buying firm from viewing the exchanges as a
----------------------
commodity purchase.
----------------------
13.6 THE STAGES IN KEY ACCOUNT MANAGEMENT
----------------------
The main stages in key account management are summarized in figure.
This highlights that managing major customers is a lot more than just calling to ----------------------
make presentations. In fact, the frequency of presentations to major accounts is ----------------------
low, but the allocation of time in developing an understanding of their business,
building relationships with a network of decision makers and influencers, and ----------------------
monitoring their performance against agreed objectives is large. A key account
manager will typically have a small portfolio of accounts to manage. While ----------------------

Key Account Management 249

 Notes the key account manager’s main contact may be with the titular buyer, he or
she will have to network within the buying organisation, collecting information
---------------------- feedback, and developing support and interest in his or her products, amongst a
range of decision influencers, carefully building contact and relationships and
---------------------- communicating effectively, but not gossiping, politicking or usurping anyone’s
---------------------- authority.
Table 13.2
----------------------
Actions to be taken in each stage Stages in Key Account
---------------------- Management
---------------------- Identify the trade channels for company Trade Channel Mapping
products Identify the key accounts in each
---------------------- channel
---------------------- Categorize key accounts according to
relevant profile parameters.
----------------------
Match key account parameters to company. Developing Key Account
---------------------- Profiles
Develop in depth account of the buyer and
----------------------
his or her role in the account
---------------------- Use knowledge in developing presentation Getting to know the buyer
strategies.
----------------------
Build a network of contact with persons
---------------------- involved with any aspect on the accounts
business relating to the sales of company’s
----------------------
products.
---------------------- Develop company sales and marketing Account Penetration and
programs with an account consistent with Development
---------------------- the accounts own objectives and strategies
---------------------- and increase sales and market share of
company brands with that account.
---------------------- Give a clear focus to key account meeting
---------------------- and to developing strategies with the
account.
---------------------- Provide a basis for measuring the Setting Key Account Sales
---------------------- effectiveness of key account managers in Objectives
developing company business through the
---------------------- key accounts.
Use strategic selling and negotiating skills
----------------------
to match company objectives with the key
---------------------- accounts needs, strategies and opportunities
for negotiating.
----------------------
Increase the overall company business with Key Account Negotiating
---------------------- the account.

250 Sales and Distribution Management

1. Trade Channel Mapping Notes
• Collect data on the product category volume purchase/ usage by all
----------------------
customers/ users as low down the volume purchase/ usage tree as
possible. ----------------------
• Identify (ranking as best as possible) the major accounts in terms ----------------------
of volume, purchases or usage (depending on whether the products
are for onwards sales and distribution, or for internal consumption ----------------------
as an industrial or commercial input.)
----------------------
• Clarify which accounts you will treat as key accounts (do not
limit yourself only to your current customer base within category ----------------------
purchases/users – at this point you must recognise also those major
accounts who are not currently your customers, but who should ----------------------
be classified as key accounts in order to receive the development ----------------------
attention needed to penetrate and gain trial or distribution). As
a guideline only, in many categories we would identify as key ----------------------
accounts any purchaser/user who absorbed over 1% of the total
category purchases or usage. ----------------------

• Set account objectives; develop specific account development ----------------------

strategies and tactics.
----------------------
2. Developing Key Account Profiles
----------------------
The objectives in developing key account profiles are to:
• Categorize each key account according to its rating on relevant ----------------------
profile parameters.
----------------------
• Match key account parameters to your company brand target outlet
profiles. ----------------------

The next stage in formalising an approach to key account management ----------------------

is to develop a profile of each key account. Typically a form such as (the
customer/prospect record card) might help in this exercise or, alternatively, ----------------------
a format of a customer record card such as either of those illustrated. ----------------------
A key aspect in developing an account profile is to know the buying patterns
----------------------
and practices of each customer, with a focus on the point illustrated in the
table on the following page. ----------------------
A form of the type illustrated can be used to build a profile of national or
----------------------
territory accounts. In that example we are looking at the various trade channels
selling alcoholic beverages either for consumption on the premises (on trade) ----------------------
or for take home consumption (off trade). The various outlets will have very
different customer profiles for parameters that relate to the purchase consumption ----------------------
of individual alcoholic drink brands, such as in terms of location, income social
----------------------
class, ages, sex. With this kind of customer analysis the supplying company can
decide exactly which individual outlets it wishes to target as locations where it ----------------------
would like particular brands distributed and displayed.
----------------------

Key Account Management 251

 Notes 3. Getting to know the buyer
It is important to develop an in – depth understanding of the buyer, both
----------------------
from the perspective of his or her role in the key account and as a person.
---------------------- Table 13.3
---------------------- Understanding the buying Practices of Key Accounts

---------------------- Establish the company’s share of • Ask questions to establish purchase/

the Customers’ business in the sales data
---------------------- product category.
---------------------- • Observe visible information (display
units in use)
---------------------- • Collect any published information
(accounts data)
----------------------
• Is the company share growing or
---------------------- declining?
• Is the company gaining or losing
----------------------
penetration?
---------------------- Clarify future company potential • Establish their plans (markets,
with the account products, people).
----------------------
• Will they need more or fewer of your
---------------------- products to meet their plans?
Identify trends in the customers • How are they reacting to positive
---------------------- business and your business with it. trends or countering negative trends?
---------------------- • Allocate more effort to growing
accounts and less to declining
---------------------- accounts.
---------------------- • Policies regarding multiple suppliers
or any favoured supply sources.
---------------------- Understand procurement policies • Policies concerning particular product
and procedures groups.
----------------------
• Alternative points of sale on the
---------------------- premises.
• The system of gaining approval for
----------------------
products or other proposals.
---------------------- • Paperwork systems for new products
and repeat purchases.
----------------------
• Structure of any buying committees
---------------------- Establish buying criteria • Product pricing or positioning.
(in theory and in practice)
----------------------
• Trade buying terms.
---------------------- • Product source or type.
• Advertising and promotional support.
----------------------

252 Sales and Distribution Management

 • Merchandising support Notes
• Delivery options
----------------------
Know the competition and • Why were they chosen?
competitive products ----------------------
• What volumes are purchased?
----------------------
• What share does each have of the
accounts sector purchases? ----------------------
• Does any market research exist to
----------------------
provide an insight to competitor?
4. Account Penetration and development ----------------------

Establishing Relationships ----------------------

When working with major accounts the selling relationship is not ----------------------
normally a quick, hard sell, but protected negotiations over a period of time,
often supported with substantial figure work and analysis of products. The key ----------------------
account manager must work over time to build an appropriate business rapport
and relationship of mutual respect and equality. ----------------------

Building Relationships within Key Accounts ----------------------

The objectives of developing relationships with key accounts are to: ----------------------
●● Build a network of contact throughout the account with persons involved ----------------------
in any aspect of the accounts business, which impacts on the actual
potential sales of your products. ----------------------
●● Establish a relationship of trust with key contacts that can be built on in
----------------------
negotiation and influencing the account to take favourable decisions.
What do we mean by a business rapport? ----------------------
●● A process of two-way communications between the account manager and ----------------------
key account, not a monologue situation in meetings nor a demand and
respond situation in non-face to face contact. ----------------------
●● An ability to raise contentious issues without rancor, and to discuss them ----------------------
without animosity or conflict, but from a position of mutual respect and a
willingness to identify and address issues impacting on the performance ----------------------
and objectives of either party.
----------------------
●● Personal relations at a satisfactory level where social contacts pass
smoothly but are not the dominant aspect of relationships to the point that ----------------------
active and effective account management is inhibited.
----------------------
●● A level of mutual trust demonstrated by the key account through a
willingness to discuss his or her business, its performance and issues with ----------------------
the account manager.
----------------------
What do we mean by a relationship of equality?
----------------------
●● Mutual respect between the account manager and key account, i.e., for
■ Their roles and responsibilities. ----------------------

Key Account Management 253

 Notes ■ Their particular expertise and inputs to developing a mutual
business.
----------------------
■ Their respective goals and objectives.
---------------------- ■ Their needs (for the business and personally).
---------------------- ●● Neither assuming or projecting a dominant or submissive role or attitude
towards the other.
----------------------
●● Either party being willing to seek or heed the advice of the other. Within
---------------------- a key account organisation there is normally a network of managers who
take decisions of influence, decisions that impact on the opportunities
---------------------- for your products to develop through the account. Even within an
entrepreneurially owned key account the owner will normally be
----------------------
supported by a management structure.
---------------------- ●● Therefore, it becomes critical in effective key account management that
the key account manager develops.
----------------------
●● Detailed knowledge of the internal management structure of each key
---------------------- account organisation, including any power or political factors.
---------------------- ●● Relationships with all the managers who have any input to the buying,
testing specification, use, merchandising and marketing of the product
---------------------- category in general and your products or brands in particular.
---------------------- For any particular account the key account manager must take a list of the
network of contacts to be developed and allocate time to developing his
---------------------- or her relations with this network, as all will have various inputs to, and
---------------------- influence on the buying process.
Once the network of contact is identified then the key account manager
---------------------- can build his or her knowledge, getting to know the buyer and the buying
---------------------- organisation in depth. We can build on and focus now on collecting,
collating and building on information about the buying organisation,
---------------------- covering:
---------------------- ●● The buyer and the buying company’s motivations.
●● The buying organisation business.
----------------------
●● The market environment, the buying organisation operates in (getting to
---------------------- understand the buyers industry, markets, competition, etc.).
---------------------- ●● Your role, function and importance as supplier to the buying organisation.

---------------------- Contacts to develop and Follow up with

Key account management is all about team work, both linking to the
---------------------- buying team and within your own organisation. Align your organisation with
---------------------- the account.
●● For retail customers ensure merchandising experts such as those with
---------------------- space planning skills who are in contact with key account merchandising
---------------------- departments, and that your field sales management is working with key

254 Sales and Distribution Management

 account field management (store controllers or branch managers, etc.) as Notes
locally appropriate.
----------------------
●● For industrial customers put your technical experts/engineers and
researchers in touch with those in the client company concerned with ----------------------
technical issues (specifications, performance, maintenance).
----------------------
Typical Contacts to Make and Cultivate
----------------------
Industrial and Commercial Retail Products
Products ----------------------
Build and cultivate relations Build and cultivate relations with
----------------------
with managers involved in: managers involved in:
• Buying • Buying (include any member of ----------------------
buying committees)
----------------------
• Product specification • Product range distribution policies
(decisions on which outlets will stock ----------------------
which brands) ----------------------
• Product trial and testing • Marketing (e.g., store advertising and
promotion programs) ----------------------
• Product use • Merchandising (specifying store ----------------------
section product display layouts)
----------------------
• Product maintenance and • Store operations (management at the
servicing regional, area or branch levels). ----------------------
• Other approvers or authorisers • Physical distribution of goods (central ----------------------
who make inputs to the buying warehouse management, if the
process. account handles its own distribution ----------------------
from a central warehouse)
----------------------
• Accounts (on processing payments)
----------------------
Owner Sets
Policies ----------------------

Decision Maker ----------------------

Buyer Merchandiser ----------------------
User/Implementers
----------------------
Factory Managers, Engineers, Store Managers
----------------------
Sifters
Contact must be maintained and developed and indicates some typical ----------------------
job functions where liaison may be advantageous. An account manager is ----------------------
responsible for driving this process, but must also delegate appropriately to
allow time to work on priorities and key result areas. The degree or level of ----------------------
interaction will depend on the sophistication of the account and the depth of
your backup services available. ----------------------

Key Account Management 255

 Notes Getting to know the buying organisation
What motivates His Business His Supplier in
----------------------
the buyer Environment the mix
---------------------- • Business • Goals and • The market • Importance
• Operational  Objectives
----------------------
e.g., • Organisation • Competition • Share of
---------------------- turnover
 Structure • Pressures • Share of
----------------------
Profit
----------------------  Skills • Opportunities
---------------------- • Size • Opportunities • Legal • Plans
direction
---------------------- • Profit • Procedures • Social • Influence
---------------------- • Security • Markets • Stake
• Personal socio- • Performance
---------------------- psychological
---------------------- e.g. • Financial
• Status • Trade
----------------------
• Recognition • Channels
---------------------- • Achievement • Potential

---------------------- 5. Setting key accounts sales objectives: supporting relationships with a

value adding approach to account management
----------------------
The starting point in looking for ways to add value is to recognize the
---------------------- different objectives of the supplier and the customer account within the market
place, and look for ways to add value to the accounts business through help in
---------------------- achieving its objectives for its business than relying solely on relationships.
---------------------- The table helps us develop a model that recognizes the importance of
relationships in a very competitive trading environment and also the need to
---------------------- find ways that add value to an account business and the two pronged approach
to motivating and managing key accounts.
----------------------
The professional account manager will work to excel in his or her
---------------------- development of relationships, but will also ensure that every call has a value
adding theme, aiming to sell more of his or her product enhancing the customer’s
----------------------
progress towards achieving its own goals and objectives.
----------------------

----------------------

----------------------

----------------------

----------------------

256 Sales and Distribution Management

 Table 13.4 Notes
Organisational Industrial buyer Retail buyer ----------------------
objective
Volume Input cost control Profit from trading activities ----------------------
Profit Input reliability After sales service support ----------------------
and availability
----------------------
Brands market share Performance in Growth without direct investment
of product category use in brand development ----------------------
Distribution by After sales Market share within its trade
----------------------
brand service support channel and product categories.
Brand awareness Risk spreading through range ----------------------
development
----------------------
6. Key account negotiating
----------------------
Use strategic selling and negotiating skills to match company objectives
with the key accounts needs, strategies and opportunities for negotiating. The ----------------------
negotiation could be in the areas of
----------------------
Pricing/Discounts
----------------------
Packaging
Delivery schedule ----------------------
Mode of transportation ----------------------
Sharing of transportation costs ----------------------
Mode of payment and credit period
----------------------
Installation
----------------------
Warranty and guarantees
Replacement policy ----------------------
Training of the buyers personnel in case of industrial products ----------------------
These areas need to be negotiated skillfully keeping a balance between the ----------------------
buyers and the organisational interest and thereby creating a win-win situation
for both at the same time increasing the company’s overall business with the ----------------------
account.
----------------------
Check your Progress 2 ----------------------

----------------------
Fill in the blanks.
State True or False. ----------------------
1. In the trade channel mapping stage, the action taken is like using of ----------------------
knowledge in developing presentation strategies.
----------------------

Key Account Management 257

 Notes 13.7 FUTURE TRENDS AND CHALLENGES OF KEY
---------------------- ACCOUNT MANAGEMENT

---------------------- Compared to the past, the changes that are taking place in word economy
are happening at mind boggling place. The world is reduced to a seamless market.
---------------------- Therefore, in the past where one country would look to be a large market, today
the world looks like a big village. Thanks to the technology which has increased
----------------------
interaction of organisations with their customers, globalisation of customers,
---------------------- increase in sales, marketing and service efficiencies using automation tools.

---------------------- Over the last 15-20 years there has been a evolution in supplier-base
management. In the first stage supplier base reduction, customers focused on
---------------------- buying the same components or parts from fewer suppliers. Now customers are
further reducing their suppliers and dealing directly with only their designated
---------------------- primary suppliers. They accept these primary suppliers, in turn, to take on the
---------------------- responsibility of monitoring and managing secondary/other smaller suppliers. In
order to continue being suppliers to their key accounts, primary suppliers have
---------------------- to redefine significantly the scope of these relationships, taking on additional
roles and responsibility.
----------------------
For example, one industrial customer now expect its electrical component
---------------------- supplier also to manage the customer’s physical plant service operations. Seller
needs to make conscious decisions about whether it is worthwhile for them to
----------------------
take on these additional responsibilities and they must understand how these
---------------------- decisions could affect their ability to serve other customers.

---------------------- The second trend is emergence of global customers. As a result of

globalization and lateral movement of organisations across the continents
---------------------- they have been transformed from being a regional, national organisation to a
multinational organisation having world wide presence. In most cases, the global
---------------------- organisations, in their quest to maintain standardisation in the quality of their
---------------------- products and services source the products centrally but want the vendors to supply
the products locally. These organisations are inclined to deal with only such
---------------------- supplying organisations that are prepared to make substantial global investments.
---------------------- Therefore, understanding the implications of developing global service
will be a very critical area for sellers. It is therefore not wise to conclude that
---------------------- going global is to scaling up national level KAM programs. To service such
---------------------- global organisations the companies therefore need to develop a sales force
with global outlook dedicated to support key accounts. Since the operations
---------------------- would have international implications involving different countries therefore
understanding the local country regulations, market conditions cultures and
---------------------- competitive situations in different markets is a must. This is definitely going to
---------------------- make the key account management a very complex and complicated task.
The third trend is increased use of the internet. The internet has the
----------------------
potential to redefine interactivity in various stages of buyer-seller transactions.
---------------------- For example, customer can now use the internet to access any information that is

258 Sales and Distribution Management

stored on-line by the seller. In addition they can also place orders electronically Notes
and monitor the entire order cycle. Further the after sales service can also be
provided effectively over the internet. Seller will need to develop skills and ----------------------
technologies needed to harness the power of the internet to provide better service
to their key accounts on a timely and cost-effective basis. This does not mean ----------------------
that the role of personal selling will diminish in the future, but its scope will ----------------------
significantly be redefined. Sellers will need to recognise their selling efforts to
strike the right balance between the new modes of interaction and conventional ----------------------
person-to-person interactions.
----------------------
Lastly, recent advances in the power of computing hardware and software
and the availability of communications technologies have already had a ----------------------
significant impact on sales force management. Comprehensive automation
----------------------
solutions are now available that allow seller to link their marketing, sales and
service, operations. Using these systems seller can provide integrated services ----------------------
to manage customer through all stages of the purchase cycle.
----------------------
Each of these trends places new challenges on KAM programs. Seller
have new investment opportunities with customers, but these trends make costs ----------------------
and benefits more difficult to evaluate and predict. This will further compound
coordination problems and require more sophisticated organisational structures, ----------------------
making KAM programs more complex and challenging to manage.
----------------------
13.8 BENEFITS OF KEY ACCOUNT MANAGEMENT ----------------------

●● Increase sales effectiveness by pursuing high potential accounts and ----------------------

opportunities.
----------------------
●● Increase market share and revenue within existing accounts.
●● Increase profitability through development of the appropriate product and ----------------------
service offering for the customer. ----------------------
●● Provide opportunities to contribute to the success of the customer.
----------------------
●● Improve customer retention through stronger relationships and increased
client satisfaction. ----------------------
●● Facilitate the allocation of marketing and sales resources. ----------------------
Benefiting through KAM – TATA TELECOM LTD. – A Case Study
----------------------
Factory : Gandhinagar
Corporate : New Delhi ----------------------

Regd. Office : Mumbai ----------------------

Set up : 4 RO’s and 25 BO’s ----------------------
Product : EPABX’s, KTS, Radios, CTI Solutions, Telephones
----------------------
and Allied products.
----------------------

----------------------

Key Account Management 259

 Notes The Selling Process
KTS Other products
----------------------
Through Distribution n/w Direct Sales Team
----------------------
Level – 2 n/w Key Account interface
---------------------- (Both Sales and Services)
---------------------- Agreement to pass on orders Managing Key A/c’s

---------------------- From Key A/C’s to the Co. at Corporate level

Pro Distributor Policy Development Flexible Policy for Key Accounts
----------------------
Responsibility
----------------------
Regional – CIC Regional – KAI
---------------------- Corporate – Sr. G.M. Channel Corporate – GM
---------------------- Till 1996-97 the organisation had a conventional sales approach and had a
market share of 70% (declining @ 3.5% p.a.) and a turnover of 110 crores
---------------------- (increasing @ 5% p.a.)
---------------------- During the year 1997, an internal and external assessment was done by a
consulting firm.
----------------------
Result – The new process in place, which is pro active to market, changes.
----------------------
1997-98 – Market Share – 80%
---------------------- Turnover – 143 crores.
---------------------- Key Accounts Management is the driving force behind many successful
organisations.
----------------------

---------------------- Check your Progress 3

----------------------
State True or False.
---------------------- 1. One of the benefits of KAM is increasing sales effectiveness by
pursuing high potential accounts and opportunities.
----------------------

----------------------
Activity 1
----------------------

---------------------- Design a key account management strategy for selling of office furniture to
Ministry of Finance, Government of India.
----------------------

----------------------

----------------------

----------------------

260 Sales and Distribution Management

 Summary Notes

●● Key Account Management (KAM) is one of the approaches calling for ----------------------
customer focus of such customers which are strategically important for the
----------------------
organisation. Key Account Management (KAM) is a natural development
of customer focus and relationship marketing in business-to-business ----------------------
markets. The need for Key Accounts Management (KAM) arises from
the consolidation of buying points, in industrial and retail organisations. ----------------------
●● There are various objectives of Key Account Management like Improved ----------------------
customer insight understanding of customer needs, understanding of usage
patterns, better product knowledge, better access to marketing material, ----------------------
better competitor information, improved performance information,
----------------------
measurable goals, and link between Business plan strategy and customer
strategy for sales and marketing organisations. For the customers the ----------------------
benefits are better product information, better information on services,
better understanding of reimbursement, better product benefit knowledge, ----------------------
ability to raise individual profile and increased end users.
----------------------
●● There are six states in key customer management. They are trade channel
mapping, developing key account profiles, getting to know the buyer, ----------------------
account penetration and development, setting key account sales objectives
----------------------
and key account negotiating.
●● Compared to the past the changes that are taking place in word economy ----------------------
are happening at mind boggling place. The world is reduced to a seamless
market. Therefore, in the past where one country would look to be a large ----------------------
market, today the world looks like a big village. Thanks to the technology ----------------------
which has increased interaction of organisations with their customers,
globalisation of customers, increase in sales, marketing and service ----------------------
efficiencies using automation tools.
----------------------
●● The trends challenging KAM are supplier base reduction, customers
focused on buying the same components or parts from fewer suppliers. ----------------------
The second trend is emergence of global customers. The third trend is
increased use of the internet. The internet has the potential to redefine ----------------------
interactivity in various stages of buyer-seller transactions. Lastly, recent ----------------------
advances in the power of computing hardware and software and the
availability of communications technologies. ----------------------
●● The benefits of key account management are increase sales effectiveness ----------------------
by pursuing high potential accounts and opportunities, increase market
share and revenue within existing accounts, increase profitability ----------------------
through development of the appropriate product and service offering for
the customer, provide opportunities to contribute to the success of the ----------------------
customer, improve customer retention through stronger relationships and ----------------------
increased client satisfaction that facilitate the allocation of marketing and
sales resources ----------------------

----------------------

Key Account Management 261

 Notes Keywords
----------------------
●● Paradigm: One that serves as a pattern or model.
---------------------- ●● Global customers: Organisations having presence in many countries.
●● Market environment: Refers to conditions prevailing in the marketing
----------------------
environment.
---------------------- ●● Entrepreneurially owned: Organisation owned singularly by an individual.
----------------------
Self-Assessment Questions
----------------------
1. What do you understand by the term key account management? Discuss
---------------------- in details.
---------------------- 2. Discuss the six stage model as developed by Millar and Wilson.
3. State the characteristics of key accounts.
---------------------- 4. What are the objectives of key account management?
---------------------- 5. Discuss future trends and implications of key account management.
6. What are the benefits of key account management?
----------------------

---------------------- Answers to Check your Progress

---------------------- Check your Progress 1
---------------------- Fill in the blanks.
1. Key Account Management is an organisational process that assumes that
----------------------
relationships are dynamic and not static and that the relationships evolve
---------------------- over period of time.
Check your Progress 2
----------------------
State True or False.
----------------------
1. False
----------------------
Check your Progress 3
---------------------- State True or False.
---------------------- 1. True

----------------------
Suggested Reading
----------------------
1. Bowersox, Logistical Management: The Integrated Supply Chain Process.
---------------------- 2. Calvin, Robert J. Sales Management.
---------------------- 3. Chopra, Supply Chain Management.
4. Ghoshal, World Class in India. Penguin India.
----------------------
5. Lamba, A.J. The Art of Retailing.
---------------------- 6. Scheuing, Kurtz, Johnson. Sales Management: Concepts, Practices and
Cases.
262 Sales and Distribution Management
 PART - II
DISTRIBUTION MANAGEMENT
Introduction to Distribution Management
UNIT

1
Structure:

1.1 Introduction
1.2 Understanding Distribution Channels
1.3 Scope of Distribution Channels
1.4 Functions of Distribution Channels
1.5 Multiple Channels of Distribution
1.6 Types of Channel Members
1.7 Benefits offered by Channel Members
1.8 Physical Distribution Management (PDM)
1.9 Systems or Total Approach to PDM
1.10 Distribution Resource Planning (DRP)
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Introduction to Distribution Management 265

 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Explain the meaning of distribution channels
----------------------
• Outline the scope of distribution channels
---------------------- • Discuss functions of distribution channels
---------------------- • List the benefits offered by channel members
---------------------- • Define the concept of Physical Distribution Management

---------------------- • State the meaning of Distribution Resource Planning

----------------------
1.1 INTRODUCTION
----------------------
Marketing channels always emerge from the demands of a marketplace.
----------------------
However, markets and their needs are always changing. It’s true, that marketing
---------------------- channels operate in a state of continuous evolution and transformation.
Channels of distribution must constantly adapt in response to changes in the
---------------------- global marketplace. Remember - Nothing endures but change.
---------------------- At the beginning of the nineteenth century, most goods were produced
on farms. The point-of-production had to be close to the point of-consumption.
---------------------- But soon afterward, the Industrial Revolution prompted a major shift in the
American populace from rural communities to emerging cities. These urban
----------------------
centers produced markets that needed larger and more diverse bundles of goods
---------------------- and services. At the same time, burgeoning industrialisation required a larger
assortment of production resources, ranging from raw materials to machinery
---------------------- parts. The transportation, assembly and reshipment of these goods emerged as
a critical part of production.
----------------------
During the 1940s, the U.S. gross national product (GNP) grew at an
---------------------- extraordinary rate. After World War II ended, inventories of goods began to
stockpile as market demand leveled off. The costs of dormant inventories-
----------------------
goods not immediately convertible into cash-rose exponentially. Advancements
---------------------- in production and distribution methods now focused on cost-containment,
inventory control and asset management. Marketers soon shifted from a
---------------------- production to a sales orientation. Attitudes like “a good product will sell itself”
or “we can sell whatever we make” receded. Marketers confronted the need to
----------------------
expand sales and advertising expenditures to convince individual customers
---------------------- to buy their specific brands. The classic four Ps classification of marketing
mix variables-product, price, promotion and place-emerged as a marketing
---------------------- principle. Distribution issues were relegated to the place domain.
---------------------- This new selling orientation inspired the development of new
intermediaries, as manufacturers sought new ways to expand market coverage
---------------------- to an increasingly mobile population. The selling orientation required that more

266 Sales and Distribution Management

intimate access to be established to a more diversified marketplace now. In Notes
response, wholesale and retail intermediaries evolved to reach consumers living
in rural areas, newly emerging suburbs and densely populated urban centers. ----------------------
In 1951 marketers first embraced the marketing concept. The marketing ----------------------
concept decrees that customers should be the focal point of all decisions about
marketing mix variables. It was accepted that organisations should only make ----------------------
what they could market instead of trying to market whatever they could make.
----------------------
This new perspective had a phenomenal impact on channels of distribution.
Suppliers, manufacturers, wholesalers and retailers were all forced to adopt a ----------------------
business orientation initiated by the needs and expectations of each channel
member’s customer. ----------------------
The marketing concept quickly reinforced the importance of obtaining ----------------------
and then applying customer information when planning production, distribution
and selling strategies. Sensitivity to customer needs became firmly embedded as ----------------------
a guiding principle by which emerging market requirements would be satisfied.
----------------------
The marketing concept remained the cornerstone of marketing channel strategy.
----------------------
1.2 UNDERSTANDING DISTRIBUTION CHANNELS
----------------------
Distribution channels move products and services from businesses to
----------------------
consumers and to other businesses. Distribution channels are also known as
Marketing channels. The channels of distribution consist of a set of interdependent ----------------------
organisations-such as wholesalers, retailers and sales agents-involved in making
a product or service available for use or consumption. Distribution channels are ----------------------
just one component of the overall concept of distribution networks, which are
----------------------
the real, tangible systems of interconnected sources and destinations through
which products pass on their way to final consumers. A basic distribution ----------------------
network consists of two parts:
----------------------
1) A set of locations that store, ship or receive materials (such as factories,
warehouses, retail outlets); and ----------------------
2) A set of routes (land, sea, air, satellite, cable, Internet) that connect these
----------------------
locations. Distribution networks may be classified as either simple or
complex. ----------------------
A simple distribution network is one that consists of only a single source ----------------------
of supply, a single source of demand or both, along with fixed transportation
routes connecting that source with other parts of the network. In a simple ----------------------
distribution network, the major decisions for managers to make include when
and how much to order and ship based on internal purchasing and inventory ----------------------
considerations. ----------------------
A distribution channel is composed of three structures:
----------------------
1) Manufacturer
----------------------
The manufacturer focuses on the development and production of products
and originates the distribution process. ----------------------

Introduction to Distribution Management 267

 Notes 2) Distributor
In between the two lies a process called distribution. One involved in the
----------------------
distribution process is labeled a “distributor.” Distributor can be defined
---------------------- as,

---------------------- “A business that does not manufacture its own products but purchases and
resells these products”.
----------------------
Since the distributors are expected to meet the demands of the retailers,
---------------------- they always maintain stocks, which are generally paid, to replenish the
stocks as required by the retailers.
----------------------
3) Retailer
----------------------
The terminal point in the channel is the retailer who sells goods and
---------------------- services directly to the customer for their personal, non-business use.

---------------------- Thanks to technology and evolution of various alternative forms of

distribution such as catalog sales, mail order, internet etc have made it difficult
---------------------- to define the term distribution and the distribution process.

---------------------- The term distribution channel is often used interchangeably with “sales
channel” or “marketing channel”, i.e. in addition to distribution or selling
---------------------- of products they carry out lot of marketing functions negotiation, sales
promotion, take the title of goods, give feedback to the organisation, market
----------------------
development etc.
---------------------- Therefore it can be said that distributors include “All enterprises
---------------------- that sell products to retailers and other merchants, industrial, institutional,
and commercial users-but do not sell in significant amounts to the ultimate
---------------------- customer”.

----------------------
Check your Progress 1
----------------------

---------------------- Fill in the blanks.

1. Distribution channels are also known as ______________.
----------------------

----------------------
1.3 SCOPE OF DISTRIBUTION CHANNELS
----------------------
According to the above definition, most companies that are involved with
---------------------- the disbursement of raw materials and finished products, belong in one sense or
another, to the distribution industry. Distribution involves a number of activities
----------------------
centered around physical flow of goods and information. At one time the term
---------------------- distribution applied only to the outbound side of supply chain management, but
it now includes both inbound and outbound. Management of the inbound flow
---------------------- involves these elements:
---------------------- ●● Material planning and control

268 Sales and Distribution Management

●● Purchasing Notes
●● Receiving
----------------------
●● Physical management of materials via warehousing and storage
●● Materials handling ----------------------
Management of the outbound flow involves these elements: ----------------------
●● Order processing ----------------------
●● Warehousing and storage
----------------------
●● Finished goods management
●● Material handling and packaging ----------------------
●● Shipping ----------------------
●● Transportation
----------------------
Distribution channels are formed to solve three critical distribution
problems: functional performance, reduced complexity, and specialisation. ----------------------
The central focus of distribution is to increase the efficiency of time, place ----------------------
and delivery utility. When demand and product availability are immediate, the
producer can perform the exchange and delivery functions itself. However, as ----------------------
the number of producers grows and the geographical dispersion of the customer
----------------------
base expands, the need for both internal and external intermediaries who can
facilitate the flow of products, services and information via a distribution ----------------------
process increases.
----------------------
Distribution management can also decrease overall channel complexity
through sorting and assistance in routinisation. Sorting is the group of activities ----------------------
associated with transforming products acquired from manufacturers into the
assortments and quantities demanded in the marketplace. Routinisation refers ----------------------
to the policies and procedures providing common goals, channel arrangements,
----------------------
expectations and mechanisms to facilitate efficient transactions
----------------------
Check your Progress 2
----------------------

State True or False. ----------------------

1. Distribution channels are formed to solve three critical distribution ----------------------
problems, viz. functional performance, reduced complexity and
specialisation. ----------------------

----------------------
1.4 FUNCTIONS OF DISTRIBUTION CHANNELS ----------------------
There are a number of critical functions performed by the channel ----------------------
distributor. Ross describes these functions as:
----------------------
1. Product acquisition : This means acquiring products in a finished or semi-
finished state from either a manufacturer or through another distributor ----------------------

Introduction to Distribution Management 269

 Notes that is higher up in the supply channel. These functions can be performed
by independent channel intermediaries or by the distribution facilities of
---------------------- manufacturing companies.
---------------------- • Product movement: This implies significant effort spend on
product movement up or down the supply channel.
----------------------
• Product transaction: Distributors can be characterised as selling
---------------------- products in bulk quantities solely for the purpose of resale or
---------------------- business use. Downstream businesses will then sell these products
to other distributors or retailers who will sell them directly to the
---------------------- end customer or to manufacturers who will consume the material/
components in their own production processes.
----------------------
• Sorting: Is the function of physically separating a heterogeneous
---------------------- group of items into homogeneous subgroups. This includes grading
---------------------- and grouping individual items into an inventory lot by quality or
eliminating defects from the lot.
----------------------
• Accumulating: Is the function of combining homogeneous stocks
---------------------- of products into larger groups of supply.
---------------------- • Allocation: Is the function of breaking down large lots of products
into smaller salable units.
----------------------
• Assorting: Is the function of mixing similar or functionally related
---------------------- items into assortments to meet customer demand. For example,
---------------------- putting items into kit form.

---------------------- • Bulk breaking: This is one of the fundamental functions of

distribution. Manufacturers normally produce large quantities of
---------------------- a limited number of products. However, retailers normally require
smaller quantities of multiple products. When the distribution
---------------------- function handles this requirement, it keeps the manufacturer from
---------------------- having to break bulk and repackage its product to fit individual
requirements. Lean manufacturing and JIT techniques are
---------------------- continuously seeking ways to reduce lot sizes, so this function
enhances that goal.
----------------------
Following are the separate elements contained within the abaove critical
---------------------- functions of distribution:
---------------------- 2. Selling and promoting : This function is very important to manufacturers.
---------------------- One strategy involves the use of distribution channels to carry out the
responsibilities of product deployment. In addition to being marketing
---------------------- experts in their industry, distribution firms usually have direct-selling
---------------------- organisations and a detailed knowledge of their customers and their
expectations. The manufacturer utilising this distributor can then
---------------------- tap into these resources. Also, because of the scale of the distributing

270 Sales and Distribution Management

 firm’s operations and its specialised skill in channel management, it Notes
can significantly improve the time, place, and possession utilities by
housing inventory closer to the market. These advantages mean that the ----------------------
manufacturer can reach many small, distant customers at a relatively low ----------------------
cost, thus allowing the manufacturer to focus its expenditures on product
development and its core production processes. ----------------------
3. Buying and building product assortments: This is an extremely ----------------------
important function for retailers. Most retailers prefer to deal with
few suppliers providing a wide assortment of products that fit their ----------------------
merchandising strategy rather than many with limited product lines. This, ----------------------
of course, saves on purchasing, transportation and merchandising costs.
Distribution firms have the ability to bring together related products from ----------------------
multiple manufacturers and assemble the right combination of these ----------------------
products in quantities that meet the retailer’s requirements in a cost-
efficient manner. ----------------------

4. Value-added processing: Postponement specifies that products should be ----------------------

kept at the highest possible level in the pipeline in large, generic quantities
----------------------
that can be customised into their final form as close as possible to the
actual final sale. The distributor can facilitate this process by performing ----------------------
sorting, labeling, blending, kitting, packaging and light final assembly at
----------------------
one or more points within the supply channel. This significantly reduces
end-product obsolescence and minimises the risk inherent with carrying ----------------------
finished goods inventory.
----------------------
5. Transportation: The movement of goods from the manufacturer to the
retailer is a critical function of distribution. Delivery encompasses those ----------------------
activities that are necessary to ensure that the right product is available ----------------------
to the customer at the right time and right place. This frequently means
that a structure of central, branch and field warehouses, geographically ----------------------
situated in the appropriate locations, are needed to achieve optimum
----------------------
customer service. Transportation’s goal is to ensure that goods are
positioned properly in the channel in a quick, cost-effective and ----------------------
consistent manner.
----------------------
6. Warehousing: Warehousing exists to provide access to sufficient stock in
order to satisfy anticipated customer requirements and to act as a buffer ----------------------
against supply and demand uncertainties. Since demand is often located ----------------------
far from the source (manufacturer), warehousing can provide a wide range
of marketplaces that manufacturers, functioning independently, could not ----------------------
penetrate. ----------------------
7. Marketing information: The distribution channel also can provide ----------------------
information regarding product, marketplace issues and competitors’
activities in a relatively short time. ----------------------

Introduction to Distribution Management 271

 Notes Distribution decisions focus on establishing a system that, at its basic
level, allows customers to gain access and purchase a marketers product.
---------------------- However, marketers may find that getting to the point at which a customer can
acquire a product is complicated, time consuming and expensive. The bottom
---------------------- line is a marketer’s distribution system must be both effective (i.e., delivers a
---------------------- good or service to the right place, in the right amount, in the right condition) and
efficient (i.e., delivers at the right time and for the right cost). Yet, as we will
---------------------- see, achieving these goals takes considerable effort.
---------------------- Distribution decisions are relevant for nearly all types of products. While it
is easy to see how distribution decisions impact physical goods, such as laundry
---------------------- detergent or truck parts, distribution is equally important for digital goods (e.g.,
television programming, downloadable music) and services (e.g., income tax
----------------------
services). In fact, while the Internet is playing a major role in changing product
---------------------- distribution and is perceived to offer more opportunities for reaching customers,
online marketers still face the same distribution issues and obstacles as those
---------------------- faced by offline marketers.
---------------------- In order to facilitate an effective and efficient distribution system, many
decisions must be made including (but certainly not limited to):
----------------------
●● Assessing the best distribution channels for getting products to customers.
---------------------- ●● Determining whether a reseller network is needed to assist in the
distribution process.
----------------------
●● Arranging a reliable ordering system that allows customers to place
---------------------- orders.
---------------------- ●● Creating a delivery system for transporting the product to the customer.
●● For tangible and digital goods, establishing facilities for product storage.
----------------------
As the supply chain grows more complex, costs and inefficiencies
---------------------- multiply in the channel. In response, some channels add or contain partners
that specialise in one or more of the elements of distribution, such as exchange
---------------------- or warehousing. Specialisation then improves the channel by increasing the
---------------------- velocity of goods and value-added services and reducing costs associated with
selling, transportation, carrying inventory, warehousing, order processing and
---------------------- credit.
----------------------
1.5 MULTIPLE CHANNELS OF DISTRIBUTION
----------------------
For many products and services, their manufacturers or providers use
---------------------- multiple channels of distribution. A personal computer, for example, might be
bought directly from the manufacturer, either over the telephone, direct mail
---------------------- or the Internet or through several kinds of retailers, including independent
---------------------- computer stores, franchised computer stores and department stores. In addition,
large and small businesses may make their purchases through other outlets.
---------------------- Channel structures range from two to five levels. The simplest is a
---------------------- two-level structure in which goods and services move directly from the

272 Sales and Distribution Management

manufacturer or provider to the consumer. Two-level structures occur in Notes
some industries where consumers are able to order products directly from
the manufacturer and the manufacturer fulfills those orders through its own ----------------------
physical distribution system. In a three-level channel structure retailers serve as
intermediaries between consumers and manufacturers. Retailers order products ----------------------
directly from the manufacturer, then sell those products directly to the consumer. ----------------------
A fourth level is added when manufacturers sell to wholesalers rather than
----------------------
to retailers. In a four-level structure, retailers order goods from wholesalers
rather than manufacturers. ----------------------
Finally, a manufacturer’s agent can serve as an intermediary between
----------------------
the manufacturer and its wholesalers, creating a five-level channel structure
consisting of the manufacturer, agent, wholesale, retail and consumer levels. ----------------------
A five-level channel structure might also consist of the manufacturer,
----------------------
wholesale, jobber, retail and consumer levels, whereby jobbers service smaller
retailers not covered by the large wholesalers in the industry. ----------------------
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------
Fig. 1.1 : Multiple Channels & distribution ----------------------

1.6 TYPES OF CHANNEL MEMBERS ----------------------

Channel activities may be carried out by the marketer or the marketer may ----------------------
seek specialist organisations to assist with certain functions. We can classify ----------------------
specialist organisations into two broad categories: resellers and speciality
service firms. ----------------------

Introduction to Distribution Management 273

 Notes Resellers
These organisations, also known within some industries as intermediaries,
----------------------
distributors or dealers, generally purchase or take ownership of products from
---------------------- the marketing company with the intention of selling to others. If a marketer
utilizes multiple resellers within its distribution channel strategy the collection
---------------------- of resellers is termed a reseller network. These organisations can be classified
into several sub-categories including:
----------------------
●● Retailers - Organisations that sell products directly to final consumers.
----------------------
●● Wholesalers - Organisations that purchase products from suppliers, such
---------------------- as manufacturers or other wholesalers and in turn sell these to other
resellers, such as retailers or other wholesalers.
----------------------
●● Industrial Distributors - Firms that work mainly in the business-to-
---------------------- business market selling products obtained from industrial suppliers.

---------------------- Speciality Service Firms

These are organisations that provide additional services to help with the
---------------------- exchange of products but generally do not purchase the product (i.e., do not
---------------------- take ownership of the product):
●● Agents and Brokers - Organisations that mainly work to bring suppliers
----------------------
and buyers together in exchange for a fee.
---------------------- ●● Distribution Service Firms - Offer services aiding in the movement
of products such as assistance with transportation, storage and order
----------------------
processing.
---------------------- ●● Others - This category includes firms that provide additional services
---------------------- to aid in the distribution process such as insurance companies and firms
offering transportation routing assistance.
----------------------
1.7 BENEFITS OFFERED BY CHANNEL MEMBERS
----------------------
1. Cost Savings in Specialisation
----------------------
By being their respective trades over a period of time the members of the
---------------------- distribution channel become specialists of the trade. Organisations cannot
supply directly to the consumers, since it proves very costly and less
----------------------
effective. They need to have services of middlemen who as specialists
---------------------- can often perform their tasks and functions at costs lower than that of the
companies who themselves do not have distribution experience.
----------------------
2. Reduce Exchange Time
---------------------- Not only channel members are able to reduce distribution costs by
---------------------- being experienced at what they do but they also perform their job more
rapidly resulting in faster product delivery. For instance, consider what
---------------------- would happen if a grocery store received direct shipment from every
manufacturer that sells products in the store. This delivery system would
---------------------- be chaotic as hundreds of trucks line up each day to make deliveries, many

274 Sales and Distribution Management

 of which would consist of only a few boxes. On a busy day a truck may Notes
sit for hours waiting for space so they can unload their products. Instead,
a better distribution scheme may have the grocery store purchasing ----------------------
its supplies from a grocery wholesaler that has its own warehouse for
handling simultaneous shipments from a large number of suppliers. The ----------------------
wholesaler will distribute to the store in the quantities the store needs, on ----------------------
a schedule that works for the store and often in a single truck, all of which
speeds up the time it takes to get the product on the store’s shelves. ----------------------
3. Add Convenience and value to the customers ----------------------
Marketers have to understand what customers want in their shopping
----------------------
experience, resellers, whether the distributor is selling to the retailer or
the retailer is selling to the consumer, channel of distribution serves two ----------------------
very important needs:
----------------------
1) They give customers the products they want by purchasing from
many suppliers. In the process they are carrying out the assortment ----------------------
and accumulation.
----------------------
2) They make it convenient to purchase by making products available
in single location. In the process, they are providing the place utility ----------------------
to the consumers.
----------------------
Intermediaries by bridging the gap between the assortment of goods and
services generated by producers and those in demand from consumers ----------------------
and necessarily providing value to their customers/consumers.
----------------------
4. Resellers Sell Smaller Quantities
----------------------
Distributors are appointed to cater to the needs of the customers/retailers
in a pre-defined area which comprises of large number of retailers. To ----------------------
cater to such number of customers, distributors need to stock goods in
large quantities and in all the assortment and varieties of the company’s ----------------------
products. On the other hand since the consumers buy in smaller quantities
----------------------
of one or two pieces frequently from the retailers, retailers in turn buy
smaller quantities frequently from the distributors. ----------------------
Hence to meet the frequent requirements of the retailers, distributors need
----------------------
to buy larger quantities from the manufacturers to meet the daily market
demand for the company’s products. The process of buying products in ----------------------
large quantities and selling them in smaller quantities is known as breaking
the bulk. The ability of intermediaries to purchase large quantities and to ----------------------
resell them in smaller quantities, not only makes these products available
----------------------
to those wanting smaller quantities but the reseller is able to pass along
to their customers a significant portion of the cost savings gained by ----------------------
purchasing in large volume.
----------------------
5. Contribute in generating sales
The distributors are the extended arm of the company. They represent the ----------------------
company in distant markets. Hence they become the front to the operations ----------------------
of the company and fulfill the market demand for the company’s products

Introduction to Distribution Management 275

 Notes in their area of operation. In addition to just distribution the products,
they also take initiative in persuading the retailers in selling more of
---------------------- the company’s products. it is observed the more dynamic distributors
contribute from their own profits in arranging special product displays
---------------------- and making use of other promotional means to increase the sales.
---------------------- 6. Financial Support
---------------------- The distributors by investing in the products of the organisation and
paying to the company within the stipulated time, in a way finance the
---------------------- operations of the company. On the other hand, they on their own offer
credit facilities to the retailers either by giving more days of credit or by
---------------------- exchanging the goods in case, there is no movement of the product at the
---------------------- retail level and remains unsold with the retailers.
7. Provide Feedback and Information
----------------------
Companies depend on distributors to provide information that can help
---------------------- to improve the product. The distributors have close association with
retailers who in turn have close relationships with their consumers. The
---------------------- distributors through the retailers get the first hand information about the
changing tastes and preferences of the consumers, changing trends in
----------------------
the lifestyles, new product introductions by the competitors and in all
---------------------- anything and everything about the marketing environment which enables
the manufacturers understand the situation at the ground level and take
---------------------- immediate proactive decisions. The feedback can be obtained either
through surveys or interviews with reseller’s employees or by requesting
----------------------
the reseller to allow the marketer to survey customers.
---------------------- 8. Aid in Search Process
---------------------- The use of intermediaries also aids the search processes of both buyers
and sellers. Producers are searching to determine their customers’ needs,
---------------------- while customers are searching for certain products and services. A degree
of uncertainty in both search processes can be reduced by using channels
----------------------
of distribution.
---------------------- For example, consumers are more likely to find what they are looking
for when they shop at wholesale or retail institutions organised by
----------------------
separate lines of trade, such as grocery, hardware and clothing stores.
---------------------- In addition, producers can make some of their commonly used products
more widely available by placing them in many different retail outlets, so
---------------------- that consumers are more likely to find them at the right time.
---------------------- Distribution Channel Strategies
Channel strategy is all about the ‘trading channel’ or ‘transactional channel’ that
---------------------- a product follows after manufacturing to the point of consumption. This channel
---------------------- is also sometimes described in industry as the ‘channel of the ownership’ or
‘channel of the title’ of the product to the market.
---------------------- This distribution channel strategy is the commercial channel through which
---------------------- a product’s ownership goes. It is in this trading channel that supply chain
collaborative relationships are formed.
276 Sales and Distribution Management
Channel strategy will largely be influenced by a business’s market coverage Notes
objectives, which in turn is derived from a business’s long-term strategic
objectives. The various distribution strategies are: ----------------------
a) Intensive distribution ----------------------
This strategy is used for distributing mass consumer products/fast moving ----------------------
consumer products like biscuits, cigarettes, soft drinks, milk etc. Under
the intensive distribution channel strategy, goods are made available ----------------------
widely and within the arms length of the consumer. Therefore the
----------------------
distribution channel in case of intensive distribution is long and comprises
of distributors, wholesalers, retailers and finally the consumers. ----------------------
b) Selective distribution ----------------------
This strategy is required in case of relatively high value branded ----------------------
products that enjoy some exclusivity. Selective distribution strategies
are often used for branded products in the apparel, electronics industry ----------------------
and appliances etc. such as Raymonds, Loui Philips, Nike, Sony, Lego,
Barbie etc. Selective distribution is applied to products that the buying ----------------------
public is prepared to travel to buy and does not have to be available in a ----------------------
convenience store.
----------------------
Other examples of products that are distributed by means of a selective
distribution strategy are the so-called white goods such as washing machines ----------------------
and fridges. Selective distribution strategies also have intermediaries but
the length of the channel is relatively shorter as compared to the channel ----------------------
in intensive distribution. Here we typically have a dealer selling the goods ----------------------
who also happens to sell directly to the consumers and hence from the
consumers point of view can be called as retailer. ----------------------
c) Exclusive distribution ----------------------
This strategy can be used for the products which are exclusive in nature. ----------------------
In case of such products the customers are prepared to wait. Such
products are generally associated with the status and serve as status ----------------------
symbols. The examples of these products can be Mercedes Benz, Rolls
----------------------
Royce Cars etc.
----------------------
Check your Progress 3 ----------------------

Fill in the blanks. ----------------------

1. The distributors are the ______________ of the company. ----------------------
2. Companies depend on distributors to _____________ that can help to ----------------------
improve the product.
----------------------

----------------------

Introduction to Distribution Management 277

 Notes 1.8 PHYSICAL DISTRIBUTION MANAGEMENT (PDM)
---------------------- A company organises a channel or network of intermediaries who take
responsibility for the management of goods, as they move from the producer to
----------------------
the consumer. Needless to state each channel member must be carefully selected.
---------------------- Having established such a network, the organisation must next consider how
these goods can be efficiently transferred, in the physical sense, from the place
---------------------- of manufacture to the place of consumption.
---------------------- Physical distribution management (PDM) is concerned with making the
product available at the right time and at the right place has always been thought
---------------------- of as being the least dynamic of the ‘4Ps’. Traditionally marketers focused more
---------------------- on product. price and promotion and the fourth P, the Place was relegated to
the back. It is now realised that in spite of having the best product at the most
---------------------- competitive price and with strong consumer pull, if the product is not available
in the arms length of the consumers then the entire marketing effort goes down
---------------------- the drain.
---------------------- Hence it is now increasingly recognised that product availability at the place
of consumption can result in consumer consuming the product and patronising
---------------------- it on a continuous basis. Therefore Physical Distribution Management has now
---------------------- come to occupy the most critical place in the overall marketing mix. Marketing
management realised that distribution could be organised in a scientific way so the
---------------------- concept of business logistics developed, focusing attention on and increasing the
importance of PDM. As marketing analysis became increasingly sophisticated,
---------------------- managers became more aware of the costs of physical distribution. Needless to
---------------------- mention the primary aim of business is to provide customer satisfaction which
will alone result in generation in organisational profits.
---------------------- The marketing environment is changing at a mind boggling pace resulting
---------------------- in a very vibrant consumer, whose needs are also changing at every moment.
This has resulted in the life cycle of the products, calling for more and more
---------------------- innovation and introduction of newer and newer products each coming day. As
a result like in the past, the manufacturers can no longer afford to hold huge
---------------------- inventories. This is putting more pressure on the manufacturers to practice the
---------------------- PDM to its logical conclusion. Therefore any cost cutting in PDM may result in
customer dissatisfaction, similarly, it does not make economic sense to provide
---------------------- a level of service that is not really required by the customer and leads to an
erosion of profits.
----------------------
Logistical issues facing physical distribution managers today is the
---------------------- increasing application by customers of Just-in-time management techniques or
lean manufacturing tresses that companies who demand ‘JIT’ service from their
----------------------
suppliers carry only a few hours stock of material and components and rely
---------------------- totally on supplier service to keep their production running. This demanding
distribution system is supported by company expediters whose task it is to
---------------------- ‘chase’ the progress of orders and deliveries, not only with immediate suppliers,
but right along the chain of supply (called ‘supply chain integration’).
----------------------

278 Sales and Distribution Management

 Lean manufacturing has been widely adopted throughout the automotive Notes
industry here companies possess the necessary purchasing power to impose
such delivery conditions on their suppliers. Their large purchasing power also ----------------------
necessitates stringent financial controls, and huge financial savings can be made
in the reduction or even elimination of stockholding costs where this method of ----------------------
manufacturing is employed. To think of the logistical process merely in terms
----------------------
of transportation is too much a narrow view.
Physical distribution management (PDM) is concerned with the flow of ----------------------
goods from the receipt of an order until the goods are delivered to the customer.
In addition to transportation, PDM involves close liaison with production ----------------------
planning, purchasing, order processing, material control and warehousing. All ----------------------
these areas must be managed so that they interact efficiently with each other
to provide the level of service that the customer demands and at a cost that the ----------------------
company can afford.
----------------------
Components of Physical distribution Management
1. Order processing. ----------------------
2. Stock levels or inventory. ----------------------
3. Warehousing.
4. Transportation. ----------------------
PDM is concerned with ensuring that the individual efforts that go to ----------------------
make up the distributive function are optimised so that a common objective is
realised. This is called the ‘systems approach’ to distribution management and ----------------------
a major feature of PDM is that these functions be integrated because:
----------------------
1. The success of an efficient distribution system relies on integration of
effort. An overall service objective can be achieved, even though it may ----------------------
appear that some individual components of the system are not performing
at maximum efficiency. ----------------------
2. It is never possible to provide maximum service at a minimum cost. The ----------------------
higher the level of service required by the customer, the higher the cost.
Having decided on the necessary level of service, a company must then ----------------------
consider ways of minimising costs, which should never be at the expense
----------------------
of or result in, a reduction of the predetermined service level.
The Distribution Process ----------------------
The distribution process begins when a supplier receives an order from a ----------------------
customer. The customer is not too concerned with the design of the supplier’s
distributive system, nor in any supply problems. In practical terms, the customer ----------------------
is only concerned with the efficiency of the supplier’s distribution. That is, the
likelihood of receiving goods at the time requested. Lead-time is the period of time ----------------------
that elapses between the placing of an order and receipt of the goods.
----------------------
This can vary according to the type of product and the type of market and
industry being considered. Lead-time in the shipbuilding industry can be measured ----------------------
in fractions or multiples of years, whilst in the retail sector, days and hours are
----------------------
common measures. Customers make production plans based on the lead-time
agreed when the order was placed. Customers now expect that the quotation will be ----------------------
adhered to and a late delivery is no longer acceptable in most purchasing situations.

Introduction to Distribution Management 279

 Notes 1) Order processing
Order processing is the first of the four stages in the logistical process.
----------------------
The efficiency of order processing has a direct effect on lead times. Orders
---------------------- are received from the sales team through the sales department. Many
companies establish regular supply routes that remain relatively stable
---------------------- over a period of time providing that the supplier performs satisfactorily.
Very often contracts are drawn up and repeat orders (forming part of the
----------------------
initial contract) are made at regular intervals during the contract period.
---------------------- Taken to its logical conclusion this effectively does away with ordering
and leads to what is called ‘partnership sourcing’.
----------------------
This is an agreement between the buyer and seller to supply a particular
---------------------- product or commodity as and when required without the necessity
of negotiating a new contract every time, an order is placed. Order-
---------------------- processing systems should function quickly and accurately. Other
departments in the company need to know as quickly as possible that an
----------------------
order has been placed and the customer must have rapid confirmation
---------------------- of the order’s receipt and the precise delivery time. Even before
products are manufactured and sold the level of office efficiency is a
---------------------- major contributor to a company’s image. Incorrect ‘paperwork’ and
slow reactions by the sales office are often an unrecognised source of
----------------------
ill-will between buyers and sellers.
---------------------- When buyers review their supplier’s efficiency of order, processing
is an important factor in their evaluation. A good computer system
----------------------
for order processing allows stock levels and delivery schedules to be
---------------------- automatically updated so management can rapidly obtain an accurate
view of the sales position. Accuracy is an important objective of order
---------------------- processing as are procedures that are designed to shorten the order
processing cycle.
----------------------
2) Inventory
----------------------
Inventory or stock management, is a critical area of PDM because stock
---------------------- levels have a direct effect on levels of service and customer satisfaction.
The optimum stock level is a function of the type of market in which the
---------------------- company operates. Few companies can say that they never run out of
---------------------- stock but if stock-outs happen regularly then market share will be lost to
more efficient competitors. Techniques for determining optimum stock
---------------------- levels are illustrated later in this chapter. The key lies in ascertaining the
re-order point. Carrying stock at levels below the re-order point might
---------------------- ultimately mean a stock-out, whereas too high stock levels are unnecessary
---------------------- and expensive to maintain. The stock/cost dilemma is clearly illustrated
by the systems approach to PDM that is dealt with later.
---------------------- Stocks represent opportunity costs that occur because of constant
---------------------- competition for the company’s limited resources. If the company’s
marketing strategy requires that high stock levels be maintained, this
---------------------- should be justified by a profit contribution that will exceed the extra

280 Sales and Distribution Management

 stock carrying costs. Sometimes a company may be obliged to support Notes
high stock levels because the lead-times prevalent in a given market are
particularly short. In such a case, the company must seek to reduce costs ----------------------
in other areas of the PDM ‘mix’.
----------------------
3) Warehousing
----------------------
When a firm markets goods that are ordered regularly, but in small
quantities, it becomes more logical to locate warehouses strategically ----------------------
around the country. Transportation can be carried out in bulk from the
place of manufacture to respective warehouses where stocks wait ready ----------------------
for further distribution to the customers. This system is used by large
----------------------
retail chains, except that the warehouses and transportation are owned
and operated for them by logistics experts. Levels of service will of course ----------------------
increase when numbers of warehouse locations increase, but cost will
increase accordingly. Again, an optimum strategy must be established ----------------------
that reflects the desired level of service. To summarise, factors that must
----------------------
be considered in the warehouse equation are:
a) Location of customers ----------------------
b) Size of orders ----------------------
c) Frequency of deliveries ----------------------
d) Lead times.
----------------------
4) Transportation
----------------------
Transportation usually represents the greatest distribution cost. It is usually
easy to calculate because it can be related directly to weight or numbers ----------------------
of units. Costs must be carefully controlled through the mode of transport
selected amongst alternatives and these must be constantly reviewed. ----------------------
The various transport methods available are road, rail air and by water. ----------------------
Depending on the nature of the goods, geographical area to be covered, the
lead time, the intensity of the distribution, the company should arrive at an ----------------------
ideal transportation mix whereby reducing the expenses and optimising ----------------------
the operational efficiency. The bottom line is the customer satisfaction by
making the products available at the right time and at the right place. ----------------------
The chosen transportation mode should adequately protect goods from ----------------------
damage in transit. Not only do damaged goods erode profits but frequent
claims increase insurance premiums and inconvenience customers, ----------------------
endangering future business.
----------------------
Check your Progress 4 ----------------------

----------------------
State True or False.
1. The distribution process begins when a supplier gives an order to a ----------------------
customer.
----------------------

Introduction to Distribution Management 281

 Notes 1.9 SYSTEMS OR TOTAL APPROACH TO PDM
---------------------- As mentioned earlier due to change in marketing environment
continuously, there is need to integrate marketing activities, so they combine
----------------------
into a single marketing effort. Because PDM has been neglected in the past, this
---------------------- function has been late in adopting an integrated approach towards it activities.
Managers have now become more conscious of the potential of PDM, and
---------------------- recognise that logistical systems should be designed with the total function
in mind. A fragmented or disjointed approach to PDM is a principal cause of
----------------------
failure to provide satisfactory service and causes excessive costs. Within any
---------------------- PDM structure, there is potential for conflict. Individual managers striving to
achieve their personal goals can frustrate over all PDM objectives.
----------------------
Sales and marketing management will favor high stock levels, special
---------------------- products and short production runs coupled with frequent deliveries. Against
this, the transport manager attempts to reduce costs by selecting more
---------------------- economical but slower transportation methods or by waiting until a load is
---------------------- full before making a delivery. Financial management will exercise pressure
to reduce inventory wherever possible and discourage extended warehousing
---------------------- networks. Production managers will favor long production runs and standard
products. It is possible for all these management areas to appear efficient if they
---------------------- succeed in realising their individual objectives but this might well be at the cost
---------------------- of the chosen marketing strategy not being implemented effectively.
Senior management must communicate overall distribution objectives
---------------------- to all company management and ensure that they are understood. Ideally,
---------------------- the systems approach to PDM should encompass production and production
planning, purchasing and sales forecasting. Included in the systems approach
---------------------- is the concept of total cost because individual costs are less important than the
total cost. The cost of holding high stocks may appear unreasonable but if high
---------------------- stocks provide a service that leads to higher sales and profits, then the total
---------------------- cost of all the PDM activities will have been effective. Costs are a reflection
of distribution strategy and maximum service cannot be provided at minimum
---------------------- cost.

---------------------- PDM as a cost centre is worth extensive analysis as this function is now
recognised as a valuable marketing tool in its own right. In homogeneous product
---------------------- markets, where differences in competitive prices may be negligible, service is
often the major competitive weapon. Indeed, many buyers pay a premium for
---------------------- products that are consistently delivered on time.
---------------------- Similarly, the salesperson whose company provides a comprehensive
spare parts and service facility, has a valuable negotiating tool when discussing
----------------------
prices. Distribution is not, therefore, an adjunct to marketing; it has a full place
---------------------- in the marketing mix and can be an essential component of marketing strategy.
In terms of marketing planning, a well-organised business logistics system can
---------------------- help to identify opportunities as well as supplying quantitative data that can be
used to optimise the marketing mix as a whole
----------------------

282 Sales and Distribution Management

Basic output of physical distribution systems Notes
The output from any system of physical distribution is the level of
----------------------
customer service. This is a key competitive benefit that companies can offer
existing and potential customers to retain or attract business. From a policy ----------------------
point of view, the desired level of service should be at least equivalent to that
of major competitors. The level of service is often viewed as the time it takes ----------------------
to deliver an order to a customer or the percentage of orders that can be met
----------------------
from stock. Other service elements include technical assistance, training and
after-sales services. The two most important service elements to the majority ----------------------
of firms are:
----------------------
1. Delivery - reliability and frequency.
2. Stock availability - the ability to meet orders quickly. ----------------------

----------------------
1.10 DISTRIBUTION RESOURCE PLANNING (DRP)
----------------------
The need for more detailed distribution planning led to the emergence of
distribution requirements planning (DRP) during the 1970s. DRP is a widely ----------------------
used and potentially powerful technique for helping outbound logistics systems ----------------------
to manage and minimise inbound inventories. This concept extended the time-
phase order point found in material requirements planning (MRP) logic to the ----------------------
management of channel inventory. By the 1980s DRP had become a standard
approach for planning and controlling distribution logistics activities and had ----------------------
evolved into distribution resource planning. The concept now embraces all ----------------------
business functions in the supply channel, not just inventory and logistics and is
termed DRP II. ----------------------
DRP is usually used with an MRP system, although most DRP models ----------------------
are more comprehensive than stand-alone MRP models and can schedule
transportation. The underlying rationale for DRP is to more accurately fore-cast ----------------------
demand and then use that information to develop delivery schedules. This way,
----------------------
distribution firms can minimise inbound inventory by using MRP in conjunction
with other schedules. ----------------------
One of the key elements of DRP is the DRP table, which includes the ----------------------
following elements:
●● Forecast demand for each stock-keeping unit (SKU) ----------------------

●● Current inventory level of the SKU ----------------------

●● Target safety stock ----------------------
●● Recommended replenishment quantity ----------------------
●● Replenishment lead time.
----------------------
The concept of DRP very closely mimics the logic of MRP. As with MRP,
gross requirements consist of actual customer orders, forecasted demand or ----------------------
some combination of both. Scheduled receipts are the goods, the distributor ----------------------
expects to receive from orders that already have been released, while goods that

Introduction to Distribution Management 283

 Notes already are received and entered into inventory constitute the on-hand inventory
balance. Subtracting scheduled receipts and on-hand inventory from gross
---------------------- requirements yields net requirements. Based upon the distributor’s lot-sizing
policy and receiving behavior, planned order receipts are generated. Firms may
---------------------- order only what they need for the next planning period or for a designated time
---------------------- period, known as economic order quantity (EOQ).

---------------------- This involves a lot size based on a costing model. Alternatively, firms may
be limited to multiples of a lot size simply because the supplying firm packages
---------------------- or palletizes their goods in standard quantities. Also, some distributors may
require some time interval between the arrival of goods on their docks and the
---------------------- entry of the goods into the inventory system. For example, a firm may have a
---------------------- staging area where goods remain for an average time period while awaiting
quality or quantity verification. Hence, planned order receipt may be during the
---------------------- planning period when the goods are needed or they may need to be received
earlier depending on time requirements. Order release is then determined by
---------------------- offsetting the planned order receipt by the supplier’s lead time.
----------------------
Check your Progress 5
----------------------

---------------------- Fill in the blanks.

---------------------- 1. DRP is a widely used and potentially powerful technique for helping
_____________ to manage and minimise inbound inventories.
----------------------

---------------------- Activity 1
----------------------
Visit the market in your vicinity and describe the distribution channel
---------------------- structure for FMCG products.
----------------------
Summary
----------------------
●● Distribution channels have evolved over a period of time. Due to the
----------------------
constant evolution in the marketing environment, innovations and
---------------------- advancements in the technology, growing consumer demand for all the
products across the board, it became essential to reach consumers over a
---------------------- wide geographical area. Hence the evolution of distribution channels over
period of time.
----------------------
●● The structure of distribution channel consists of manufacturer, distributor
---------------------- and retailer. the scope of distribution channels involve material planning
and control purchasing, receiving, physical management of materials
----------------------
via warehousing and storage, materials handling, order processing,
---------------------- warehousing and storage, finished goods management, material handling
and packaging, shipping and transportation.
----------------------

284 Sales and Distribution Management

●● The functions of distribution channel include product acquisition, product Notes
movement, product transaction, sorting, accumulating, allocation,
assorting and bulk breaking in addition to performing the functions ----------------------
like selling and promotion, value added processing, transportation,
warehousing, marketing information etc. ----------------------

●● In addition to retailers, wholesalers, industrial distributor’s resellers include ----------------------

specialty service firms like Agents and Brokers - Organisations that mainly
work to bring suppliers and buyers together in exchange for a fee. ----------------------
●● Physical distribution management (PDM) is concerned with making ----------------------
the product available at the time right and at the right place, Physical
distribution components are 1) Order processing; 2) Stock levels or ----------------------
inventory 3) Warehousing 4) Transportation. ----------------------
●● DRP is a widely used and potentially powerful technique for helping
----------------------
outbound logistics systems to manage and minimise inbound inventories.
This concept extended the time-phase order point found in material ----------------------
requirements planning (MRP) logic to the management of channel
inventory. By the 1980s DRP had become a standard approach for ----------------------
planning and controlling distribution logistics activities and had evolved
----------------------
into distribution resource planning. The concept now embraces all
business functions in the supply channel, not just inventory and logistics ----------------------
and is termed DRP II.
----------------------
Keywords ----------------------

● Lead-time: is the period of time that elapses between the placing of an ----------------------
order and receipt of the goods.
----------------------
● Opportunity costs: The cost of an alternative that must be forgone in
order to pursue a certain action. Put another way, the benefits you could ----------------------
have received by taking an alternative action.
----------------------
● Partnership Sourcing: A commitment by customers and suppliers,
regardless of size, to a long-term relationship based on clear, mutually ----------------------
agreed objectives to strive for world-class capability and competitiveness.
----------------------
● Routinisation: refers to the policies and procedures providing common
goals, channel arrangements, expectations and mechanisms to facilitate ----------------------
efficient transactions.
----------------------
● Stock keeping unit: referred to as SKU means a single unit in the
product range. For example shampoo of 400Ml, 100Ml, 50 Ml and sachet ----------------------
is individually considered as a stock keeping unit. ----------------------

Self-Assessment Questions ----------------------

----------------------
1. What do you understand by distribution channels?
2. Discuss in detail functions of distribution channels. ----------------------

Introduction to Distribution Management 285

 Notes 3. Discuss the scope of distribution channels of distribution.
4. Draw the diagram multiple channels of distribution.
----------------------
5. What is the objective of PDM? Discuss its elements in detail.
----------------------
6. What do you understand by Distribution Resource Planning? Discuss.
----------------------

----------------------
Answers to Check your Progress

---------------------- Check your Progress 1

Fill in the blanks.
----------------------
1. Distribution channels are also known as Marketing Channels.
----------------------
Check your Progress 2
---------------------- State True or False.
---------------------- 1. True

---------------------- Check your Progress 3

Fill in the blanks.
----------------------
1. The distributors are the extended arm of the company.
----------------------
2. Companies depend on distributors to provide information that can help to
---------------------- improve the product.
Check your Progress 4
----------------------
State True or False.
----------------------
1. False
----------------------
Check your Progress 5
---------------------- Fill in the blanks.
---------------------- 1. DRP is a widely used and potentially powerful technique for helping
outbound logistics systems to manage and minimise inbound inventories.
----------------------

---------------------- Suggested Reading

---------------------- 1. Bowersox, Logistical Management: The Integrated Supply Chain Process.
---------------------- 2. Calvin, Robert J. Sales Management.
3. Chopra, Supply Chain Management.
----------------------
4. Ghoshal, World Class in India. Penguin India.
----------------------
5. Lamba, A.J. The Art of Retailing.
---------------------- 6. Scheuing, Kurtz, Johnson. Sales Management: Concepts, Practices and
---------------------- Cases.

----------------------

286 Sales and Distribution Management

Retailing
UNIT

2
Structure:

2.1 Introduction
2.2 What is Retailing
2.3 Functions of Retailers
2.4 Retail Formats
2.5 Retail Ownership
2.6 Retail Strategies
2.7 Technology in Retail
2.8 Radio Frequency Identification (RFID) in Retail
2.9 Challenges to Retailers
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Retailing 287
 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Explain the meaning and functions of retailer
----------------------
• List the various retail formats
---------------------- • Describe various retail strategies
---------------------- • Elaborate on technology in retail
---------------------- • Discuss RFID

---------------------- • Enumerate the challenges faced by retailers

----------------------
2.1 INTRODUCTION
----------------------
Retail is the industry we live with day in day out. A retailer is a part
----------------------
and parcel of our day to day life. With eleven million retailers in the country,
---------------------- Retailing consists of all activities involved in selling goods and services to the
ultimate consumers for final consumption. Retailer by making the products
---------------------- available to the consumers within arms length at the right time confers the time
and place utility to the consumers. By undertaking various functions the retailer
----------------------
adds value to the consumers.
---------------------- On the other hand by taking part in various flows, is of immense value to
the manufacturers in making the products available to the consumers. India is
----------------------
known as a country of retailers. In our country retail is the second largest sector
---------------------- next to agriculture. Retail sector approximately employs around eight percent
of total workforce of the country. The retail sector is highly fragmented in terms
---------------------- of ownership and is dominated by the traditional formats.
----------------------
2.2 WHAT IS RETAILING
----------------------
The word Retail is derived from French word Retailer. Meaning to cut a piece
---------------------- off or to break bulk. Retailing is the set of business activities that adds value to the
products and services sold to consumers for their personal or family use.
----------------------
Retailing is defined as selling products to consumers for their personal
---------------------- use. A retailer is a reseller (i.e., obtains product from one party in order to sell
to another) from which a consumer purchases products.
----------------------
In most of the cases, the retailer from which a consumer makes purchases
---------------------- is a reseller of products obtained from others and not the product manufacturer.
However in some cases, some manufacturers also operate their own retail
----------------------
outlets in a corporate channel arrangement. While consumers are the retailer’s
---------------------- buyers, a consumer does not always buy from retailers.

---------------------- For consumers, the most important benefits relate to the ability to purchase
small quantities of a wide assortment of products at prices that are considered
288 Sales and Distribution Management
reasonably affordable. For suppliers the most important benefits relate to offering Notes
opportunities to reach their target market, build product demand through retail
promotions and provide consumer feedback to the product marketer. ----------------------

----------------------
2.3 FUNCTIONS OF RETAILERS
----------------------
1. Bulk breaking
This is one of the fundamental functions of retailers. Manufacturers ----------------------
normally produce large quantities of a limited number of products. ----------------------
However, retailers normally require smaller quantities of multiple
products. They procure smaller quantities of various products from all ----------------------
the companies. We as consumers buy in very small quantities. Retailers
by buying in larger quantities and breaking the bulk are definitely adding ----------------------
value to the consumers. ----------------------
2. Buying and building product assortments
----------------------
This is an extremely important function for retailers. Most retailers
prefer to deal with few suppliers providing a wide assortment of products ----------------------
that fit their merchandising strategy rather than many with limited ----------------------
product lines. This, of course, saves on purchasing, transportation
and merchandising costs. Distribution firms have the ability to bring ----------------------
together related products from multiple manufacturers and assemble the
right combination of these products in quantities that meet the retailer’s ----------------------
requirements in a cost- efficient manner. ----------------------
3. Inventory holding function
----------------------
Retailers by buying various products from all the companies, markets
invest heavily in the inventory in anticipation of consumer demand. In ----------------------
the process they are carrying out the important extending place and time ----------------------
utility to the consumers.
4. Risk bearing function ----------------------

Retailer invests considerably in the inventory of large varieties of products ----------------------

running into thousands of stock keeping units. This, the retailer does in
----------------------
anticipation of consumer demand. In the process, the retailer runs into the
risk of: ----------------------
a. Products going out of fashion thereby resulting in slow moving or ----------------------
dead inventory. Such inventory needs to be sold off by giving heavy
discounts. ----------------------
b. Shop lifting and pilferage are common problems. To control the ----------------------
problems the retailers needs to invest heavily in technology for
security which calls for lot investment and also this does not solve ----------------------
the problem completely.
----------------------
c. The factors like slowdown in the economic conditions, riots, floods,
earthquakes have adverse impact on the business. ----------------------

Retailing 289
 Notes 4. Market information and feedback
The retailers provide information regarding product, marketplace issues
----------------------
and competitors’ activities in a relatively short time. Retailers are in day to
---------------------- day personal touch with the customers and hence they can sense changes
in the customers preferences, changing marketing environment and pass
---------------------- the information up the channel to the manufacturers which of immense
value to the manufacturers.
----------------------
5. Promotion
----------------------
The retailers participate in the promotion activities carried out by the
---------------------- manufacturers. The let out their windows or shelf space in the store to
give exposure to the products, they participate in the display contests,
----------------------
undertake reimbursement of coupon value to the customers, cooperate
---------------------- in undertaking in shop promotions on the floor of the stores. Thus by
participating in the promotional activities of the manufactures participates
---------------------- in the promotion flow.
---------------------- 6. After sales service

---------------------- This is a very important function carried out by the retailers. Retailers give
credit, home delivery, accept various modes of payments, replacement of
---------------------- the products. Many retailers have no replacement policy.
---------------------- 7. Educating the customers

---------------------- Retailers by giving information about the products and its features,
advantages and benefits add value to the customers. It is a common
---------------------- experience for us that when we visit any show room selling appliances,
they go out of the way to explain the customers in great detail and in
---------------------- the process help the customers in taking proper decision. This function
---------------------- assumes significance more in case of technically complex and high value
products and in case of new products.
----------------------

---------------------- Check your Progress 1

----------------------
Fill in the blanks.
---------------------- 1. In the list of functions of retailers, _____________ is the fundamental
function of retailers.
----------------------

----------------------
2.4 RETAIL FORMATS
----------------------
Is a type of retail mix that the retailer adopts, which includes the following
---------------------- factors:
---------------------- ●● The nature of merchandise and services offered

---------------------- ●● The pricing policy

290 Sales and Distribution Management

●● The retailers approach to advertising and promotional programs Notes
●● The choice of location preferred
----------------------
●● Size of the store
Deciding on retail format is the most essential component of retail strategy. ----------------------
Since we have presented ways in which retailers can be classified, we can ----------------------
now use these categories to distinguish general formats or business models that
best describes a retail operation. These categories are designed to identify the ----------------------
primary format, a retailer follows. In some cases, particular with the advent of ----------------------
the internet, a retailer will be involved in more than one format.
1. Mom-and-Pop ----------------------

Represent the small, individually owned and operated retail outlet. In many ----------------------
cases, these are family-run businesses catering to the local community.
----------------------
For example the kirana, general stores, pan/bidi shops etc.
2. Convenience Stores ----------------------
As the name implies these general merchandise retailers cater to offering ----------------------
customers an easy purchase experience. Convenience is offered in many
ways which includes through easily accessible store locations, small ----------------------
store size that allows for quick shopping, and fast checkout. The product
----------------------
selection offered by these retailers is very limited and pricing can be high.
They provide high level of convenience and sell mostly food and ----------------------
essential items. Product is usually priced low and easy to obtain. Offer ----------------------
limited variety of assortment. The stores are conveniently located and
the checkout if speedier. Stores are usually 1500 to 8000 sq. ft. in area. ----------------------
Modern version of POP & MOM grocery stores. The products sold have
following characteristics: ----------------------

• Low cost items. ----------------------

• Regularly consumed. ----------------------
• Purchased very frequently.
----------------------
• Sold easily-no hassles of measuring, trying or testing
----------------------
7 - 11 stores of Southland Corporation, Japan having 21,000 outlets.
Nilgiris, Spencers are the Indian examples of convenience stores. ----------------------
3. Department Stores ----------------------
These retailers are general merchandisers offering mid-to-high quality
products and strong level of services, though in most cases these retailers ----------------------
would not fall into the full-service category. While department stores are ----------------------
classified as general merchandisers, some carry a more selective product
line. ----------------------
• Multi-Tiered large stores. ----------------------
• Stock vast range of products departmentwise.
----------------------

Retailing 291
 Notes • Look like collection of specialty operations under one roof - one
owner.
----------------------
• Broad variety, deep assortment and higher level of customer service.
---------------------- • Are run on the principle of increased revenue through high sales
---------------------- volumes.
• In some situations departments within departmental stores are
----------------------
leased.
---------------------- • A leased department in an area within a retail stores that is leased or
---------------------- rented to an independent firm.
• This is also termed as “shop-in-shop” concept.
----------------------
• A promotional departmental store is a specialty departmental stores
---------------------- that sells most of its merchandise on weekly promotion.
---------------------- • Examples of Departmental stores: J. C. Penny, Nordstrom, Dayton
Hudson Bloomingdale’s, Shoppers Stop etc.
----------------------
4. Warehouse Stores/clubs
----------------------
This is a form of mass discounter that often provides even lower prices
---------------------- than traditional mass discounters. In addition, they often require buyers to
make purchases in quantities that are greater than what can be purchased
---------------------- at mass discount stores. These retail outlets provide few services and
---------------------- product selection can be limited. Furthermore, the retail design and
layout is as the name suggests, warehouse style, with consumers often
---------------------- selecting products off the ground from the shipping package. Some forms
of warehouse stores, called warehouse clubs, require customers purchase
---------------------- memberships in order to gain access to the outlet. For example, in addition
---------------------- to being in the discount store format, wall mart is also in Warehouse stores
formats. Some of its important features are as follows:
----------------------
• typically carry only around 2500 items
---------------------- • merchandise displayed on cut boxes/cartons.
---------------------- • project low price image with no frills/service.
---------------------- • located in low rent areas.

---------------------- • customers attracted because of savings.

• sell nationally branded goods at low prices and make low profits as
----------------------
% of sales
---------------------- • examples: Sam’s club, Costco, Quality stores, The Price co. etc.
---------------------- 5. Speciality Stores
---------------------- Also called limited line stores. Attract customers by specialising in a
particular line of merchandise. Large variety in terms of width/depth
---------------------- usually less than 18,000 sq. ft. Compared to departmental/discount stores

292 Sales and Distribution Management

 focus on narrow market segment /niche. Customers attracted by their Notes
deep assortments, personalised service and intimate stores atmosphere.
----------------------
Category Killers
Many major retail chains have taken what were previously narrowly ----------------------
focused, small specialty store concepts and have expanded them to create
----------------------
large specialty stores. These so-called “category killers” have been found
in such speciality areas as electronic (e.g., Best Buy), office supplies (e.g., ----------------------
Staples) and sporting goods (e.g., Sport Authority).
----------------------
• similar to speciality and discount stores.
----------------------
• offering narrow variety/deep assortments.
• by offering complete assortment in a category, generate large ----------------------
volumes.
----------------------
• can ‘kill’ category of merchandise for other retailers and also known
as category killers. ----------------------

• ‘toys’ “R” US” account for 40% of toys and games market in the ----------------------
U.S.
----------------------
6. Super Markets
----------------------
Conventional super markets are primarily self service food stores. They
offer almost all items of daily necessity. Stores are around 30,000 sq. ft. ----------------------
in size. Sell non food items also. Are very promotional and have sales
promotions round the year. Offer their own discount coupons. To draw foot ----------------------
fall generally sell fast moving food/items at cost. Appeal to customers on ----------------------
account of low prices self service. Provide neat/clean environment, fast
check out counters and attractive organised layouts. Examples of popular ----------------------
international SM’s: *Safe Ways * Krogers *A&P *Giant Eagle *Food
lion etc. ----------------------

7. Mass discounters ----------------------

These retailers can be either general or specialty merchandisers but ----------------------
either way their main focus is on offering discount pricing. Compared
to department stores, mass discounters offer fewer services and lower ----------------------
quality products.
----------------------
8. Boutique
----------------------
This retail format is best represented by small store carrying very
specialised and often high-end merchandise. In many cases, a boutique is ----------------------
a full-service retailer following a full-pricing strategy.
----------------------
9. Catalog Retailers
----------------------
Catalog retailers generally specialise in hard goods like jewellry,
furniture, etc. A customer walks into the showroom and goes through ----------------------
the catalog and places the order. Generally products in such cases are
made to order. ----------------------

Retailing 293
 Notes 10. E-tailers
Possibly the most publicised retail model to evolve in the last 50 years is
----------------------
the retailer that principally sells via the internet. There are thousands of
---------------------- online-only retail sellers of which Amazon.com is the most famous. These
retailers offer shopping convenience including being open for business all
---------------------- day, every day. Electronic retailers or e-tailers also have the ability to
offer a wide selection of product, since all they really need in order to
----------------------
attract orders is a picture and description of the product. That is, they may
---------------------- not need to have the product on-hand the way physical stores do. Instead,
an e-tailer can wait until an order is received from their customers before
---------------------- placing their own order with their suppliers. This cuts down significantly
on the cost of maintaining products in-stock.
----------------------
11. Franchise
----------------------
A franchise is a form of contractual channel in which one party, the
---------------------- franchisor, controls the business activities of another party, the franchisee.
Under these arrangements, an eligible franchisee agrees to pay for the right
---------------------- to use the franchisor’s business methods and other important business
aspects, such as the franchise name. For instance, McDonalds is a well-
----------------------
known franchisor that allows individuals to use the McDonalds name and
---------------------- methods to deliver food to consumers. Payment is usually in the form of a
one-time, upfront franchise fee and also on-going percentage of revenue.
----------------------
While the cost to the franchisee may be quite high, this form of retailing
---------------------- offers several advantages including: a) allowing the franchisee to open a
retail outlet that may already be known to local customers and b) being
---------------------- trained in how to operate the business, which may allow the franchisee
---------------------- to be successful much faster than if they attempted to start a business on
their own.
---------------------- For the franchisor, in addition to added revenue, the franchise model
---------------------- allows for faster expansion since funds needed to expand the business
(e.g., acquiring retail space, local advertising) are often supported by the
---------------------- franchisee’s up-front franchise fee.
---------------------- 12. Vending
Within this category are automated methods for allowing consumers to
----------------------
make purchases and quickly acquire products. While most consumers are
---------------------- well aware of vending machines, allowing customers to purchase smaller
items, such as beverages and snack food, newer devices are entering the
---------------------- market containing more expensive and bulkier products. These systems
require the vending machine have either internet or telecommunications
----------------------
access to permit purchase using credit cards.
---------------------- 13. Consumer co-operatives
---------------------- Is a retail institution owned by its member customers? A consumer
cooperative may arise because of dissatisfied consumers, whose needs are
---------------------- not fulfilled by the existing retailers. As the members of the cooperatives

294 Sales and Distribution Management

 run the stores, there is a limitation on its growth. Examples of co-operatives Notes
in India are the Sahakari Bhandars and Apna Bazars in Mumbai.
----------------------
Check your Progress 2 ----------------------

State True or False. ----------------------

1. Deciding retail format is the most essential component of retail ----------------------
strategy.
----------------------
2. Speciality Stores are also called limited line stores.
----------------------

----------------------
Activity 1
----------------------
Give the names of two stores the following categories in your city:
----------------------
a) Convenience stores b) Departmental Stores c) Franchisee
d) Consumer co-operatives ----------------------

----------------------
2.5 RETAIL OWNERSHIP ----------------------
1. Individually Owned and Operated ----------------------
Under this ownership structure, an individual or corporate entity owns
and operates one or a very small number of outlets. Single ownership of ----------------------
retail outlets most frequently occurs with small retail stores, though there ----------------------
are some cases, for instance in the automotive or furniture industries,
where single ownership involves very large outlets. For example the ----------------------
various retail stores we see around us which are individually owned like
the kirana and general stores in our locality. ----------------------
2. Corporate Chain ----------------------
A retail chain consists of multiple retail outlets owned and operated by a
single entity all performing similar retail activities. While the number of ----------------------
retail outlets required to be classified as chain has never been specified, ----------------------
we will assume that anyone owning more than five retail locations
would be considered a chain. For example, ITC owns and operates Wills ----------------------
Lifestyle chain of apparel stores or West Side dealing in apparels owned
and operated by Trent Holdings, a company owned by Tatas. ----------------------
3. Contractually Licensed and Individually Operated ----------------------
In the contractual channel retail, ownership structure operators of the
----------------------
retail outlet are not the out-right owners of the business. Instead, the
arrangement often involves a legal agreement in which the owner of the ----------------------
retail concept allows the operator to run the owner’s business concept in
exchange for financial considerations such as a percentage of revenue. ----------------------
This structure is most often seen in retail franchising. For example,
----------------------
McDonalds.

Retailing 295
 Notes 2.6 RETAIL STRATEGIES
---------------------- Target Markets Strategy
---------------------- Depending on the retail format, that is the decision of the retailer to enter
into a product category, the retailers undertake one of the following strategies
---------------------- to cater to the suitable target segment.
---------------------- 1. Mass Market Strategy
---------------------- Mass market retailers appeal to the largest market possible by selling
products of interest to nearly all consumers. With such a large market
---------------------- from which to draw customers, the competition among these retailers is
often fierce.
----------------------
2. Specialty Market Strategy
----------------------
Retailers categorised as servicing the specialty market are likely to target
---------------------- buyers looking for products having certain features that go beyond mass
marketed products. For example Cross Words, the retailers selling books,
---------------------- target to the educated class and amongst educated who are serious readers.
The second example that can be quoted can be of Toys ‘R’ Us, a retail
----------------------
chain in U. S. dealing exclusively in Toys. While not as large as the mass
---------------------- market, the target market serviced by specialty retailers can be sizable.

---------------------- 3. Exclusive Market Strategy

Within the specialty retailers there will be retailers who target their
---------------------- products at a very exclusive set of customers. For example Nakshatra
---------------------- Diamond Jewellery, and Tanishq - a TATA organisation selling diamond
jewellery specialising in high value jewellery targeted at a exclusive
---------------------- segment of the customers. Appealing to this market means appealing to
discriminating customers who are often willing to pay a premium for
---------------------- features found in very few products and for highly personalised services.
---------------------- Since this target market is small, the number of retailers addressing this
market within a given geographic area may also be small.
---------------------- 4. Product Strategy
---------------------- Depending on their decision to enter a particular format, or so to say types
of business retailers follow various product strategies as discussed below.
----------------------
i) General Merchandise strategy
----------------------
Under this strategy retailers carry a wide range of product categories
---------------------- though the number of different items within a particular product
line is generally limited. Spencer’s (Food world) and Subhiksha, in
---------------------- convenience stores format and discount stores format respectively
---------------------- sell general merchandise in both food and non food category.
ii) Multiple Lines Specialty Merchandise strategy
----------------------
Under this strategy the retailers stock a limited number of product
---------------------- lines (i.e., narrow) but within the categories they handle they often

296 Sales and Distribution Management

 offer a greater selection (i.e., deep) than are offered by general Notes
merchandisers. For example, Shoppers Stop and Pyramid who
operate on the principle of departments in the store, operate few ----------------------
product categories but offer variety within the category.
----------------------
iii) Single Line Specialty Merchandise strategy
----------------------
Some retailers limit their offerings to just one product line, and
sometimes only one product. For example, again, Tanshiq and ----------------------
Nakshtra Diomand Jewellery dealing only in diamond jewellery.
----------------------
5) Pricing Strategy
From the various elements given in the definition of the retail format, ----------------------
pricing is a very crucial and critical element of the retail format. Depending
----------------------
upon the type of format the retailer intends to be, they would have pricing
strategy to suit to the format. It is often seen that a retailer may be present ----------------------
in more than one format. For example Pyramid in addition to being in
the departmental stores format is also in the convenience stores format ----------------------
through True Mart dealing in convenience goods. The strategies being
----------------------
followed by the retailers are therefore linked with the format they are in
and follow the following types of pricing strategies. ----------------------
i) Competitive Pricing
----------------------
The objective of some retailers is not to compete on price but
alternatively not to be seen as charging the highest price. These ----------------------
retailers, who often operate in specialty markets, aggressively
----------------------
monitor the market to insure their pricing is competitive but they do
not desire to get into price wars with discount retailers. Thus, other ----------------------
elements of the marketing mix (e.g., higher quality products, nicer
store setting) are used to create higher value for which the customer ----------------------
will pay more.
----------------------
ii) Discount Pricing
----------------------
Discount retailers are best known for selling low priced products
that have a low profit margin (i.e., price minus cost). To make ----------------------
profits these retailers look to sell in high volume. Typically discount
retailers operate with low overhead costs by vigorously controlling ----------------------
operational spending on such things as real estate, design issues
----------------------
(e.g., store layout, website presentation) and by offering fewer
services to their customers. ----------------------
iii) Full Price Pricing
----------------------
Retailers targeting exclusive markets find such markets are far less
price sensitive than mass or specialty markets. In these cases, the ----------------------
additional value added through increased operational spending ----------------------
(e.g., expensive locations, more attractive design, more services)
justify higher retail prices. While these retailers are likely to sell ----------------------
in lower volume than discount or competitive pricing retailers, the
profit margins for each product are much higher. ----------------------

Retailing 297
 Notes 6) Promotional Strategy
The promotional strategies of the different types of retailers vary from each
----------------------
other depending on their trade area-the area from where they generate the
---------------------- business. For example, convenience store format retailer like Spencers
draw 80% of their customer within one KM area and as such a banner
---------------------- displayed outside the stores or a bill board within the stores indicating
that the actual selling price is lower than the MRP is enough to spread
----------------------
word of mouth within the trade area and thus attracting the customer.
---------------------- On the other hand, for big retailers like Shoppers Stop and Pyramid,
the trade area often covers the entire city or a covering a very large
----------------------
geographical area. In such a situation, the strategy adopted by the retailers
---------------------- would be different calling for using various promotional tools and
techniques which would effectively communicated with the customers,
---------------------- like advertising, hoardings, events etc.
---------------------- The promotion strategies of the retailers would include using one or more
than one of the following methods.
----------------------
i) Advertising
----------------------
Many retailers find traditional mass promotional methods of
---------------------- advertising, such as through newspapers or television, continue to
be their best means for creating customer interest. Retailers selling
---------------------- online rely mostly on internet advertising as their promotional
method of choice.
----------------------
ii) Direct Mail
----------------------
A particular form of advertising that many retailers use for the
---------------------- bulk of their promotion, is direct mail - advertising through postal
mail. Using direct mail for promotion is the primary way, catalog
---------------------- retailers distribute their materials and is often utilised by smaller
---------------------- local companies who promote using postcard mailings.
iii) Personal Selling
----------------------
Retailers selling expensive or high-end products might use personal
---------------------- selling for generating sales.
---------------------- 7) Distribution Strategy
---------------------- Retailers sell in many different formats with some requiring consumers
visit a physical location. Therefore P the element of Marketing Mix in
---------------------- retail refers to the location of the facility-the retail stores. It should be
noted that many retailers are not tied to a single distribution method but
----------------------
operate using multiple methods.
---------------------- a) Store-Based Sellers
---------------------- By far the predominant method, consumers use to obtain products,
is to acquire these by physically visiting retail outlets ( brick-and-
---------------------- mortar). Store outlets can be further divided into several categories.

298 Sales and Distribution Management

 One key characteristic that distinguishes categories is whether retail Notes
outlets are physically connected to one or more others stores:
----------------------
i. Stand-Alone - These are retail outlets that do not have other
retail outlets connected. ----------------------
ii. Strip-Shopping Center - A retail arrangement with two or ----------------------
more outlets physically, connected or that share physical
resources (e.g., share parking lot). ----------------------
iii. Shopping Area - A local center of retail operations containing ----------------------
many retail outlets that may or may not be physically
connected but are in close proximity to each other such as a ----------------------
city shopping district.
----------------------
iv. Regional Shopping Mall - Consists of a large self-contained
shopping area with many connected outlets. ----------------------

b) Non-Store Sellers ----------------------

A fast growing method used by retailers to sell products, is through ----------------------

methods that do not have customers physically visiting a retail
outlet. In fact, in many cases, customers make their purchase from ----------------------
within their own homes. ----------------------
i. Online Sellers - The fastest growing retail distribution method
----------------------
allows consumer to purchase products via the internet. In
most cases, delivery is then handled by a third-party shipping ----------------------
service.
----------------------
ii. Direct Marketers - Retailers that are principally selling via
direct methods, may have a primary location that receives ----------------------
orders but does not host shopping visits. Rather, orders are
received via mail or phone. ----------------------

iii. Vending - While purchasing through vending machines does ----------------------

require the consumer to physically visit a location, this type
----------------------
of retailing is considered as non-store retailing as the vending
operations are not located at the vending company’s place of ----------------------
business.
----------------------
8) Service Strategy
----------------------
Retail is about shopping experience. All things being equal, in addition
to desirable and affordable products and prices, it is the service that can ----------------------
prove to be a differential factor in retailing. It is the service by which the
retailer enhances the purchase experience of the customers. Secondly the ----------------------
service level is also related to the format in which the retailer is operating.
----------------------
For example in discounts store formats, since the retailer is operating on
a very thin margin, they may for example not extend the air conditioning ----------------------
comfort. The various service strategies followed by the retailers are as
follows: ----------------------

Retailing 299
 Notes i) Self-Service
This service level allows consumers to perform most or all of the
----------------------
services associated with retail purchasing. For some consumers,
---------------------- self-service is considered a benefit while others may view it as
an inconvenience. Self-service can be seen with: a) self-selection
---------------------- services, such as online purchasing and vending machine purchases,
and b) self-checkout services, where the consumer may get help
----------------------
selecting the product but they use self-checkout stations to process
---------------------- the purchase including scanning and payment.

---------------------- ii) Assorted-Service

The majority of retailers offer some level of service to consumers.
----------------------
Service includes handling the point-of-purchase transaction product
---------------------- selection assistance arrange payment plans offer delivery and many
more.
----------------------
iii) Full-Service
----------------------
The full-service retailer attempts to handle nearly all aspects of
---------------------- the purchase to the point, where all the consumer select the item
they wish to purchase. Retailers that follow a full-price strategy
---------------------- often follow the full-service approach as a way of adding value to a
customer’s purchase.
----------------------

---------------------- Check your Progress 3

----------------------
Fill in the blanks.
----------------------
1. Promotion strategies of the retailers include advertising, direct mail
---------------------- and ________________.

----------------------

---------------------- 2.7 TECHNOLOGY IN RETAIL

---------------------- Retailing is all about giving experience which a consumer should cherish
and continue patronising the retail chain. The large retailers like Wall Mart,
---------------------- Tesco, Sears, A&P have global presence with thousands of retail stores, stock
keeping units running into thousands, suppliers spread across the globe,
---------------------- millions of workers and millions of transactions every day. Operations of such
---------------------- dimension cannot be carried out manually. This calls for use of technology in
each and every function thereby increasing the operational efficiency and at the
---------------------- end of the day giving a shopping experience to the customers which alone leads
to profit.
----------------------
1. Product information/ordering kiosk
----------------------
The product information/ordering kiosk is an easy-to-use computer
---------------------- and touch-screen video display that provides shoppers with additional

300 Sales and Distribution Management

 information about products in the store as well as offering an expanded Notes
selection of items that can be special ordered. If a product is available
in the store, the kiosk prints a map of the store and highlights the item’s ----------------------
location.
----------------------
2. Frequent shopper kiosk
----------------------
The frequent shopper kiosk consists of a computer and touch-screen video
display located near the entrance of the retail store. When consumers ----------------------
insert a frequent shopper card into the kiosk, it displays a customised
set of products and promotions based on the shopper’s past purchases. ----------------------
It can also display recipes, special offers, samples and sweepstakes ----------------------
opportunities. The system automatically deducts electronic coupons at
checkout.This frequent shopper kiosk provides tailored information about ----------------------
products, specials and promotional items.
----------------------
3. Virtual display Case
----------------------
The “virtual display case” is a large-screen, rear-projection video display
and computer graphics system which shows realistic, three-dimensional ----------------------
images of shelves stocked with products. Located near a store’s entrance,
it allows customers to view and purchase a wider selection of items than ----------------------
could be carried in the store itself. Consumers wear a pair of 3-D glasses, ----------------------
available in a bin on the side of the display, to view the stereo images. The
device has a hand-held controller and joystick that allows consumers to ----------------------
select between different product categories, zoom in on shelf displays and
pick up products and examine them from any angle. When products are ----------------------
selected from the virtual shelf, they appear to float in space. To select a ----------------------
product for purchase, consumers simply drop it into a simulated shopping
basket. ----------------------
4. Electronic point-of-sale (POS) signage ----------------------
Electronic POS signs are battery- or solar-powered liquid-crystal displays ----------------------
(LCDs) which shows the names and prices of merchandise (including
unit pricing and currency conversions). These signs are attached to ----------------------
store shelves or directly to products, replacing conventional price tags
and printed shelf labels. The information displayed on the signs is ----------------------
electronically transmitted from the store’s central computer, which also ----------------------
feeds prices to the checkout registers.
----------------------
5. Hand-held shopping assistant
The hand-held shopping assistant is a lightweight palm-size device with ----------------------
a touch-sensitive. ----------------------
LCD screen and a product barcode reader. By scanning the barcodes of
----------------------
products located throughout the store, shoppers can access additional
product information such as specifications, operating instructions, usage ----------------------
suggestions and warranty information. This information is downloaded
through a wireless modem from the manufacturer’s Web site. ----------------------

Retailing 301
 Notes Shoppers use a store-issued identification card, to obtain a shopping
assistant from a dispenser rack.
----------------------
6. Body scanning
---------------------- Body scanning is a computerised system for taking body measurements,
---------------------- which is much more accurate than using a tape measure. Retailers who
use this technology can tell consumers the exact size of clothing they
---------------------- need, as well as order custom-made products. Dimensions are stored on a
‘smart card’ that can be used at any time in a particular store.
----------------------
Consumers enter a private scanning booth, where a computer uses video
---------------------- cameras to take body measurements from several angles and then generates
a 3-D model. Consumers can then select from a variety of clothing styles
----------------------
in assorted colors and the computer will show them an image of their
---------------------- body wearing the finished clothing. When consumers see something they
like, they can order the clothes, which will be custom-manufactured for
---------------------- their unique measurements.
---------------------- 7. Self scanning
---------------------- The self-scanning system is a hand-held product barcode reader, similar
in size and shape to a wireless telephone handset. It is used by consumers
---------------------- to scan and tally their purchases while shopping. Consumers obtain a
scanner from a dispenser rack by swiping their store-issued identification
----------------------
card. The scanner allows shoppers to check an item’s price on its LCD
---------------------- screen to ensure that it matches the shelf price and keep a running total
of selected purchases. Items can be added to or deleted from the order. At
---------------------- the end of the shopping trip, the scanner prints out a ticket that consumers
take to an express checkout counter to pay for their order.
----------------------
8. Self-checkout
----------------------
The self-checkout system consists of an automated teller machine (ATM),
---------------------- barcode scanner, weighing scale and check stand located in a special
express-checkout lane in the store. Consumers scan their purchases and
----------------------
bag them without assistance from a cashier, and then insert cash, a credit
---------------------- card or a debit card to pay for the transaction. A cashier is stationed near
the self-checkout to answer questions and help with coupons, checks,
---------------------- food stamps and gift certificates. As a security check, the self-checkout
system has an overhead surveillance camera to confirm that each product
----------------------
has been properly scanned.
----------------------
2.8 RADIO FREQUENCY IDENTIFICATION (RFID) IN
----------------------
RETAIL
----------------------
With many retailers, particularly those involved in ‘mass merchandising’,
---------------------- offering similar products, services, and prices, competitive advantage often
relies on merchandise selection and availability, marketing, cross-selling,
---------------------- promotions, customer service, operational efficiency and protection of both

302 Sales and Distribution Management

merchandise and store property. A promising technology for effecting gains on Notes
all of these dimensions is radio frequency identification (RFID) coupled with a
unique code. ----------------------
RFID technology has been in use for decades, initially in military ----------------------
applications, such as tracking material in rugged and fast-moving situations
where barcodes could not be used. More recently, it has been used to identify ----------------------
vehicles passing through tollbooths so that motorists can be billed monthly
----------------------
rather than pay each time they pass through the booth. Only within the past few
years has this technology been considered as a complement and an eventual ----------------------
replacement for barcode technology in the retail industry. Three aspects of
RFID that make it a particularly attractive alternative to barcode are that: ----------------------
a) It allows information to be read by radio waves from a tag without ----------------------
requiring line of sight scanning.
----------------------
b) It allows virtually simultaneous and instantaneous reading of multiple
tags in the vicinity of the reader. ----------------------
c) Each tag can have a unique code that ultimately allows every tagged item ----------------------
to be individually accounted for.
----------------------
What’s in a tag?
The RFID tag consists of a tiny chip, approximately the size of a pinhead, ----------------------
on which the RFID code resides and a small antenna. RFID tags can be ----------------------
manufactured with a variety of chip architectures and code formats. One code
format that enjoys substantial support in the retail industry is the Electronic ----------------------
Product Code (EPC). The EPC uses a 96-bit scheme advocated by EPC global
(previously known as the Auto-ID Center). Some prominent retailers are ----------------------
suggesting that an even larger code may be helpful, while other organisations ----------------------
have advocated a more compact, 64-bit code for at least some purposes. No
matter which format is used, all of these coding schemes are capable of uniquely ----------------------
identifying trillions of objects.
----------------------
The real power of this technology for retail, results from associating these
unique identifiers with other information of interest from fields in a database ----------------------
that pertains to the item. Just a few examples with retail application are:
----------------------
a) Payment method used in buying the item. b) Expiry date. c) Last date of
service. d) Warranty period. e) Date of manufacture. f) Time spent in transit. g) ----------------------
Location of distribution center holding the item. h) Name of the last person to
handle the item. i) Amount for which the item was sold. ----------------------
While most of these fields will be stored in a computer system that is ----------------------
detached from the tag, some RFID tag technologies permit additional information
to be written to the tag itself as well as being removed from it. ----------------------
Financial Opportunities ----------------------
The opportunities for improving retail business through RFID are ----------------------
enormous. Barcodes and universal product codes (UPCs), offering a fraction of
the advantages of RFID, were able to provide hard and soft savings to a large ----------------------

Retailing 303
 Notes extent. By being able to quickly and uniquely identify and track objects, RFID
goes beyond the capabilities of barcodes and UPCs in allowing:
----------------------
a. Inventories to be better managed
---------------------- b. Customers to be better served
---------------------- c. Merchandise to be more effectively displayed to attract purchase

---------------------- d. Merchandise to be sold with higher margins

e. Merchandise and store property to be better protected
----------------------
f. Labour to be more effectively utilised
----------------------
Use of RFID and its benefits to the retail stores
---------------------- 1. Store management alerted to out-of-place items
---------------------- An in-store system could use RFID to monitor actual versus intended
product location on the floor or in the stockroom. By using RFID-
---------------------- encoded shelf edge labels with embedded shelf readers, a grid could be
---------------------- set up for verifying Planogram compliance for standard shelving and
promotional displays, with a corresponding alert for misplaced items sent
---------------------- to store personnel. Big payoffs could be realised for frequently moved
and misplaced items, such as shoes, CDs and DVDs.
----------------------
2. Re-stocking alerts and replenishment
---------------------- Shelves are monitored to make sure they remain stocked at appropriate
---------------------- levels. When they fall below that level, an alert is sent to the stockroom or
office to bring out more merchandise and/or to order more merchandise.
---------------------- For stores with stockrooms, RFID monitoring alerts employees when
stockroom levels reach the threshold for reordering. Depending on how
---------------------- the system is configured, reorders may be done automatically for items
---------------------- that the store plans to continue to buy.
3. Reduced need to check merchandise carried by customer into store
----------------------
Some stores require customers to leave merchandise that they are carrying
---------------------- into the store at a desk or provide evidence of purchase. However, if a store
had RFID readers/writers and RFID-tagged merchandise, shoppers could
----------------------
avoid this step. Rather, at checkout, the readers would charge customers
---------------------- only for items with tags that indicated that they were not already paid for.
4. Alerts and tracking of merchandise removed from shelf
----------------------
When a particular type of item (e.g. an expensive one that would be easy
---------------------- to conceal) or an unusually large quantity is removed from a shelf, an
---------------------- alert could be sent to store security and it could then track the movement
of the merchandise with graphical displays on computers or PDAs. Store
---------------------- cameras could also be programmed to automatically pan and tilt to follow
the customer with the merchandise until it is paid for.
----------------------
5. Monitoring controlled substances
---------------------- If the packaging of controlled substances (certain drugs) were tagged with

304 Sales and Distribution Management

 RFID, their movement from receiving to storage to handoff to customer, Notes
to removal from the premises could be closely monitored.
----------------------
6. Expiration and obsolescent/seasonal alerts
----------------------
For food and drug, notification could be sent when RFID-tagged
merchandise was approaching an expiration date, becoming obsolete to ----------------------
newer models or seasonal change, or ‘going bad’ as indicated by sensors
attached to the merchandise. Store personnel could move that time- ----------------------
sensitive merchandise to the front of the shelf, reduce its price to promote
----------------------
faster sale, or ship it to a store with greater demand.
7. Rejection of counterfeit or fraudulent merchandise ----------------------

Store could use RFID tag readers to authenticate merchandise received ----------------------
from suppliers or from customers doing returns. This of course acts for
----------------------
the customer’s protection as well as the protection of the store against
defective merchandise in its inventory. ----------------------
8. Display of prices and expanded product information on mobile ----------------------
devices and kiosks
----------------------
Information about price, warranty, capabilities, preparation/assembly, etc.
could be made available on a personal digital assistant, cellular telephone, ----------------------
shopping cart display or kiosk equipped with an RFID reader that accessed
a store database for product information. While the product’s barcode ----------------------
could enable some of this functionality, the finer-grained capabilities of ----------------------
RFID would be required for displaying information such as expiration
date, size, colour, etc. This would make it easier for shoppers to find ----------------------
the information for which they are looking than trying to locate it on
the package or having to open the package and examine enclosed ----------------------
documentation or product. ----------------------
9. Streamlined self-checkout
----------------------
Since RFID could do away with the need to remove items from the cart or
----------------------
basket (except perhaps for bagging) and scan them, self-checkout would
be simplified and become more attractive to customers. Even bagging at ----------------------
the checkout could be eliminated if shopping carts are built to facilitate
bagging as the customer shops. ----------------------

10. Dynamic pricing ----------------------

RFID can be used in conjunction with electronic shelf labels to automate ----------------------
pricing based on the number of items on the shelf (and available from
the stockroom) and rules set up by store. For example, if the store were ----------------------
trying to clear out items, RFID could be used to automatically reduce
----------------------
prices based on inventory remaining to be sold at any point of time.
Alternatively, when certain popular items were in short supply (e.g., at ----------------------
Christmas time), the price can be automatically raised. The new price
would automatically be associated with the item at checkout. ----------------------

Retailing 305
 Notes 11. PDA-based shopping lists that interact with RFID tagged merchandise
and store map
----------------------
If the shopper came into the store with a shopping list on a mobile
---------------------- electronic device, such as a personal digital assistant, the shopper could
transmit the list to the store. The store would then use RFID to locate
---------------------- the shopper (identified by an RFID tagged hand-held device or loyalty
card) and the RFID tagged items on the list. It would transmit to the
----------------------
mobile device a path for finding the things on the list. The shopper could
---------------------- be alerted to items on the list and associated promotions as they were
approached. Based on shopper characteristics stored on a database, the
---------------------- system could suggest either the most direct route or one that takes the
shopper past items that may be of interest even though they were not on
----------------------
the list.
---------------------- 12. Warnings about contents to which a shopper or family member is
allergic or wants to avoid
----------------------
If food or clothing were tagged with RFID that could provide information
---------------------- about the ingredients and materials composing the item, shoppers could
be warned about items to which they or a family member was allergic
----------------------
when those items were placed in their shopping carts/baskets equipped
---------------------- with RFID readers. This would be done by having software that compared
the contents of the selected items with profiles that the shoppers set up for
---------------------- things that they wanted to be warned of. The warning could be shown on
a display on the shopping cart, on an RFID-tagged cell phone or personal
----------------------
digital assistant, or on a kiosk to which the customer could go to review
---------------------- selections before checkout.

---------------------- A smart system that indexed items in the store’s inventory by type (e.g.,
sweater) or purpose (e.g., sweetener) and accessed the composition of
---------------------- those items could suggest alternatives that did not contain the problematic
component and tell the shopper where to find them. This same approach
---------------------- could help shoppers avoid other kinds of merchandise (e.g., items
---------------------- containing animal content or by-products objectionable to vegans) and
find acceptable substitutes.
---------------------- 13. Mapping shopping behaviours’
---------------------- By tagging carts and baskets with RFID, individual shopper movements
through the store could be precisely tracked in real time. The data could
---------------------- be used to map paths typically followed by shoppers and the amounts of
---------------------- time that shoppers spent in certain parts of the store. RFID would enable
stores to track how often a particular item was removed from a shelf,
---------------------- rack, container or promotional display for inspection and even how long
it was removed. This could provide data from which to infer shopper
---------------------- interest. Length of stops in certain store areas and frequency and length
---------------------- of handling merchandise could be correlated with actual purchase of the
item to learn whether shoppers were merely interested in the item or
---------------------- whether their inspection led to a sale.

306 Sales and Distribution Management

 Notes
Check your Progress 4
----------------------
State True or False. ----------------------
1. RFID allows virtually simultaneous and instantaneous reading of
----------------------
multiple tags in the vicinity of the reader.
----------------------

2.9 CHALLENGES TO RETAILERS ----------------------

Retailers are faced with many challenges as they attempt to be successful. ----------------------
The key areas include:
----------------------
1. Customer Satisfaction - Retailers know that satisfied customers are
loyal customers. Consequently, retailers must develop strategies intended ----------------------
to build relationships that result in customers returning to make more ----------------------
purchases.
----------------------
2. Ability to Acquire the Right Products - A customer will only be satisfied
if they can purchase the right products to satisfy their needs. Since a large ----------------------
percentage of retailers do not manufacture their own products, they must
seek suppliers who will supply products demanded by customers. Thus, ----------------------
an important objective for retailers is to identify the products, customers
----------------------
will demand and negotiate with suppliers to obtain these products.
3. Product Presentation - Once obtained products must be presented ----------------------
or merchandised to customers in a way that generates interest. Retail ----------------------
merchandising often requires hiring creative people who understand and
can relate to the market. ----------------------
4. Traffic Building - Like any marketer, retailers must use promotional ----------------------
methods to build customer interest. For retailers, a key measure of interest
is the number of people visiting a retail location or website. Building ----------------------
“traffic” is accomplished with a variety of promotional techniques such
----------------------
as advertising, including local newspapers or internet and specialised
promotional activities, such as coupons. ----------------------
5. Layout - For store-based retailers, a store’s physical layout is an important ----------------------
component in creating a retail experience that will attract customers. The
physical layout is more than just deciding in what part of the store to locate ----------------------
products. For many retailers, designing the right shopping atmosphere
(e.g., objects, light, sound) can add to the appeal of a store. Layout is also ----------------------
important in the online world where site navigation and usability may be ----------------------
deciding factors in whether of a retail website is successful.
----------------------
6. Location - Where to physically locate a retail store may help or hinder
store traffic. Well placed stores with high visibility and easy access, while ----------------------
possibly commanding higher land usage fees, may hold significantly
more value than lower cost sites that yield less traffic. Understanding the ----------------------

Retailing 307
 Notes trade-off between costs and benefits of locations is an important retail
decision.
----------------------
7. Keeping Pace with Technology - Technology has invaded all areas
---------------------- of retailing including customer knowledge (e.g., customer relationship
management software), product movement (e.g., use of RFID tags for
---------------------- tracking), point-of-purchase (e.g., scanners, kiosks, self-serve checkout),
web technologies (e.g., online shopping carts, purchase recommendations)
----------------------
and many more.
----------------------
Summary
----------------------
●● Retailing is defined as selling products to consumers for their personal
----------------------
use. A retailer is a reseller (i.e., obtains product from one party in order
---------------------- to sell to another) from which a consumer purchases products. Retailer
carries out various functions like bulk breaking, buying and building
---------------------- assortments, inventory holding, risk bearing, information and feedback,
after sales service and educating the customers.
----------------------
●● Retail format is a type of retail mix that the retailer adopts, which includes
---------------------- the nature of merchandise and services offered, the pricing policy, the
retailers approach to advertising and promotional programs, the choice
----------------------
of location preferred and the size of the store. The various retail formats
---------------------- include mom and pop stores, convenience stores, discount stores,
specialty stores, category killers, warehouse stores/clubs, super markets,
---------------------- departmental stores, franchisee, consumer cooperatives etc.
---------------------- ●● The various strategies perused by the retailers include pricing strategy,
target market strategy, location strategy, service strategy and promotion
---------------------- strategy. The strategies vary depending upon the business format in which
the retailers wants to be in. The various technologies used by the retailers
---------------------- include product information/ordering kiosk, frequent shoppers kiosk,
---------------------- virtual display case, electronic point of sale (Pos) signage, body scanning,
self scanning and self checkout etc.
---------------------- ●● Radio Frequency Identification (RFID) information to be read by radio
---------------------- waves from a tag without requiring line of sight scanning; virtually
simultaneous and instantaneous reading of multiple tags in the vicinity
---------------------- of the reader and each tag can have a unique code that ultimately allows
every tagged item to be individually accounted for. RFID bestows various
---------------------- benefits like, store management alerted to out-of-place items, reduced need
---------------------- to check merchandise carried by customer into store, monitoring controlled
substances and rejection of counterfeit or fraudulent merchandise etc.,
---------------------- ability to acquire right products, product presentation, innovative layout
and designs of the stores, providing convenient and accessible locations
---------------------- and keeping pace with the technology.
---------------------- ●● Retailing is all about giving shopping experience to the consumers. The
fact that the environment and the consumer’s needs and preferences keep
---------------------- on changing, puts a lot of pressure on the retailers to match the customer’s

308 Sales and Distribution Management

 expectations. The various challenges therefore they face include ensuring Notes
customer satisfaction on an ongoing basis.
----------------------
Keywords ----------------------
● Franchise: A franchise is a form of contractual channel in which one ----------------------
party, the franchisor, controls the business activities of another party, the
franchisee. ----------------------
● RFID: Radio frequency identification. ----------------------
● Stand-Alone: These are retail outlets that do not have other retail outlets
----------------------
connected.
● UPC: Universal Product Code. ----------------------

----------------------
Self-Assessment Questions
----------------------
1. What do you understand by the term retailer?
----------------------
2. Discuss the various functions of the retailer.
----------------------
3. What is a retail format? Discuss various retail formats.
4. Discuss the various retail strategies. ----------------------

5. Discuss various technologies being used in retail. ----------------------

6. What do you understand by the term RFID? Discuss its role in retail. ----------------------

Answers to Check your Progress ----------------------

Check your Progress 1 ----------------------

Fill in the blanks. ----------------------

1. In the list of functions of retailers, bulk breaking is the fundamental ----------------------
function of retailers.
----------------------
Check your Progress 2
State True or False. ----------------------

1. True ----------------------
2. True ----------------------
Check your Progress 3
----------------------
Fill in the blanks.
----------------------
1. Promotion strategies of the retailers include advertising, direct mail and
personal selling. ----------------------

----------------------

----------------------

Retailing 309
 Notes Check your Progress 4
State True or False.
----------------------
1. True
----------------------

---------------------- Suggested Reading

---------------------- 1. Bowersox, Logistical Management: The Integrated Supply Chain Process.
---------------------- 2. Calvin, Robert J. Sales Management.
3. Chopra, Supply Chain Management.
----------------------
4. Ghoshal, World Class in India. Penguin India.
----------------------
5. Lamba, A.J. The Art of Retailing.
---------------------- 6. Scheuing, Kurtz, Johnson. Sales Management: Concepts, Practices and
---------------------- Cases.

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

310 Sales and Distribution Management

Wholesaling
UNIT

3
Structure:

3.1 Introduction
3.2 Wholesale Markets
3.3 Meaning of Wholesaling
3.4 Benefits of Wholesaling
3.5 Functions of Wholesalers
3.6 Wholesale Formats
3.7 Types of Wholesalers
3.8 Appointment of Distributors
3.9 Concerns of Wholesalers
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Wholesaling 311
 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Explain the meaning and benefits of wholesaling
----------------------
• List the functions of wholesalers
---------------------- • Identify types of wholesalers
---------------------- • Describe the process of appointment of distributors
---------------------- • Discuss the concerns of wholesalers

----------------------

---------------------- 3.1 INTRODUCTION

---------------------- Wholesaling comprises all the activities involved in selling goods and
---------------------- services to the intermediaries in the distribution channel for resale or for making
other products or for general business operations. For example, a retailer buys
---------------------- products from the wholesalers for resale to the consumers or a baker buys wheat
flour for baking breads or an organisation might buy various raw materials for
---------------------- making further finished products. Firms primarily engaged in wholesaling
---------------------- activity are called wholesalers. Wholesalers by participating in all the channel
flows render invaluable service both to the manufacturers on the one hand and
---------------------- the retailers on the other.
----------------------
3.2 WHOLESALE MARKETS
----------------------
Wholesale markets improve efficiency in distribution of products by
---------------------- encouraging competition through creating conditions for transparent price
discovery at relatively low costs and by enhancing access to market information
---------------------- for various players in the market. Where multiple equilibrium prices occur for a
---------------------- single commodity because there are no wholesale markets, price transparency is
undermined and transaction costs rise (the cost incurred by market participants
---------------------- in obtaining market information). Wholesale markets therefore play a crucial
role in the vertical coordination of markets, equilibrating supply with demand
---------------------- and facilitating price formation. Their role reduces per unit marketing costs,
---------------------- promotes stable markets for local produce and encourages increased output and
productivity.
----------------------
Wholesale markets basically have to perform the following five functions cost-
---------------------- effectively:

---------------------- ●● physical exchange of products.

●● sorting of produce on the basis of standard criteria, thus facilitating
----------------------
sales they work much more efficiently with standardisation of weights,
---------------------- measures and quality.

312 Sales and Distribution Management

●● formation of an equilibrium price for product. Notes
●● exchange of information between suppliers and buyers; and
----------------------
●● risk management (price fluctuation risks).
----------------------
The fundamental objective of wholesale markets is to improve efficiency
in the distribution pipeline. By centralising transactions at a single location, ----------------------
reducing the period for transactions and separating wholesale and retail functions
----------------------
in the distribution system, wholesale markets promote greater transparency and
better price formation through a clearer interplay of supply and demand. Storage ----------------------
and handling conditions are also enhanced, leading to significant reductions in
losses especially in the case of perishable produce. ----------------------
Benefits derived from the physical functions of wholesale markets ----------------------
The physical infrastructure and facilities at wholesale markets facilitate ----------------------
the reduction of post-harvest losses and promote increased productivity
through: ----------------------
a) Ensuring protection ----------------------
Goods are protected from the elements (rain, wind and sun) and stored ----------------------
under more hygienic conditions, thus reducing spoilage.
----------------------
b) Improved handling operations
The market considerably reduces loading and unloading times as well as ----------------------
repeated handling of goods between unloading and display; vehicles are ----------------------
also parked and unutilised for shorter periods; and
----------------------
c) Easier introduction of innovation and new technology
The physical concentration of a large group of operators at the same place ----------------------
makes it easier to introduce innovation and to develop improved storage, ----------------------
handling and management technology and methods.
Economic benefits of wholesale markets ----------------------

a) Greater stability of supply and sale of produce ----------------------

The existence of centralised physical locations, known and easily accessible ----------------------
to operators, reduces the number of intermediaries in the distribution
pipeline and improves the flow of information between operators, both ----------------------
upstream (growers and collectors) and downstream (wholesalers and ----------------------
retailers), thus reducing uncertainty concerning supplies and completion
of sales transactions. ----------------------
b) Improved market information ----------------------
The centralisation of transactions that occur in modern wholesale markets ----------------------
enhances the collection, processing and wide dissemination of accurate
market information, hence improving the quality of enterprise investment ----------------------
decisions as well as promoting efficient resource allocation in the economy
in general and food production and distribution in particular. ----------------------

Wholesaling 313
 Notes c) Specialisation of Traders
The separation of wholesale and retail functions encourages specialisation
----------------------
by traders leading to efficiency and lower distribution costs.
---------------------- d) Enhanced Competition
---------------------- Leading to improved efficiency in the exchange process (efficiency in
resource allocation and price) and facilitating price discovery.
----------------------
e) Improved inspection, quality control. Sorting and grading according
---------------------- to quality

---------------------- Encourage the use of standard weights and measures and improved
standards of hygiene in the sale of produce (especially of perishables);
---------------------- and
---------------------- f) Marketing of increased volume of produce and quality differentiation
The reduction in the number of intermediaries in the food marketing chain
----------------------
and consequent increase in the tonnage handled by individual traders or
---------------------- the scale of their operations tend to lower distribution costs (especially
the cost of transporting produce) and also encourage efficient sorting and
---------------------- grading which facilitates trade in produce of different quality.
----------------------
Check your Progress 1
----------------------

---------------------- State True or False.

1. The fundamental objective of wholesale markets is to improve
----------------------
efficiency in the distribution pipeline.
----------------------

---------------------- 3.3 MEANING OF WHOLESALING

---------------------- Wholesaling is defined as the activities involved in selling to organisational
buyers who intend to either resell or use for their own purposes. A wholesaler is
----------------------
an organisation providing the necessary means to:
---------------------- 1) Allow suppliers (e.g., manufacturers) to reach organisational buyers (e.g.,
---------------------- retailers, business buyers), and
2) Allow certain business buyers to purchase products which they may not
---------------------- be able to otherwise purchase.
---------------------- According to El-Ansary : “Wholesaling is concerned with the activities
of those persons or establishments which sell to retailers and other merchants
----------------------
and/or to industrial, institutional and commercial users, but who do not sell in
---------------------- significant quantities to ultimate consumers”.
While many large retailers (Wall Mart) and even manufacturers (Dell)
----------------------
have centralised facilities and carry out the same tasks as wholesalers, they
---------------------- cannot be classified as wholesalers since these relationships only involve one

314 Sales and Distribution Management

other party, the buyer. Thus, a distinguishing characteristic of wholesalers is Notes
they offer distribution activities for both 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.
----------------------
As we see, the wholesale markets around us, we find that wholesale
market is part of every city; town and all the product categories across the board ----------------------
have their respective wholesale markets. These whole sellers sell products of ----------------------
all the companies in the industry in a particular product category and such
many traders located in close proximity of each other comprises of wholesale ----------------------
markets. For example we see around us wholesale market for grains, stationery,
garments, hosiery, automobiles spare parts etc. Such wholesalers do not buy ----------------------
products directly from the company but source them from the distributors. ----------------------
Say for example a wholesaler selling products like general merchandise
----------------------
including Colgate tooth paste will buy products from the distributor for the
company of his area. However there are certain product category where the ----------------------
company supplies products directly to the wholesalers who are called dealers or
stockist who in turn sell to smaller traders and or retailers. ----------------------

Distributors on the other hand are the first customers for the organisation. ----------------------
They are appointed under a contract for a period of time to service predefined
----------------------
geographical territory and it is the responsibility of the distributor to supply
the products of the company located in the assigned territory. For example, X ----------------------
company in Mumbai may appoint a distributor to look after a defined territory
say for example, Bandra, Mahim, Parle and Santacruz suburbs. Mumbai being ----------------------
a large city, it will have more number of distributors to cover the city. However
----------------------
in case of smaller towns and cities where more than one distributor cannot be
justified, the town may be represented by one distributor to service the town. ----------------------
The above perspective needs to be kept in mind while understanding this ----------------------
chapter.
----------------------
Check your Progress 2 ----------------------

----------------------
Fill in the blanks.
1. _____________ are the first customers for the organisation. ----------------------

----------------------
3.4 BENEFITS OF WHOLESALING ----------------------
The benefits wholesalers offer to members of the channel can be ----------------------
significant. However specific benefits vary by type of wholesaler. Yet there are
two particular benefits - one for suppliers and one for retailers. ----------------------
Provide Access to Products ----------------------
Wholesalers are in business to provide products and services to buyers ----------------------
(e.g., retailers) who either cannot purchase directly from suppliers because

Wholesaling 315
 Notes their purchase quantities are too low to meet the supplier’s minimum order
requirements or, if they purchase directly from suppliers, will pay higher
---------------------- prices compared to bigger retailers who obtain better pricing by purchasing
in greater quantities. Since wholesalers sell to a large number of buyers their
---------------------- order quantities may match those of large retailers thus allowing them to obtain
---------------------- lower prices from suppliers. Wholesalers can then pass these lower prices along
to their buyers, which can enable smaller retailers to remain competitive with
---------------------- larger rivals. In this way transacting through wholesalers is often the only way
certain retailers can stay in business.
----------------------
Provide Access to Markets
----------------------
Providing smaller retailers access to products they cannot acquire without
---------------------- wholesaler help offers a benefit for suppliers as well since it opens additional
market opportunities for suppliers. Namely, suppliers can have their products
---------------------- purchased and made available for sale across a wide number of retail outlets.
---------------------- More importantly, for a company offering a new product, convincing a
few wholesalers to stock a new product may make it easier to gain traction in the
---------------------- market as the wholesaler can yield power with the smaller retailers convincing
them to stock the new product. Considering a wholesaler can serve hundreds of
----------------------
small retail customers, the marketing efforts persuading the wholesaler to adopt
---------------------- a new product may be far more efficient compared to efforts needed to convince
individual store owners to stock the new product.
----------------------
Secondly, for most small producers, an immediate geographic location
---------------------- is typically insufficient to provide and maintain an on-going customer base for
their operations. As a means to sell their goods, smaller producers must have
---------------------- avenues to develop market segments of potential customers and must make sure
---------------------- their goods are of the quality customers want at prices they are willing to pay.
The role of wholesalers is to provide links to an expanded market base, i.e., to
---------------------- discover where customers are located and how best to reach them. In this sense,
wholesaling uses time and place as it relates to information and availability.
---------------------- Wholesalers create utility through holding goods that can be drawn upon by
---------------------- buyers at a cost lower than direct exchange.
Finally, wholesalers act as distribution channels and interface with
---------------------- markets and producers within markets. Whereas wholesaling and retailing
---------------------- provide similar functions in that they receive, store and distribute goods, the
importance of wholesaling is in its ability to moderate supply and demand
---------------------- fluctuations and cope with larger transactions with less emphasis on selling
techniques and services and product promotion. Wholesaling has the capability
---------------------- to adjust the distribution of goods from surplus to deficit areas or reach the
---------------------- goods from the place of production to the place of consumption.

---------------------- 3.5 FUNCTIONS OF WHOLESALERS

---------------------- Wholesalers are successful only if they are able to serve the needs of their
---------------------- customers, who may be retailers or other wholesalers. Some of the marketing
functions provided by wholesalers to their buyers are:
316 Sales and Distribution Management
1. Selling and promoting Notes
This function is very important to manufacturers. In addition to being
----------------------
marketing experts in their industry, distributors and wholesalers
usually have direct-selling organisations and a detailed knowledge of ----------------------
their customers and their expectations. Also, because of the scale of
the distributing firm’s operations and its specialised skill in channel ----------------------
management; it can significantly improve the time, place and possession
----------------------
utilities by housing inventory closer to the market.
These advantages mean that the manufacturers can reach many small and ----------------------
distant customers at a relatively low cost, allowing the manufacturers to
----------------------
channel their expenditures on product development and its core production
processes. ----------------------
2. Bulk breaking
----------------------
This is one of the fundamental functions of distribution. Manufacturers
normally produce large quantities of a limited number of products. ----------------------
However, retailers normally require smaller quantities of multiple ----------------------
products. When the distribution function handles this requirement it keeps
the manufacturer from having to break bulk and repackage its product to ----------------------
fit individual requirements. Lean manufacturing and JIT techniques are
continuously seeking ways to reduce lot sizes, so this function enhances ----------------------
that goal. ----------------------
3. Value-added processing
----------------------
Postponement specifies that products should be kept at the highest possible
level in the pipeline in large quantities that can be customised into their ----------------------
final form as close as possible to the actual final sale. The distributor
can facilitate this process by performing sorting, labeling, blending, ----------------------
packaging etc., This significantly reduces end-product obsolescence and ----------------------
minimises the risk inherent with carrying finished goods inventory.
----------------------
4. Transportation
After they receive the goods from the transporters, distributors redistribute ----------------------
the stocks to the retailers down the line. This means once they receive
----------------------
the orders from the retailers, the assortment of the order given is packed
and delivered to the retailers at his premises. This we see everyday in ----------------------
our neighbourhood kirana and general stores that there is a stream
of distributor’s delivery vehicles for delivery of the ordered goods. ----------------------
Distributors in the process ensure that the right product is available at the
----------------------
right time and at the right place.
In Indian conditions, the customer visiting the wholesale markets are, ----------------------
in addition to the retailers from the local town, are retailers from the ----------------------
neighbouring markets who depend on the wholesale markets for their
requirements. In such cases, the distributors undertake the packaging of ----------------------
the goods and handing over the goods to the transporters for transporting
to the retailers upcountry town. ----------------------

Wholesaling 317
 Notes 5. Warehousing
Since the distributors service consists of a wide geographical area, they
----------------------
need to maintain large stocks of goods to cater to the daily needs of
---------------------- their customers. This calls for making provision of large warehouses.
The USP of the distributor/wholesaler is their capacity to hold large
---------------------- stocks ensuring availability of the products all the time Warehousing
exists to provide access to sufficient stock in order to satisfy anticipated
----------------------
customer requirements and to act as a buffer against supply and demand
---------------------- uncertainties. Since demand is often located far from the source
(manufacturer), warehousing can provide a wide range of marketplaces
---------------------- that manufacturers, functioning independently, could not penetrate. In the
process, the wholesaler/distributors are also undertaking the warehousing
----------------------
function.
---------------------- 6. Marketing information
---------------------- The distributors are located in the markets and are constantly in touch
with the retailers who in turn have direct interface with the consumers.
---------------------- The retailers have the pulse of the market who pass on the information
about the changing consumer preferences, styles and fashions, about the
----------------------
competition, changes in the marketing environment etc. to the distributors/
---------------------- wholesalers who in turn pass it up the channel to the manufactures which
is of immense value.
----------------------
7. Providing cost-effectiveness
---------------------- If the manufacturers were to supply the products directly to the consumers,
---------------------- then it would be very costly affair, since it would involve huge costs like
large inventory, man power etc. The distributors/wholesalers through their
---------------------- presence, reduce the number of contacts to be made by the manufacturers.
That is instead of contacting crores of consumers, now the manufactures
---------------------- can manage this by routing their products through may be thousands of
---------------------- distributors, thereby saving costs.

---------------------- 3.6 WHOLESALE FORMATS

---------------------- 1. General Merchandise
---------------------- These wholesalers offer broad but shallow product lines that are mostly
of interest to retailers, carrying a wide assortment of products, such as
---------------------- convenience stores, variety stores (e.g., those offering closeout products)
---------------------- and novelty retailers. Since these wholesalers offer such a wide range of
products, their knowledge of individual products may not be strong.
---------------------- 2. Speciality Merchandise
---------------------- Many wholesalers focus on specific product lines or industries and in
doing so supply a narrow assortment of products but within the product
----------------------
lines offered there is great depth. Additionally, these wholesalers tend to
---------------------- be highly knowledgeable of the markets they serve.

318 Sales and Distribution Management

3. Contractual Notes
In the wholesaler-sponsored channel arrangements a wholesaler brings
----------------------
together and manages many independent retailers. The services of
these wholesalers are limited to the retailers involved in the contractual ----------------------
arrangement.
----------------------
4. Industrial distributors
----------------------
The industrial distributor directs their operations to the business customer
rather than to other resellers. Depending on the distributor, they can carry ----------------------
either broad or narrow product lines.
----------------------
5. Cash-and-Carry
----------------------
A wholesale operation common to the food industry is the cash-and-carry
where buyers visit the wholesaler’s facility, select their order, pay in cash ----------------------
(i.e., credit purchases not permitted) and then handle their own delivery
(i.e., carry) to their place of business. This form of wholesaling has begun ----------------------
to expand outside of the food industry as large wholesale club, such as
----------------------
Costco and Sam’s Club, allow qualified businesses to purchase products
intended for retail sale. ----------------------
6. Truck ----------------------
As the name suggests, truck wholesaling operations are primarily run
----------------------
out of a truck that is stocked with products. These wholesalers often
have assigned geographic territories where they regularly visit buyer’s ----------------------
locations. In most cases, these wholesalers offer specialty product lines
with many being found in the retail food industry and the industrial ----------------------
markets.
----------------------
7. Rack Jobber
----------------------
Similar to truck wholesalers, the rack jobber also sells from a truck.
However, the main difference is that rack jobbers are assigned and ----------------------
manage space (i.e., racks) within a retailer’s store. The rack jobber is
----------------------
then responsible for maintaining inventory and may even handle other
marketing duties such as setting product price. This form of wholesaling ----------------------
is most prominent with magasines, candy, bakery and health-and-beauty
products. In some trades, the name rack jobber is being replaced by the ----------------------
name service merchandiser.
----------------------
8. Drop Shipper
----------------------
Wholesalers in this category never take physical possession of products,
though they do take ownership. Essentially they are shipping coordinators ----------------------
who receive orders from customers and then place the order with a product
----------------------
supplier. Shipping is then arranged so that the supplier ships directly to
the drop shipper’s customer. Drop shipping is often most useful when ----------------------
very large orders are placed where transportation and product handling
costs are high if there are too many distribution points. ----------------------

Wholesaling 319
 Notes Broker
A far less obvious type of wholesaler is the broker, who is responsible for
----------------------
bringing buyers and sellers together. However, brokers do not take ownership
---------------------- of products and often never handle the product. Brokers are paid based on a
pre-negotiated percentage of the sale (i.e., commission) by the side that hires
---------------------- their services.
---------------------- In most cases, the relationship that develops between the broker and the
buyer and seller is short-term and only lasts through the purchase. Brokers can
---------------------- be found in the food industry, importing/exporting and real estate.
---------------------- Agent

---------------------- Similar to brokers, agents also bring buyers and seller together though
they tend to work for clients for an extended period of time. As with brokers,
---------------------- agents generally are paid on commission. A common type of agent is the
Manufacturers’ Representative who essentially assumes the role of a sales force
---------------------- for a client. Manufacturers’ Reps may handle several non-competing product
---------------------- lines at the same time and during a single meeting with a perspective buyer may
discuss many products.
----------------------
3.7 TYPES OF WHOLESALERS
----------------------
Wholesalers can be categorised based on the following parameters.
----------------------
1. Products carried
----------------------
2. Promotional activities
----------------------
3. Distribution Method
---------------------- 4. Service level
---------------------- 5. Product ownership
---------------------- 1. Products carried

---------------------- Wholesalers can be classified by the width and depth of product lines they
handle. The categories include:
----------------------
a) General Merchandise
---------------------- Wholesalers carrying a very broad line of products fall into the
---------------------- general merchandise wholesaler category. Like general merchandise
retailers, the product lines these wholesalers carry may not offer
---------------------- many options (i.e., shallow depth). These wholesalers tend to
market to the smaller general merchandise retailer such as smaller
---------------------- convenience or general stores.
---------------------- b) Specialty Merchandise
---------------------- Wholesalers focusing on narrow product lines but offering deep
selection within the lines fall into the specialty merchandise
---------------------- category. Most specialty merchandise wholesalers direct their

320 Sales and Distribution Management

 marketing efforts to specific industries. For example, specialty Notes
wholesalers supply such industries such as electronics, seafood and
pharmaceuticals. ----------------------
2. Promotional Activities ----------------------
Wholesalers can be separated based on the importance promotion plays ----------------------
in generating demand for products handled by the wholesaler. Two basic
categories exist: ----------------------
a) Extensive Promotion ----------------------
The main job of some wholesalers is to actively locate buyers. This
----------------------
occurs most often where a wholesaler is hired to find buyers for a
supplier’s products or where the wholesaler is very aggressive in ----------------------
finding new customers for their business. Under these arrangements
the most common promotional activity is personal selling through a ----------------------
sales force, though advertising may also be used.
----------------------
b) Limited Promotion
----------------------
Nearly all wholesalers engage in some promotional activities. Even
in situations where a wholesaler dominates a channel and clients ----------------------
have little choice but to acquire products from the wholesaler, some
----------------------
promotion will still occur. For instance, at times a wholesaler may
need to use their salespeople to persuade buyers to purchase in ----------------------
larger volume than normal or to agree to stock a new product, the
wholesaler is handling. In other cases, especially for wholesalers ----------------------
selling products for business use, promotional activities may be
----------------------
more extensive and include advertising and other promotional
methods. ----------------------
3. Distribution Method ----------------------
Wholesalers have distribution methods similar to those of retailers in that
customers may or may not be able to physically visit the wholesaler’s ----------------------
location to acquire their purchase. For the purposes of our discussion ----------------------
of wholesaling, this category is separated based on whether or not a
stationary location exists from which the wholesaler conducts the physical ----------------------
movement of products.
----------------------
a) Stationary Location
----------------------
The most common wholesaler arrangement is where the wholesaler
has one or more fixed facilities where product handling operations ----------------------
take place. However, while stationary wholesalers share the
characteristic of a permanent location, they often differ on whether ----------------------
customers can visit these facilities: ----------------------
b) Customer Accessible
----------------------
At certain wholesaler locations buyers can shop at the facility. In
fact, retail warehouse clubs, such as Costco and Sam’s Club, also ----------------------

Wholesaling 321
 Notes function as wholesalers for qualifying businesses. In addition to
selecting their orders, buyers are responsible for making their own
---------------------- arrangements to transport their purchases.
---------------------- c) Not Customer Accessible
Most operations classified as wholesalers do not permit buyers
----------------------
to visit their facility in order to select items, rather buyers place
---------------------- orders via phone, web or through person-to-person contact with
wholesaler’s representatives. Also, in most cases, the wholesaler
---------------------- takes responsibility for product delivery.
---------------------- d) Non-Stationary Location

---------------------- Not all wholesalers carry inventory at a stationary location. In fact,

some do not carry inventory at all!
---------------------- e) Mobile
---------------------- Several specialised wholesalers transport products to the customer’s
location using vans or trucks. Buyers then have the ability to
---------------------- purchase product by either walking through the mobile facility or
---------------------- ordering from the wholesaler who then selects the items from the
vehicle.
----------------------
f) No Facilities
---------------------- Some wholesalers do not have physical locations that store
products. Instead, these operations rely on others, such as delivery
----------------------
companies, to ship products from one location (e.g., manufacturer)
---------------------- to the buyer’s place of business.

---------------------- 4. Service Level

Wholesalers can be distinguished by the number and depth of services,
---------------------- they provide to their customers.
---------------------- a) Full-Service
---------------------- Wholesalers in this category mainly sell to the retail industry,
and in most cases, require a strong, long-term retailer-wholesaler
---------------------- relationship be established. In addition to basic distribution services,
such as providing access to an assortment of products and furnishing
----------------------
delivery, these wholesalers also offer customers additional services
---------------------- that aid retail store operations including offering assistance with:
in-store merchandising; retail site location decisions (e.g., find best
---------------------- geographic location for a new store); store design and construction,
back-end operations (e.g., payroll services), financial support; and
----------------------
many more.
---------------------- b) Limited Service
---------------------- Compared to full-service wholesalers, buyers dealing with limited
service firms offer far fewer services. Most offer basic services, such
---------------------- as shipping and allow credit purchasing but few offer the number of

322 Sales and Distribution Management

 service options found with full-service wholesalers. Notes
c) No Service
----------------------
Some wholesalers follow a business model whose only service is to
make products available for sale and only on a cash basis. In these ----------------------
instances, the buyer handles their own transportation of the product.
----------------------
5. Product Ownership
----------------------
Wholesalers can be classified based on whether they do or do not become
the owners of the products they sell. By ownership we mean that title (i.e., ----------------------
legal ownership) has passed from the party from whom the wholesaler
purchased the product (e.g., manufacturer) to the wholesaler. It also ----------------------
means the wholesaler assumes any risk that may arise with handling the ----------------------
product.
a) Do Take Title ----------------------

Wholesalers taking title own the products they purchase. ----------------------

b) Do Not Take Title ----------------------
Wholesalers who do not take title are focused on activities that
----------------------
bring buyers and sellers together. Often these wholesalers never
physically handle products. ----------------------

Check your Progress 3 ----------------------

----------------------
Fill in the blanks.
----------------------
1. General Merchandise, Speciality Merchandise, Industrial Distributors
are the formats of _______________. ----------------------

----------------------
3.8 APPOINTMENT OF DISTRIBUTORS ----------------------
1. Factors to be taken into consideration while appointing distributors. ----------------------
a) Size of sales force ----------------------
• How many field personnel does the distributor have?
----------------------
• What are their short and long-term expansion plans, if any?
----------------------
• Would they need to expand to accommodate your account
properly? If so, would they be willing to do so? ----------------------
b) Sales Record ----------------------
• Has their sales growth been consistent? If not, why not? Try ----------------------
to determine sales growth for the past five years.
----------------------
• What are their sales objectives for the next year? How were
they determined? ----------------------

Wholesaling 323
 Notes c) Territorial Analysis
• What territory do they cover?
----------------------
• Do they have branch offices in the territory to be covered? If
---------------------- so, are they located where your sales prospects are greatest?
---------------------- • Do they have plans to open additional offices?
---------------------- d) Product Mix

---------------------- • How many product lines do they represent?

• Are these product lines compatible with yours?
----------------------
• Would there be any conflict of interest?
----------------------
• Do they represent any other Australian firms? If so, which
---------------------- ones?
---------------------- • If necessary, would they be willing to alter their product mix
to accommodate yours?
----------------------
• What would be the minimum sales volume needed to justify
---------------------- handling your line? Are their sales projections realistic?

---------------------- e) Facilities and equipment

• Do they have adequate warehouse facilities?
----------------------
• Do they have computers? If so, are they compatible with
---------------------- yours?
---------------------- • What communications equipment do they have? Fax, modem,
etc.
----------------------
f) Marketing Policies
----------------------
• How are the sales staff compensated?
---------------------- • Do they run motivation and incentive programs?
---------------------- • Do they use product managers to coordinate sales efforts for
specific product lines?
----------------------
• How do they monitor sales performance?
----------------------
• How do they train sales staff?
----------------------
g) Customer Profile
---------------------- • What type of customers are they currently contacting?
---------------------- • Are their customers’ interests compatible with your product
line?
----------------------
• Who are their key accounts?
----------------------
• What percentage of total receipts do these key accounts
---------------------- represent?

324 Sales and Distribution Management

2. Application for distributorship Notes
Name of Establishment…
----------------------
Full address........……………………………………………………………......
----------------------
PHONE No. (O)…..…………......…. (R) Fax No. ……………………….……
E-mail…………………………… ----------------------
Website…………………………… ----------------------
Date of Establishment …………………………………………………………. ----------------------
Constitution of the firm Prop/ Partnership/ Pvt. Ltd./ Ltd.
----------------------
Name of Prop./ Partner /Director …………………………………………….....
----------------------
Details of Staff (1) Sales………………......…. Office…………………………
Mode of Delivery…………………………………………………...................... ----------------------
Products presently dealing (1)……....…....(2)….....…..…..….(3)….........……. ----------------------
Yearly turn over…………………………………………………...……………
----------------------
No. of out lets in your area……………………………………………………....
----------------------
Area preferred for operation……………………………………....……………
Name of the Bankers……………………………………………………………. ----------------------

Name of your Transporters……………………………………………………... ----------------------

Suggestion if any………………………………………………………………... ----------------------
Place……………… Name………………
----------------------
Date. /…. /………
----------------------
Sign of Distributor/ Seal
3. Distributor Agreement ----------------------
This agreement is entered into on this …. Day of ….. Year 2005 at…. ----------------------
By and between: - ----------------------
ABC Pvt. Ltd. Registered office at 246, Mittal Chambers, Nariman Point,
Mumbai having factory at Plot No. 103, Rajguru Industrial Area, Taloja, ----------------------
Maharashtra hereinafter referred to as the Company ----------------------
AND
----------------------
M/s ………………………………………………………………
----------------------
Hereinafter referred to as Distributor where as the company wanted to
appoint distributor for selling to dealers/retailers, the products of ABC brand ----------------------
of products (hereinafter referred as the “Products”) belonging to the company
and whereas the distributor has shown its willingness to deal in the company’s ----------------------
products in the markets of and the company has agreed to do business with
----------------------
distributor on the following terms and conditions.
a) This distributor agreement is effective from the………day of ……….2006 ----------------------

Wholesaling 325
 Notes for a period of one year. This agreement may be renewed after mutual
agreement between the company and the distributor.
----------------------
b) That the distributor shall take all the necessary steps for promoting the
---------------------- sales of the products in the assigned territory with the help of company
sales team and shall ensure the regular supply of the products to the market
---------------------- assigned. The distributor shall keep at least 30 days inventory with them
---------------------- for market requirement.
c) That the products will be supplied to the distributor on the bases of FOR
----------------------
to his warehouse at………………….as per the agreed prices. A margin of
---------------------- 8 % will be offered to the distributors.

---------------------- d) Terms of payment will be advance payment.

---------------------- e) Order should be placed in 15 days advance.

---------------------- f) That the company will dispatch the goods only on receipt of payment.

---------------------- g) In the event of inter-state transactions, Central Sales Tax will be levied
as prevailing at the time of dispatch for which the distributor is liable to
---------------------- submit the relevant CST Forms. In the absence of the form, tax at the rate
of 10% becomes applicable. The distributor is liable to pay the difference
---------------------- in the tax along with penalty if any along with interest.
---------------------- h) That the company will make sure of regular supply of the products to the
distributor based upon the projected indent submitted by the distributor to
----------------------
the company
----------------------
i) The company will not be responsible for Irregular supply or no supply,
---------------------- for any reason beyond its control including reasons in the nature of force
majore.
----------------------
j) The prices applicable for the dispatches would be as prevailing as on the
---------------------- date of dispatch.
---------------------- k) The company shall provide to you the companies official prices list from
time ti time. That the company pricelist to be provided from time to time
---------------------- will finalise the rates.
---------------------- l) The distributor will be responsible for servicing the retailers/wholesalers
as required in his area of operation.
----------------------
m) In the event of the distributor providing credit to the customers in his area
----------------------
of operation it would be entirely at his own risk.
---------------------- n) That the targets on sales will be fixed from time to time based on the
---------------------- market feed back. However, the distributor has to make sure of logical
and reasonable efforts in achieving the targets assigned in their area of
---------------------- operation. The product wise target agreed upon is per month is enclosed
herewith.
----------------------

326 Sales and Distribution Management

o) The advertising, sales promotion, publicity would be provided at the Notes
discretion of the company which would be in relation to the achievement
of targets. ----------------------
p) That a certificate of association will be awarded to the distributor to hang/ ----------------------
display in the distributor’s office.
----------------------
q) That this agreement can be terminated by either of the parties on one
month written notice to do so and all the claims if any, will have to settled ----------------------
within the noticed period of one month from either of the parties.
----------------------
r) That the distributor shall not deal with any competitor’s products during
the currency of this agreement. ----------------------
s) That on the expiry of the agreement or in the event of termination of the ----------------------
agreement the company will make the payment of security amount (Good
will money) within 30 days deducting any balance due. The interest ----------------------
free security deposit as agreed by both parties in this agreement will be
Rs ______________ ----------------------

t) That all disputes are subject to Mumbai Jurisdiction only. Arbitration ----------------------
clause will also apply.
----------------------
In Witness here of the parties here to have set their hands and signed this
agreement of Distributorship on this…….. day of ……. 2005 as mentioned ----------------------
above in the presence of the following witnesses.
----------------------
Signed
----------------------
Distributor Ands Trading Pvt. Ltd.
Witnesses: ----------------------
1 ---------------------------- 2 ------------------------------ ----------------------

3.9 CONCERNS OF WHOLESALERS ----------------------

The wholesalers have been part and parcel of the distribution process ----------------------
of ages. However, since the evolution if a continuous process, the needs of ----------------------
the markets keep on changing the situation keep on changing which creates
uncertainly and gives rise to concerns. Some of the critical issues faced by the ----------------------
wholesalers are discussed here below:
----------------------
1. Disintermediation
----------------------
The growth of organised retailing where in the manufacturers are
more and more supplying goods directly to the retailers bypassing the ----------------------
wholesalers and the internet as a communication and distribution channel
has lead many to conclude that wholesaling will lose its importance ----------------------
as manufacturers and final buyers learn to transact directly. This so
----------------------
called “disintermediation” of marketing channels is a real concern to
some wholesalers, especially those that do not function as a dominant ----------------------
party within a distribution channel. For example with revolution that is
taking place in the organised retailing industry, it can be seen that the ----------------------

Wholesaling 327
 Notes retailers like Spencer’s, Pyramids, Subhiksha, Margin Free, etc., due to
heavy volumes are buying directly from the manufacturers or from the
---------------------- producers like farmers in case of agricultural products, thereby bypassing
the distributors. This process is called disintermediation.
----------------------
2. Facility Location
----------------------
Wholesalers need to be located in the wholesale markets where customers
---------------------- from all over the town or from nearby smaller town and village visit for
their routine purchases. This facilitates ease of operation and ensures
---------------------- better customer service. However in case of distributors they need to have
their facilities located very close to the customers in the assigned territory
----------------------
which adds to the operational convenience and efficient customer service.
---------------------- Real estate prices are rising every where particularly in the metro’s and sub
metros thereby the decision as to where to locate becomes more difficult
---------------------- and more expensive the closer the location is to major metropolitan areas.
---------------------- 3. Transportation Costs

---------------------- Wholesalers are involved in transporting products since the requirements

of retailers in their assigned territory need to be supplied in their stores.
---------------------- The rise in fuel costs has forced a close examination of how they handle
product distribution. Transportation expense can represent a significant
---------------------- portion of overall distribution costs and these higher costs are often
---------------------- passed on to customers in the form of higher product prices. Wholesalers
can overcome this problem by methods such as:
---------------------- 1. Using equipment and delivery vehicles that are more fuel efficient;
---------------------- 2. Utilising computer routing software to determine less costly
delivery routes; and
----------------------
3. Offering greater incentives to customers to accept deliveries during
---------------------- less congested times of the day.
---------------------- 4. Adapting to New Technologies

---------------------- In addition to technologies to lower fuel costs, other technologies that assist
the distribution process are offering both advantages and disadvantages to
---------------------- wholesalers.

---------------------- Use of computer hardware and software for maintaining data bases
of customers, maintaining accounts, purchases and sales records
---------------------- etc. wholesalers, particularly in India conduct business in traditional
manner without much application of technology. However with literacy
---------------------- increasing at all levels, technology is being gradually adopted by the
---------------------- trading fraternity. However, acquiring, learning, installing, operating and
maintaining the technology infrastructure is a costly and expensive affair
---------------------- which adds to the operational costs.

---------------------- 5. Offering Non-Product Assistance

Wholesalers are finding that offering products is not the only thing of
----------------------
interest to their buyers. Many customers also want wholesalers to offer

328 Sales and Distribution Management

 additional value-added services such as employee training (e.g., teach Notes
selling skills), promotional support (e.g., financial support for advertising)
and assistance in managing their operations (e.g., building an online ----------------------
store). Keeping pace with the services in demand by their customers
requires constant research and communication with customers. ----------------------

----------------------
Check your Progress 4
----------------------
Fill in the blanks. ----------------------
1. The wholesalers have been part and parcel of the ____________ ----------------------
process of ages.
----------------------

Activity 1 ----------------------

----------------------
Visit the wholesale agriculture produce/grocery market in your city and
describe the functions performed by a wholesaler. ----------------------

----------------------
Summary
----------------------
●● Wholesale markets improve efficiency in distribution of products by
----------------------
encouraging competition through creating conditions for transparent
price discovery at relatively low costs and by enhancing access to market ----------------------
information for various players in the market. The functions of wholesale
markets include physical exchange of products, sorting of produce on the ----------------------
basis of standard criteria, thus facilitating sales (they work much more
----------------------
efficiently with standardisation of weights, measures and quality); formation
of an equilibrium price for product, exchange of information between ----------------------
suppliers and buyers; and Risk management (price fluctuation risks).
●● Wholesaling is defined as the activities involved in selling to organisational ----------------------
buyers who intend to either resell or use for their own purposes. A ----------------------
wholesaler is an organisation providing the necessary means to allow
suppliers and certain business buyers to purchase products which they may ----------------------
not be able to otherwise purchase. According to El-Ansary “Wholesaling
is concerned with the activities of those persons or establishments which ----------------------
sell to retailers and other merchants, and/or to industrial, institutional ----------------------
and commercial users but who do not sell in significant quantities to
ultimate consumers”. The functions of the wholesalers include selling ----------------------
and promoting, bulk breaking; value-added processing, transportation,
warehousing, market information and providing cost effectiveness. ----------------------

●● The wholesalers are categorised on various parameters like products ----------------------

carried, promotional activities performed, methods of distribution,
service level and product ownership. There are various wholesale formats ----------------------
like general merchandise, specialty merchandise, contractual, industrial ----------------------

Wholesaling 329
 Notes distributors, cash and carry, truck, rack jobber etc. While appointing
the distributors various factors like size of the sales force, sales record,
---------------------- territorial analysis, product mix, facilities and equipment, marketing
policies and customer profit etc. need to be taken into consideration.
----------------------
●● The main concerns of the wholesalers are disintermediation, transportation
---------------------- costs, facility location, adapting to new technologies etc.
----------------------
Keywords
----------------------
● Disintermediation: Reducing the intermediaries’ from the distribution
---------------------- channel.
---------------------- ● JIT: Just in time, a concept being followed by the organisations so as to
reduce the inventory and increase operational efficiency.
----------------------
● USP: Unique selling proposition meaning special features like price,
---------------------- benefits etc better than the substitutes.
● Value-added processing: All those activities which add value at each
----------------------
stage. Grading of the products, labeling and packaging to mention a few
---------------------- add value to the final product and the consumer by making the appropriate
product available at the right price.
----------------------

---------------------- Self-Assessment Questions

---------------------- 1. What are wholesale markets? Discuss the benefits of the wholesale
markets.
----------------------
2. What is wholesaling? Discuss various functions of the wholesalers.
----------------------
3. Discuss various functions of wholesalers.
----------------------
4. Explain various wholesale formats.
----------------------
5. Discuss the various factors that need to be taken into consideration while
---------------------- appointing the distributors.
---------------------- 6. Discuss the various concerns of the wholesalers.
----------------------
Answers to Check your Progress
----------------------
Check your Progress 1
----------------------
State True or False.
---------------------- 1. True
----------------------

----------------------

----------------------

330 Sales and Distribution Management

Check your Progress 2 Notes
Fill in the blanks.
----------------------
1. Distributors are the first customers for the organisation.
----------------------
Check your Progress 3
----------------------
Fill in the blanks.
----------------------
1. General Merchandise, Speciality Merchandise, Industrial Distributors are
the formats of wholesale. ----------------------
Check your Progress 4
----------------------
Fill in the blanks.
----------------------
1. The wholesalers have been part and parcel of the distribution process of
ages. ----------------------

----------------------
Suggested Reading
----------------------
1. Bowersox, Logistical Management: The Integrated Supply Chain Process.
----------------------
2. Calvin, Robert J. Sales Management.
3. Chopra, Supply Chain Management. ----------------------

4. Ghoshal, World Class in India. Penguin India. ----------------------

5. Lamba, A.J. The Art of Retailing. ----------------------
6. Scheuing, Kurtz, Johnson. Sales Management: Concepts, Practices and
----------------------
Cases.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

Wholesaling 331
 Notes

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

332 Sales and Distribution Management

Warehousing
UNIT

4
Structure:

4.1 Introduction
4.2 Meaning and Definition of Warehousing
4.3 Need for Warehousing
4.4 Types of Warehouses
4.5 Characteristics of Ideal Warehouse
4.6 Functions of Warehouse
4.7 Advantages of Warehouse
4.8 Activities in Warehouses
4.9 Warehouse Designing and Configuration
4.10 Distribution Center
4.11 Clearing and Forwarding Agents
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Warehousing 333
 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Explain the meaning and need of warehousing
----------------------
• Identify types of warehouses
---------------------- • Specify the characteristics of ideal warehouses
---------------------- • Describe the functions and advantages of warehouses
---------------------- • Define warehouse designing and configuration

---------------------- • Elaborate on the concept of C&F agents

----------------------
4.1 INTRODUCTION
----------------------
We use variety of products in our daily life. However we are oblivious
---------------------- to the reality as to how all the products are made available to us continuously,
---------------------- to us within our arms length, and as and when we want. Is it possible to supply
us the various products for our consumption unless the goods are warehoused
---------------------- or stored? The products are manufactured by the companies and they need to
distribute/sell sell the products through out the country. Is it possible to sell the
---------------------- products directly? No it is not! The products need to be warehoused so that they
---------------------- are made available as and when required by the customers. Though we do not
realise it, it is a fact that warehouses play a direct or indirect role in the entire
---------------------- business activity by being a element in the supply value chain.
----------------------
4.2 MEANING AND DEFINITION OF WAREHOUSING
----------------------
We need different types of goods in our day-to-day life. We may buy
---------------------- some of these items in bulk and store them in our house. Similarly, businessmen
also need a variety of goods for their use. Some of them may not be available
---------------------- all the time. But, they need those items throughout the year without any break.
---------------------- Take the example of a sugar factory. It needs sugarcane as raw material for
production of sugar. You know that sugarcane is produced during a particular
---------------------- period of the year. Since sugar production takes place throughout the year,
there is a need to supply sugarcane continuously. But how is it possible? Here
---------------------- storage of sugarcane in sufficient quantity is required. Again, after production
---------------------- of sugar it requires some time for sale or distribution.
Thus, the need for storage arises both for raw material as well as finished
---------------------- products. Storage involves proper arrangement for preserving goods from the
---------------------- time of their production or purchase till the actual use. When this storage is
done on a large scale and in a specified manner it is called ‘warehousing’. The
---------------------- place where goods are kept is called ‘warehouse’. The person in-charge of
warehouse is called ‘warehouse-keeper’.
----------------------

334 Sales and Distribution Management

Definitions Notes
a) “Warehouses and distribution centers are defined as structures that are
----------------------
primarily used for the receipt, temporary storage, possible modification/
customisation and distribution of goods that are en route from production ----------------------
sites to where they are consumed. Warehouses and DCs are often sites
where value is added to the products moving through them. Examples ----------------------
of value-added activities include final assembly and customisation of
----------------------
products and preparing products for the sales floor (including packaging
and tagging).” ----------------------
b) “Warehousing refers to the activities involving storage of goods on a
----------------------
large-scale in a systematic and orderly manner and making them available
conveniently when needed. In other words, warehousing means holding ----------------------
or preserving goods in huge quantities from the time of their purchase
or production till their actual use or sale. Warehousing is one of the ----------------------
important auxiliaries to trade. It creates time utility by bridging the time
----------------------
gap between production and consumption of goods”.
----------------------
4.3 NEED FOR WAREHOUSING
----------------------
Warehousing is necessary due the following reasons.
----------------------
1. Seasonal Production
----------------------
It is well known that agricultural commodities are harvested during certain
seasons but their consumption or use takes place throughout the year. ----------------------
Therefore, there is a need for proper storage or warehousing for these
commodities, from where they can be supplied as and when required. ----------------------
2. Seasonal Demand ----------------------
There are certain goods, which are demanded seasonally, like rain coats ----------------------
or umbrellas in the rainy season. The production of these goods takes
place throughout the year to meet the seasonal demand. So there is a need ----------------------
to store these goods in a warehouse to make them available at the time of
need. ----------------------

3. Large-scale Production ----------------------

In case of manufactured goods, now-a-days production takes place to ----------------------
meet the existing as well as future demand of the products. To take the
benefits of economies of large scale manufacturers also produce goods in ----------------------
huge quantity which is more beneficial. Hence the products so produced
----------------------
on a large scale, need to be stored properly till they are sold.
4. Quick Supply ----------------------
Both industrial as well as agricultural goods are produced at some ----------------------
specific places but consumed throughout the country. For example
tea is manufactured in Assam or Kerala, away from the consumption ----------------------
centers. Therefore, it is essential to stock these goods near the place of ----------------------

Warehousing 335
 Notes consumption, so that without making any delay, these goods are made
available to the consumers at the time of their need.
----------------------
5. Continuous Production
---------------------- Manufacturers keep on producing continuously to meet future demand.
Hence Continuous production of goods in factories calls for purchase of
----------------------
raw materials in huge quantities. Therefore there it is required to keep
---------------------- sufficient quantity of stock of raw material in the warehouse to ensure
continuous production.
----------------------
6. Price Stabilisation
---------------------- To maintain a reasonable level of the price of the goods in the market, there
---------------------- is a need to keep sufficient stock in the warehouses. Scarcity in supply of
goods may increase their price in the market. Again, excess production
---------------------- and supply may also lead to fall in prices of the product. By maintaining a
balance between demand and supply of goods, warehousing leads to price
---------------------- stabilisation.
----------------------
Check your Progress 1
----------------------

---------------------- Fill in the blanks.

1. Warehousing is necessary due to reasons such as seasonal production,
----------------------
______________, quick supply and _______________.
----------------------

---------------------- 4.4 TYPES OF WAREHOUSES

---------------------- Warehouses may be classified as follows:
---------------------- 1. Private Warehouses - The warehouses which are owned and managed
by the manufacturers or traders to store, exclusively, their own stock of
---------------------- goods are known as private warehouses. Generally these warehouses are
constructed by the farmers near their fields, by wholesalers and retailers
----------------------
near their business centers and by manufacturers near their factories. The
---------------------- design and the facilities provided therein are according to the nature of
products to be stored.
----------------------
2. Public Warehouses - The warehouses which are run to store goods of
---------------------- the general public are known as public warehouses. Any one can store
his goods in these warehouses on payment of rent. An individual, a
---------------------- partnership firm or a company may own these warehouses. To start such
---------------------- warehouses a license from the government is required. The government
also regulates the functions and operations of these warehouses. Mostly
---------------------- these warehouses are used by manufacturers, wholesalers, exporters,
importers, government agencies etc.
----------------------
3. Government Warehouses - These warehouses are owned, managed
---------------------- and controlled by central or state governments or public corporations or

336 Sales and Distribution Management

 local authorities. Both government and private enterprises may use these Notes
warehouses to store their goods. Central Warehousing Corporation of
India, State Warehousing Corporation and Food Corporation of India are ----------------------
examples of agencies maintaining government warehouses.
----------------------
4. Bonded Warehouses - These warehouses are owned, managed and
controlled by Government as well as private agencies. Private bonded ----------------------
warehouses have to obtain license from the government. Bonded ----------------------
warehouses are used to store imported goods for which import duty is
yet to be paid. Incase of imported goods, the importers are not allowed ----------------------
to take away the goods from the ports till such duty is paid. These
warehouses are generally owned by dock authorities and found near the ----------------------
ports. ----------------------
5. Co-operative Warehouses - These warehouses are owned, managed and
----------------------
controlled by co-operative societies. They provide warehousing facilities
at the most economical rates to the members of their society. ----------------------
----------------------
Check your Progress 2
----------------------
State True or False. ----------------------
1. Co-operative Warehouses are owned, managed and controlled by
co- operative societies. ----------------------

----------------------

4.5 CHARACTERISTICS OF IDEAL WAREHOUSE ----------------------

In the above section, you have learnt about different types of warehouses. ----------------------
In each of these warehouses, adequate arrangements are made to keep the goods
----------------------
in proper conditions.
However, any warehouse is said be an ideal warehouse, if it possesses ----------------------
certain characteristics, which are given below: ----------------------
●● Warehouse should be located at a convenient place near highways, railway ----------------------
stations, airports and seaports where goods can be loaded and unloaded
easily. ----------------------
●● Mechanical appliances should be there to load and unload the goods. This ----------------------
reduces the wastages in handling and also minimises handling costs.
----------------------
●● Adequate space should be available inside the building to keep the goods
in proper order. ----------------------

●● Warehouses meant for preservation of perishable items like fruits, ----------------------

vegetables, eggs and butter etc. should have cold storage facilities.
----------------------
●● Proper arrangement should be there to protect the goods from sunlight,
rain, wind, dust, moisture and pests. ----------------------

Warehousing 337
 Notes ●● Sufficient parking space should be there inside the premises to facilitate
easy and quick loading and unloading of goods.
----------------------
●● Round the clock security arrangement should be there to avoid theft of
---------------------- goods.
●● The building should be fitted with latest fire-fighting equipments to avoid
----------------------
loss of goods due to fire.
----------------------
4.6 FUNCTIONS OF WAREHOUSE
----------------------
You have learnt that warehouses preserve goods on a large-scale in a
---------------------- systematic and orderly manner. They provide protection to goods against heat,
---------------------- wind, storm, moisture, etc. and also cut down losses due to spoilage, wastage
etc. This is the basic function of every warehouse. In addition to this, warehouses
---------------------- now a day also perform a variety of other functions. In this section, let us learn
about the various functions of warehouses.
----------------------
Warehouses perform the following functions.
----------------------
1. Storage of goods - The basic function of warehouses is to store large
---------------------- stock of goods. These goods are stored from the time of their production
or purchase till their consumption or use.
----------------------
2. Protection of goods - A warehouse provides protection to goods from
---------------------- loss or damage due to heat, dust, wind and moisture, etc. It makes special
arrangements for different products according to their nature. It cuts down
----------------------
losses due to spoilage and wastage during storage.
---------------------- 3. Risk bearing - Warehouses take over the risks incidental to storage of
---------------------- goods. Once goods are handed over to the warehouse-keeper for storage,
the responsibility of these goods passes on to the warehouse-keeper. Thus,
---------------------- the risk of loss or damage to goods in storage is borne by the warehouse-
keeper. Since it is bound to return the goods in good condition, the
---------------------- warehouse becomes responsible for any loss, theft or damage, etc. Thus,
---------------------- it takes all precautions to prevent any mishap.
4. Financing - When goods are deposited in any warehouse, the depositor
----------------------
gets a receipt, which acts as a proof about the deposit of goods. The
---------------------- warehouses can also issue a document in favor of the owner of the
goods, which is called warehouse-keeper’s warrant. This warrant is a
---------------------- document of title and can be transferred by simple endorsement and
delivery. So while the goods are in custody of the warehouse-keeper, the
----------------------
businessmen can obtain loans from banks and other financial institutions
---------------------- keeping this warrant as security. In some cases, warehouses also give
advances of money to the depositors for a short period keeping their
---------------------- goods as security.
---------------------- 5. Processing - Certain commodities are not consumed in the form they are
produced. Processing is required to make them consumable. For example,
---------------------- paddy is polished, timber is seasoned and fruits are ripened, etc.

338 Sales and Distribution Management

 Sometimes warehouses also undertake these activities on behalf of the Notes
owners.
----------------------
6. Grading and branding - On request warehouses also perform the
functions of grading and branding of goods on behalf of the manufacturer, ----------------------
wholesaler or the importer of goods. It also provides facilities for mixing,
blending and packaging of goods for the convenience of handling and ----------------------
sale.
----------------------
7. Transportation - In some cases, warehouses provide transport
arrangement to the bulk depositors. It collects goods from the place of ----------------------
production and also sends goods to the place of delivery on request of the
----------------------
depositors.
----------------------
Check your Progress 3
----------------------

State True or False. ----------------------

1. The basic function of warehouses is to store large stocks of goods. ----------------------

----------------------
4.7 ADVANTAGES OF WAREHOUSE ----------------------
Warehouse offers many advantages to the business community. Whether ----------------------
it is industry or trade, it provides a number of benefits which are listed below.
1. Protection and Preservation of goods - Warehouse provides necessary ----------------------
facilities to the businessmen for storing their goods, when they are not ----------------------
required for sale. It provides protection to the stocks ensures their safety
and prevents wastage. It minimises losses from breakage, deterioration ----------------------
in quality, spoilage etc. Warehouses usually adopt latest technologies to
avoid losses, as far as possible. ----------------------

2. Regular flow of goods - Many commodities like rice, wheat etc. are ----------------------
produced during a particular season but are consumed throughout the
----------------------
year. Warehousing ensures regular supply of such seasonal commodities
throughout the year. ----------------------
3. Continuity in production - Warehouse enables the manufacturers to
----------------------
carry on production continuously without bothering about the storage
of raw materials. It helps to provide seasonal raw material without any ----------------------
break, for production of finished goods.
----------------------
4. Convenient location - Warehouses are generally located at convenient
places near road, rail or waterways to facilitate movement of goods. ----------------------
Convenient location reduces the cost of transportation.
----------------------
5. Easy handling - Modern warehouses are generally fitted with mechanical
appliances to handle the goods. Heavy and bulky goods can be loaded ----------------------
and unloaded by using modern machines, which reduces cost of handling
----------------------

Warehousing 339
 Notes such goods. Mechanical handling also minimises wastage during loading
and unloading.
----------------------
6. Useful for small businessmen - Construction of own warehouse requires
---------------------- heavy capital investment, which small businessmen cannot afford. In this
situation, by paying a nominal amount as rent, they can preserve their raw
---------------------- materials as well as finished products in public warehouses.
---------------------- 7. Creation of employment - Warehouses create employment opportunities
both for skilled and unskilled workers in every part of the country. It is a
----------------------
source of income for the people, to improve their standards of living.
----------------------
8. Facilitates sale of goods - Various steps necessary for sale of goods such
---------------------- as inspection of goods by the prospective buyers, grading, branding,
packaging and labeling can be carried on by the warehouses. Ownership of
---------------------- goods can be easily transferred to the buyer by transferring the warehouse
keeper’s warrant.
----------------------
9. Availability of finance - Loans can be easily raised from banks and
---------------------- other financial institutions against the security of the warehouse-keeper’s
---------------------- warrant. In some cases, warehouses also provide advance to the depositors
of goods on keeping the goods as security.
----------------------
10. Reduces risk of loss - Goods in warehouses are well guarded and
---------------------- preserved. The warehouses can economically employ security staff to
avoid theft, use insecticides for preservation and provide cold storage
---------------------- facility for perishable items. They can install fire-fighting equipment to
---------------------- avoid fire. The goods stored can also be insured for compensation in case
of loss.
----------------------

---------------------- Check your Progress 4

---------------------- State True or False.

---------------------- 1. Warehouses are generally located at convenient places near road, rail
or waterways to facilitate movement of goods.
----------------------
2. Construction of own warehouse is very easy and affordable for small
---------------------- businessmen.
----------------------
4.8 ACTIVITIES IN WAREHOUSES
----------------------
Compared to the traditional warehouses, buildings filled with dusty cartons/
---------------------- crates, today’s warehouses are bustling with activities. While warehouses still
---------------------- contain traditional elements, such as storage and transportation functions, these
components have evolved. State-of-the-art warehouses/distribution centers are
---------------------- often years ahead of the rest of the transportation industry in implementing
technologies that improve tracking, enhance efficiency and expedite product
---------------------- movement.

340 Sales and Distribution Management

The activities that occur in warehouses today can include the following. Notes
1. Receiving
----------------------
Inbound products are received in the receiving area of the warehouse.
Depending on customer requirements, some product shipments may be ----------------------
moved directly to outbound trucks for immediate delivery, a practice
----------------------
known as “cross docking.” In other cases, truck trailers, maritime
containers and rail wagons are unloaded. Sometimes the shipments are ----------------------
loaded onto pallets. Other times, as previously mentioned, shipments are
floor loaded, meaning that they must be unloaded by hand. The Receiving ----------------------
Department also performs quality audits of inbound products, checks
----------------------
actual shipments against amounts listed in documents, palletises products,
moves the products by forklift or conveyor into the storage areas and logs ----------------------
in the products to the warehouse’s computer.
----------------------
2. Temporary Storage
Inbound products are often stored in a warehouse based on how quickly ----------------------
they will be needed. Products moving quickly will be stored near the pick
----------------------
and value added operations. Less frequently needed products are moved
to more distant locations in the building. All products moved into storage ----------------------
are bar coded and locations are tracked by the warehouse’s computer
system. This procedure enables products to be located and moved quickly ----------------------
when needed. Forklift operators may be guided by on-screen commands
----------------------
issued by the warehouse computer by radio frequency (RF) transmission.
Storage areas are quite different than several years ago. Storage areas are ----------------------
taller, narrower and more compressed. Warehouses use “very narrow aisle
----------------------
(VNA) racking systems” to increase building utilisation. By decreasing
the aisle width between rows of racks, more pallets and products can ----------------------
be stored in a smaller area. The same philosophy has led to taller racks
– new warehouse construction typically has ceiling heights of 36 feet, ----------------------
significantly higher than several years ago. Some warehouse ceiling
----------------------
heights are even higher. VNA and higher racks requires new equipment
and technology to work: ----------------------
a) The technology starts with the warehouse floor. Floors must be
----------------------
extremely flat to ensure that high racks remain level all the way
up to the warehouse ceiling. Today’s warehouses feature super flat ----------------------
floors that have been laser levelled.
----------------------
b) Forklifts must be designed to safely maneuver and operate in very
narrow aisles and tall racks. VNA operations, therefore, use “wire ----------------------
guidance systems,” meaning that wires buried in the floors of the
aisles guide the forklifts and ensure their safe operation. These ----------------------
forklifts can also extend higher and pivot in a narrower area to
----------------------
deliver or obtain a pallet from the racks.
c) Fire suppression must also be considered in this compressed ----------------------
environment, along with new approaches to reduce the cost
----------------------
associated with installing sprinklers within the racks. Ceiling-

Warehousing 341
 Notes mounted ESFR (Early Suppression Fast Response) sprinkler
systems are used, which alleviate the need for expensive in-rack
---------------------- sprinkler systems.
---------------------- d) Storage areas can include temperature-controlled space and secured
areas. Secured areas (usually fenced, enclosed and secured within
---------------------- the warehouse) are used for high value and controlled substances.
Similar secured areas are used to separate in-bond storage from the
----------------------
rest of the warehouse.
---------------------- 3. Pick Operations
---------------------- Individual items from cartons may need to be picked to fulfill an order.
This is accomplished through pick and pack operations in the warehouse.
---------------------- In this area, racks contain open cartons of the products required. Workers
guided by handheld or cart mounted RF devices collect the items required
----------------------
and place them in a shipping carton (the size of which is often determined
---------------------- by the warehouse computer). Cartons then move, generally by conveyor
to final packing and shipping. The higher ceiling heights of the new
---------------------- warehouses enable the creation of mezzanine space in the building,
increasing the available floor space. Pick and pack operations can occur
----------------------
in these mezzanine locations.
---------------------- 4. Value Added and Production Line Activities
---------------------- As previously discussed, a variety of value added activities and production
can occur within the warehouse structure. Production lines and value added
---------------------- activities are located in a specific area of the building, with conveyors or
---------------------- forklifts bringing the necessary material to the area. Conveyors or forklifts
also move the finished product to outbound shipped.
---------------------- Computer screens and printed orders instruct the workers as to the services
---------------------- to be performed, including the needed inputs and the required finished
products. Similar to pick and pack operations, these activities can occur
---------------------- both on the main floor and the mezzanine space in the warehouse.
---------------------- 5. Shipping
The last stop in the warehouse is the Shipping Department. Prior to
----------------------
reaching this department, outbound loads have been checked for accuracy,
---------------------- received their final packaging (including such functions as insertion of
foam peanuts, taping, shrink wrapping and palletising) and are ready to
---------------------- be handed off to outbound trucking services.
---------------------- Automated weight checking is increasingly used to check the accuracy
of the outbound shipments. The conveyor line passes through a “Check
---------------------- Weight” station where each carton is weighed. The computer automatically
---------------------- checks the weight of the carton against the estimated weight of the contents
and carton. If the weight matches, the carton proceeds to final packaging.
---------------------- If the weight does not match, then the carton is shunted to a station to be
manually checked. Outbound shipments leave the warehouse in a variety
---------------------- of ways, including:

342 Sales and Distribution Management

 a) Customers may send their own trucks to pick up orders. Notes
b) The warehouse or DC may arrange its own trucks to deliver orders.
----------------------
c) Transporters or other integrated carriers may pick up orders directly
at the warehouse or Distribution center. ----------------------
d) Loads may be directly loaded into rail cars for outbound movement. ----------------------
Outbound movement of paper rolls is one example of outbound rail
car movements from warehouses. The warehouse’s conveyor system ----------------------
and/or forklifts deliver the outbound shipments to the appropriate
----------------------
truck bays for loading. Sometimes, the forklifts directly load the
outbound trucks. ----------------------
6. Returns Processing ----------------------
Warehouses may process products that have been returned to stores and
other clients. In some cases, the warehouses may perform repairs and ----------------------
repackaging of these items. Warehouses may also act as the gathering ----------------------
point for these items and prepare them for return to suppliers or recycling
facilities. Returns processing is part of the growing “reverse logistics” ----------------------
trend, which focuses on the movement of products after their original use
is over. ----------------------

7. Data Processing and Office Functions ----------------------

All warehouses contain office space, as well as computer and ----------------------
telecommunications equipment. As previously mentioned, a central
warehouse computer often oversees inventory and manages product ----------------------
movement within the building. Paper work must also be processed.
----------------------
Lunchroom and locker space is provided for warehouse workers, as well
as training and conference space. ----------------------
In addition, office space in warehouses and DCs is increasingly used for
----------------------
sales and marketing. Many warehouse building designs incorporate features
more often found in corporate office parks into the facades and office areas of ----------------------
DCs. The increased height of the new DCs also allows office space to exist on
two levels in these buildings. ----------------------

----------------------
4.9 WARESHOUSE DESIGNING AND CONFIGURATION
----------------------
A. Types of Spaces
----------------------
Depending on the program of the warehouse being designed, space types
may vary dramatically. ----------------------
• Storage Space ----------------------
• Office Space
----------------------
• Loading Docks for shipping and receiving
----------------------
• Light Industrial Space
• Computer Centers ----------------------

Warehousing 343
 Notes B. Space Configurations
Warehouses should be designed based on current and future needs.
----------------------
1. Facilitate changes in business/agency growth and size/population of
---------------------- office and warehouse spaces within the building. Warehouse space
should be easily adapted to new functions such as office (on ground
----------------------
or upper levels), computer centers or light industrial/fabrication.
---------------------- 2. Accommodate need for future loading docks, truck space and car
---------------------- parking spaces if space configuration changes through effective site
design.
---------------------- 3. Address material handling technologies and business practice,
---------------------- such as “just-in-time” storage, which have fundamentally changed
operation of warehouses and distribution centers and will continue
---------------------- to do so.
---------------------- 4. Include roof design with built-in extra structural capacity to handle
addition of future rooftop equipment.
----------------------
5. Be designed with fire protection capacity to accommodate storage
---------------------- of materials with a greater fire hazard, especially needed with high
plastic product content or packaging, and plastic shrink-wrapped
---------------------- pallets.
---------------------- 6. Maximise utilisation of space while providing adequate circulation
paths for personnel and material handling equipment such as forklift
---------------------- trucks.
---------------------- 7. Use higher bays to take advantage of height allowances in the space.
---------------------- 8. Optimise layout and configuration for the warehouse operation,
including efficient circulation and material handling and storage
---------------------- processes.
---------------------- 9. Relate interior and exterior receiving and shipping operations to the
process flow of goods through the warehouse.
----------------------
10. Receiving and shipping are best separated to avoid congestion at
---------------------- the loading dock areas in the building and in the truck maneuvering
areas.
----------------------
11. Alternative material handling methods will determine other building
---------------------- aspects, such as aisle widths, lighting design, need for mezzanine
space, fire protection and egress design. Businesses will often use
----------------------
different methods of storage handling simultaneously for different
---------------------- products.

---------------------- C. Durability and functionality

1. Be planned to accommodate loads of stored materials as well as
---------------------- associated handling equipment.
---------------------- 2. Design of warehouses is to be based on the dead and live load

344 Sales and Distribution Management

 requirements of the structure as it will be built. Snow, wind and Notes
seismic loads shall be considered where they are applicable. Racking
in seismic areas must be built stronger and be better braced. ----------------------
3. Wind uplift can cause great damage to roofs and metal roof copings ----------------------
at the roof edge. Building codes recognise that wind velocity is
greater across open areas, typical for warehouse zones. ----------------------
4. Wind-driven rain can easily penetrate the vast surface areas of the ----------------------
warehouse walls. Design walls to permit any infiltrating water to
evaporate harmlessly without collecting in the wall cavities or ----------------------
damaging stored product.
----------------------
5. Proper floor types are an important consideration in the design.
General warehouse space should be floored with a concrete slab ----------------------
to carry wheel loads and withstand the abrasion generated by the
----------------------
continual use of hard rubber and steel-wheeled forklift trucks.
Consider adding hardeners and dust roofers to protect the concrete. ----------------------
Consider using epoxy coating on concrete floors near battery
charging areas. ----------------------
6. Floor flatness and levelness requirements are critical, especially for ----------------------
high ceilinged space and safe operation of high-lifting equipment.
----------------------
7. Adequate space must be provided on-site for truck maneuvering,
truck storage if the business owns a fleet, car parking for employees ----------------------
and future office space/population expansion (which might be
driven by higher rent for center-city office space) and landscaped ----------------------
areas. ----------------------
8. Be designed to ensure that no structural member will interfere with
----------------------
the spacing of rail car doors or truck berths at dock spaces. Dock
heights on the truck side of the terminal should be approximately ----------------------
4'- 4" above the pavement, with appropriate ramps at each truck berth
to bring the height of the truck bed in line with the dock height. Dock ----------------------
heights on the rail side of the terminal should be approximately 3'-9"
----------------------
above the top of the rail to ensure that the rail car floor is even with
the dock floor. Dock widths and areas inside exterior doors leading ----------------------
to dock space must be planned for maneuverability of forklift trucks
and other expected types of material handling equipment. ----------------------
9. Dock heights on the truck side of the terminal should be ----------------------
approximately 4'-40" above the pavement, with appropriate ramps,
scissor lifts, or dock levellers at each truck berth to safely bring the ----------------------
height of the truck bed in line with the dock height.
----------------------
10. Tops of doors should be high enough to accommodate full height
pallet handling from the highest trucks. ----------------------
11. Dock heights on the rail side of the terminal should be approximately ----------------------
3'-9" above the top of the rail to ensure that the rail car floor is even
with the dock floor. ----------------------

Warehousing 345
 Notes 12. Dock widths and areas inside exterior doors leading to dock space
must be planned for maneuverability of forklift trucks and other
---------------------- expected types of material handling equipment. Consider using a
non-slip finish on the concrete floor near loading areas for safety.
----------------------
D. Energy-Efficient
----------------------
1. Be designed with passive solar concepts solar geometry and building
---------------------- load requirements in mind.
2. Possess light colored roof to reflect a large percentage of solar
----------------------
radiation, reducing HVAC loads and energy consumption. First cost
---------------------- is also reduced, due to the smaller plant size required. When a large
roof area is anticipated, this effect can be significant, especially
---------------------- for temperature controlled warehouses. Greater heat reflection will
increase worker productivity in the summer.
----------------------
3. Be planned with interior dock space in colder climates to reduce
---------------------- energy consumption and provide more tolerable winter working
---------------------- conditions for dock workers.
4. Use ceiling mounted fans to reduce heat stratification and provide
---------------------- air movement, thus increasing worker comfort in both summer and
---------------------- winter. Mount fans above highest forklift level for worker safety.
5. Consider specifying white painted metal roof decking, thereby
---------------------- increasing ceiling surface reflectivity, lighting efficiency and worker
---------------------- comfort without any added energy cost.
6. Use energy-efficient fixtures, systems, and appliances, e.g., motion
----------------------
sensor instant-on lighting systems, wherever feasible.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------
E. Safety/Security of Personnel and Material
---------------------- • Address the traditional life-safety and health concerns common to
all buildings, including measures to prevent occupational injuries
----------------------
and illnesses (work-related musculoskeletal disorders (WMSD),
---------------------- trips, falls, etc.), ensure electrical safety, and eliminate exposure
to hazardous materials. The following operations have historically
---------------------- contributed to significant numbers of warehouse injuries and are
considered to be the most hazardous: docks, powered industrial
----------------------
trucks, conveyors, material storage, manual lifting/handling, roof
----------------------

346 Sales and Distribution Management

 ladders and hatches, and charging stations. Other serious operational Notes
safety problems include inadequate fire safety provisions, improper
blocking of exits and egress paths, chemical exposure, improper ----------------------
use of lockout procedures, lack of ergonomics and failure to wear
personal protective equipment. ----------------------

• Incorporate proper signage to clearly warn of hazards or to ----------------------

direct personnel to take precaution. The specific strategy for the
----------------------
warehouses signs must be determined early in the facility design
process. ----------------------
• Possess non-slip surface treatments on floors subject to wetting,
----------------------
such as outdoor docks, to eliminate slips and falls to personnel.
• Be designed with fire sprinkler systems engineered to cover ----------------------
the specific commodity classification in the specific storage
----------------------
configuration for the planned warehouse. The adequacy of the
sprinkler system must be evaluated when changes occur that can ----------------------
increase the hazard classification, such as introducing a new product
line, using a different packaging material or changing from wood ----------------------
pallets to plastic pallets.
----------------------
• Include appropriate security systems incorporated into the overall
warehouse design. ----------------------
F. Health/Comfort ----------------------
• Provide proper ventilation under all circumstances. ----------------------
• Provide local exhaust for restrooms, kitchens, janitor’s closets,
copy rooms, battery-charging areas, etc. ----------------------

• Consider installing CO2 sensors to provide real time monitoring of ----------------------

air quality.
----------------------
• Integrate day lighting with the electric lighting system.
----------------------
• Allow for natural lighting where possible. Provide lighting controls
that turn off lights when sufficient daylight exists. Consider ----------------------
dimming controls that continuously adjust lighting levels to respond
to daylight conditions. ----------------------
• Consider the different natural lighting designs for warehouses. ----------------------
• Minimise HVAC system noise in occupied space.
----------------------
• Use furnishings, chairs, and equipment that are ergonomically
designed and approved for that use. ----------------------
• Design equipment and furnishings reflective of healthy work ----------------------
practices in an effort to eliminate repetitive motions as well as
prevent strains and sprains. ----------------------
• Strive to create a ‘sense of place’ such that the warehouse has a ----------------------
unique character that engenders a sense of pride, purpose, and
dedication for individual workers and the workplace community. ----------------------

Warehousing 347
 Notes Examples of warehouse designs

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------
----------------------

----------------------
Fig. 4.1: Example of Warehouse Designs (1)
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------
Fig. 4.2: Example of Warehouse Designs (2)
----------------------

----------------------

----------------------

----------------------

----------------------

348 Sales and Distribution Management

 Notes

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------
----------------------
Fig. 4.3: Example of Warehouse Designs (3)
----------------------
4.10 DISTRIBUTION CENTER
----------------------
A distribution center for a set of products is a warehouse or other
----------------------
specialised building with refrigeration or air conditioning which is stocked with
products to be re-distributed to retailers or wholesalers. ----------------------
Distribution centers are foundation of a retailing network. They allow a ----------------------
retail location to stock vast numbers of products without incurring an explosion
in transportation costs. The way a typical distribution network operates is to ----------------------
have centers setup throughout a commercial market. Each center will then
service a number of stores. Large distributions centers for companies such as ----------------------
Wal-Mart service 50-125 stores. Suppliers will ship truckloads of products to ----------------------
the distribution center. The distribution center will then store the product until
needed by the retail location and ship the proper quantity. ----------------------
Because a large retailer might sell tens of thousands of products from ----------------------
thousands of vendors, it would be impossibly inefficient to try to ship each
product directly from each vendor to each store. Many retailers own and run ----------------------
their distribution networks, while smaller retailers may outsource this function
to dedicated logistics firms that coordinate the distribution of products for a ----------------------
number of companies. A distribution center can be co-located at a logistics ----------------------
center.
----------------------

----------------------

----------------------

----------------------

Warehousing 349
 Notes

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------
Fig. 4.4 : A Wal-Mart distribution center along an Interstate highway in
---------------------- Utah (U.S.)
---------------------- 1) Size and scale of the distribution Center
Large distribution centers might receive and ship more than ten thousand
----------------------
truckloads each year, with an individual store receiving only a couple
---------------------- trucks per week up to 20, 30 or more per week. The distribution centers
can range in size from less than 50,000 square feet up to the largest
---------------------- approaching 2 million square feet.
---------------------- 2) Storage

---------------------- Although the primary role of a distribution center is to receive large

quantities of products and ship small quantities to individual stores,
---------------------- an important secondary role is storage. Many retailers have prioritised
having as many items in stock at one time as possible. To conserve
---------------------- space, minimise inventory costs and maximise the variety they offer, the
---------------------- retail might only stock one or a few items of a particular product. This
requires the ability to ship a replacement quickly, once an item is sold. By
---------------------- keeping product on hand in the distribution center, the retailer can ship a
replacement almost immediately after a product is sold.
----------------------
In addition to shipping quickly, preparing for busy shopping seasons
---------------------- requires retailers to stock up on product ahead of time. For many retailers,
any festival shopping season is the busiest of the year. Ahead of this time,
---------------------- a distribution center might double the amount of inventory on hand and
---------------------- then draw this level down through the shopping season. This strategy
is especially important for imported items. With lead times measured in
---------------------- weeks or months, stocking these products in a distribution center is often
the only way to maintain in-stocks at the store. New seasons, holidays or
---------------------- special promotions may also prompt a retailer to store specific items prior
---------------------- to a large rollout or demand forecast.
3) Costs
----------------------
The most efficient method of distribution would be shipping a full
---------------------- truckload or rail wagon directly from the manufacturer to the retailer.
After this, the next most efficient method would be to ship a full truckload
----------------------

350 Sales and Distribution Management

 to a distribution center, unload full pallets of products and immediately Notes
load the pallets onto trucks that are going to individual stores. Both of
these methods can only be used on very high volume items. Most products ----------------------
cannot be delivered in this manner and pallets or even individual boxes,
must be broken down and divided. ----------------------

Once a full pallet must be broken apart, the costs of handling the product ----------------------
can increase quickly. Many distribution centers use large sortation systems
----------------------
with miles of conveyor to move product through the facility and into a
truck. They also may have automated equipment for de-palletising and ----------------------
re-palletising product. Some of the most sophisticated systems can convey
product straight into storage racks and then convey out of the racks to ----------------------
trucks, all automatically. With a wide variety of product sizes and weights,
----------------------
these systems are designed to handle a specific range of products. Very
large/small or heavy/light products require varying degrees of manual ----------------------
handling.
----------------------
As the process of handling involves more steps and is more manual, the
cost increases. Storing products instead of receiving and immediately ----------------------
shipping them, adds cost. Firms must determine where lost sales from not
having product on the shelves are balanced by the increased handling and ----------------------
storage costs. ----------------------
Products that cannot be handled by automatic equipment also add costs.
----------------------
Some of the largest products may require more than one person to
manually unload and load these into trucks. This process can be very time ----------------------
consuming and costly and must be offset by higher prices.
----------------------
4) Distribution Center Organisation
----------------------
All distribution centers have three main areas and may have additional
specialised areas. The three main areas are the receiving dock, the storage ----------------------
area and the shipping dock. In small organisations it is possible for the
receiving and shipping functions to occur side by side, but in large centers, ----------------------
separating these areas simplifies the process. Often a distribution center
----------------------
will have dedicated dock doors for each store in its shipping area. The
receiving area can also be specialised based on the handling characteristics ----------------------
of freight being received, whether the product is going into storage or is
going straight to a store or by the type of vehicle delivering the product. ----------------------
Other departments that a distribution center may have include: ----------------------
●● Transportation – arranges and coordinates shipments in and out of the ----------------------
DC.
----------------------
●● Repackaging – breaks open bulk packages and repackages assortments
for individual stores. ----------------------
●● Dedicated Product Departments – divisions can be based on handling ----------------------
characteristics or storage characteristics. For example, refrigerated and
non-refrigerator. ----------------------

Warehousing 351
 Notes Distribution Centers also have a variety of supporting departments. These
include human resources maintenance/facilities operations, production control
---------------------- and accounting.
---------------------- A distribution center will have a General Manager that manages the
facility. This individual will then have a number of department managers that
---------------------- report directly to them. Each department is then composed of supervisors and
warehouse workers. The jobs of a warehouse worker can include:
----------------------
●● Receiver - unloads trucks, either with or without equipment.
----------------------
●● Pallet Mover - transports pallets with equipment from one area of a plant
---------------------- to another.
---------------------- ●● Stocker - puts product into racks, either on forklifts or by hand.

---------------------- ●● Order Picker - picks product from the racks to send to a store, either on
forklifts or by hand.
----------------------
●● Packer - repackaged product from bulk boxes into assortments for
---------------------- individual stores.

---------------------- ●● Shipper - loads trucks, either with equipment or by hand.

In addition to these basic job functions, there are a number of other areas
----------------------
of employment in a DC. Inventory management, maintenance, training and
---------------------- housekeeping can all be dedicated job functions.

---------------------- 4.11 CLEARING AND FORWARDING AGENTS

----------------------
After the independence, to meet the demands of the consumers/customers
---------------------- all over the country the manufacturers used to maintain company branches
or company owned and operated warehsouses/godowns. The goods were
---------------------- transferred to the godowns from the factory and further distributed down the
line to the distribution channels or customers. However over a period of time,
----------------------
it was realised to maintain a company owned and operated godown along with
---------------------- the personnel was proving to be very costly. Added to that the company had the
liability of maintaining the manpower, company owned vehicles for delivery
---------------------- and maintenance of vehicles was also proving to be hassle. In addition having
godowns in all the political states were adding to woes of the company since it
----------------------
required conforming to all the government rules and regulations with reference
---------------------- to maintaining the warehouses.

---------------------- Therefore over a period of time a new service came into being known
as C&F agents – Clearing and Forwarding Agents who took over all the
---------------------- responsibilities and functions of maintaining and managing the warehousing
operations on behalf of the their principles ie, the companies. The number of
---------------------- C&F agents for a state depends on the size of the state and the volume of the
---------------------- business. A medium to small company may have one each for every political
state. On the other hand large companies may have minimum one for smaller
----------------------

352 Sales and Distribution Management

states like Uttaranchal or Chhattisgarh and more than one for a large state like Notes
Maharashtra, Tamilnadu, and Andhra Pradesh. C&F Agent’s stock and sell
goods on behalf of their principals. C&F agents do not have the right to property ----------------------
in the goods stocked with him by the manufacturer.
----------------------
C&F agents have come to establish themselves as a warehousing service
and are playing a crucial role in the supply chain. Increasingly more and ----------------------
more companies are dispensing with their own godowns and outsourcing the
----------------------
warehousing services managed professionally by the Clearing and Forwarding
Agents. ----------------------
Here below is appended a model C&F agreement which spells out their ----------------------
responsibilities and functions which needs to understood.
MODEL C & F AGREEMENT ----------------------

This agreement is entered in to on this ……….day of …..year 2007 at ….. by and ----------------------
between :-ABC Trading Pvt. Ltd. Registered office ………………………………
----------------------
Factory at Plot No. 103 XYZ Industrial area ——————— (name of the
town/city) herein after referred to as the Company ----------------------
M/s. ……………………………………… ----------------------
…………………………………………… ----------------------
……………………………………………
----------------------
Here in after referred to as C & F Agent (Consignee & Forwarding Agent) Where
as the Company wanted to appoint C & F Agent for stocking & dispatching to ----------------------
distributors the –———————brand of products (here in after referred as ----------------------
the “Products”) belonging to the company for the state of ……………………
and the company has agreed to do business with C & F Agent on the following ----------------------
terms and conditions:-
----------------------
1. This C & F Agent agreement is effective from the …………. day of
…….. 2007 for a period of one year. This agreement may be renewed ----------------------
after mutual agreement between the company and the C & F Agent.
----------------------
2. That the C & F Agent shall ensure the regular and timely supply of
products to the various distributors/ stockiest/ customers in his territory. ----------------------
3. That the products will be supplied to the C & F Agent on the basis of F.O.R ----------------------
warehouse at………………….on stock transfer bases from company to
its godown. The C & F Agent will bill to distributors as per the guidelines ----------------------
of the company. ----------------------
4. That the company will dispatch the material against the security of C & F
Agent to its deposit on receiving ‘F’ form or any other form as applicable ----------------------
for sales tax etc. ----------------------
5. That the C & F Agent will look after all business interest of the company
----------------------
in his assigned territory.
6. That the C & F Agent will act as custodian of goods of the company. ----------------------

Warehousing 353
 Notes 7. That the C & F Agent will stock the goods with proper inventory and shall
keep stock register and other such books of accounts necessary by the
---------------------- law.
---------------------- 8. That the C & F Agent shall ensure safe & sound position of goods so that
goods may not be damaged or stolen.
----------------------
9. That the C & F Agent will get the orders from distributors along with
---------------------- cheque or D.D. He will supply the goods to distributors and send, deposit
the cheque / D.D in the company’s bank account locally.
----------------------
10. He shall undertake liaisoning and maintain good relations with
---------------------- Government and its various departments and ensure smooth working.
---------------------- 11. That C & F Agent should oversee the activities of the company staff and
inform on any abnormalities.
----------------------
12. That the C & F Agent should display goods & promotional material in his
---------------------- office.
---------------------- 13. That the C & F Agent will keep a sign board of the company where stocks
are lying.
----------------------
14. That the C & F Agent will work on behalf of the company in the acts and
----------------------
manner directed by the Co.
---------------------- 15. That the C & F Agent will not deal the competitive products during the
---------------------- currency of this agreement.
16. That the C & F Agent will act as per the instructions & guide lines issued
----------------------
by the Company from time to time.
---------------------- 17. That the C & F Agent for his various services rendered will get —%
---------------------- commission on the total sale in his territory.
18. That the C & F Agent will deposit a security of Rs…………..with the
----------------------
company. The company shall interest at the rate of —% PA interest on the
---------------------- security deposit.

---------------------- 19. That the C & F Agent will be given 2% as office/godown rent, loading
unloading, courier, phone, fax, charges and 1% as freight charges up to
---------------------- distributors godown.
---------------------- 20. That the C&F agent shall make provision of office space for the company
field staff
----------------------
21. That company sales force will work in consultation with C & F Agent.
----------------------
22. That in case of termination the security amount along with bank interest
---------------------- will be refunded clearing all accounts and goods will be taken back. All
the claims will be settled within 30 days of termination/term notice.
----------------------
23. That in case of either of the parties desiring to discontinue the agreement
---------------------- 60 days notice is necessary from both the parties.

354 Sales and Distribution Management

24. That all the disputes are subject to ————— (name of the city town) Notes
Jurisdiction.
----------------------
IN WITNESS HERE OF THE PARTIES HERE TO have set their hands and
signed this agreement of C & F Agent on this day of ……………2007 as ----------------------
mentioned above in the presence of the following witness.
----------------------
For AbC Trading Pvt. Ltd. C&F Agent
Authorised signatory Signature and seal ----------------------
Witnesses ----------------------
1 …...........…………………… 2…………………………………….. ----------------------

Activity 1 ----------------------

----------------------
Visit the website of Central Warehousing Corporation and note down the
functions performed by the warehouse. ----------------------
----------------------
Summary ----------------------
●● The need for warehousing arises due to Seasonal production of goods, ----------------------
Seasonal Demand; Large-scale Production, Quick Supply, Continuous
Production. Price Stabilisation etc. Characteristics of an ideal warehouse ----------------------
are convenient location, use of mechanical devices for handling goods,
adequate space for storage of goods; cold storage facility for perishable ----------------------
items, protection of goods from sunlight, rain, wind, dust, moisture and ----------------------
pests; sufficient parking space for vehicles, round the clock security,
availability of fire fighting equipment. The warehouses perform various ----------------------
functions like storage of goods, protection of goods, risk bearing, financing,
processing, and grading, branding, transportation etc. advantages of ----------------------
warehouses include protection and preservation of goods, regular flow ----------------------
of goods, continuity in production, convenient location, easy handling,
useful for small businesses, creation of employment etc. ----------------------
●● The various types of warehouses include private, public, bonded, ----------------------
government, co-operative etc. The various activities that take place in the
warehouses, amongst others, include receiving, temporary storage, pick ----------------------
operations, value added and production line activities, shipping, returns
----------------------
processing etc.
●● A distribution center for a set of products is a warehouse or other ----------------------
specialised building with refrigeration or air conditioning which is
----------------------
stocked with products to be re-distributed to retailers or wholesalers.
Distribution centers are foundation of a retailing network. They allow ----------------------
a retail location to stock vast numbers of products without incurring an
explosion in transportation costs. The way a typical distribution network ----------------------
operates is to have centers setup throughout a commercial market. Each
----------------------
center will then service a number of stores. Large distributions centers for

Warehousing 355
 Notes companies such as Wal-Mart service 50-125 stores. Suppliers will ship
truckloads of products to the distribution center. The distribution center
---------------------- will then store the product until needed by the retail location and ship the
proper quantity.
----------------------
●● C & F agents have come to establish themselves as a warehousing service
---------------------- and are playing a crucial role in the supply chain. Increasingly more and
more companies are dispensing with their own godowns and outsourcing
----------------------
the warehousing services managed professionally by the Clearing and
---------------------- Forwarding Agents.

----------------------
Keywords
----------------------
● Clearing and Forwarding Agents: An organisation engaged in
---------------------- providing warehousing and related services to interested manufacturing
organisations at a remuneration mutually agreed upon.
----------------------
● Distribution center: Is a warehouse or other specialised building with
---------------------- refrigeration or air conditioning which is stocked with products to be
re-distributed to retailers or wholesalers.
----------------------
● Lead time: Time taken from the time of placement of order and receipt
---------------------- of the material.

----------------------
Self-Assessment Questions
----------------------
1. What is meant by warehousing?
----------------------
2. Explain the need for warehousing.
---------------------- 3. Describe any six characteristics of an ideal warehouse.
---------------------- 4. Classify the various types of warehouses. Explain them briefly.
---------------------- 5. Distinguish between public and private warehouse.
6. Explain the functions of warehouses.
----------------------
7. What is a distribution center? Discuss the various aspects of distribution
---------------------- center.
---------------------- 8. What do you understand by C&F agent? List any five functions of C& F
agents.
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

356 Sales and Distribution Management

Answers to Check your Progress Notes
Check your Progress 1 ----------------------
Fill in the blanks. ----------------------
1. Warehousing is necessary due to reasons such as seasonal production,
seasonal demand, quick supply and continuous production. ----------------------

Check your Progress 2 ----------------------

State True or False. ----------------------
1. True
----------------------
Check your Progress 3
----------------------
State True or False.
1. True ----------------------

Check your Progress 4 ----------------------

State True or False. ----------------------
1. True
----------------------
2. False
----------------------

Suggested Reading ----------------------

1. Bowersox, Logistical Management: The Integrated Supply Chain Process. ----------------------

2. Calvin, Robert J. Sales Management. ----------------------
3. Chopra, Supply Chain Management. ----------------------
4. Ghoshal, World Class in India. Penguin India.
----------------------
5. Lamba, A.J. The Art of Retailing.
----------------------
6. Scheuing, Kurtz, Johnson. Sales Management: Concepts, Practices and
Cases. ----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

Warehousing 357
 Notes

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

358 Sales and Distribution Management

Transportation
UNIT

5
Structure:

5.1 Introduction
5.2 Benefits of Transportation
5.3 Elements of Transportation Costs
5.4 Modes of Transport
5.5 Multimodal Transport
5.6 Containerisation
5.7 Factors in selecting Mode of Transportation
5.8 Changing Practices and Priorities in Freight Transportation Demand
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Transportation 359
 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• State the benefits of transportation
----------------------
• List the elements of transportation costs
---------------------- • Discuss various modes of transport
---------------------- • Explain the concept of multi modal transport
---------------------- • Elaborate on the concept of containerisation

---------------------- • Describe the practices and priorities in freight transportation demand

----------------------
5.1 INTRODUCTION
----------------------
Transportation leads to movement of people and goods from one location
---------------------- to another. Throughout history, the economic wealth and military power of a
---------------------- people or a nation have been closely tied to efficient methods of transportation.
Transportation provides access to natural resources and promotes trade,
---------------------- allowing a nation to accumulate wealth and power. Transportation systems and
the routes they use have greatly influenced both how and where people live.
---------------------- Reliable transportation allows a population to expand throughout a country’s
---------------------- territory and to live comfortably in remote areas far from factories and farms.
Transportation is vital to a nation’s economy. Reducing the costs of
----------------------
transporting natural resources to production sites and moving finished goods to
---------------------- markets is one of the key factors in economic competition. The transportation
industry is the largest industry in the world. It includes the manufacture and
---------------------- distribution of vehicles, the production and distribution of fuel and the provision
of transportation services.
----------------------
In developing economies like India and China, due to huge population
---------------------- leading to greater consumption calls for intensive distribution of products,
transportation is a link between the places of production and places of
----------------------
consumption. Hence a transportation system supported by proper infrastructure
---------------------- leads to tremendous opportunities for accelerating the growth of industrialisation
of the nation.
----------------------
In the context of the Indian economy, which is composed of large
---------------------- coastlines, hilly as well as plain terrains and presence of all types of minerals
and the agriculture, calls for various types of transportation facilities inclusive
---------------------- of Road, Rail, Water and also Air transport? In the light of the liberalisation
of the economy and the resultant influx FDI and rapid industrialisation has
----------------------
posed lot of opportunities and responsibilities on the transportation sector in
---------------------- the country.

----------------------

360 Sales and Distribution Management

5.2 BENEFITS OF TRANSPORTATION Notes

1. It serves as a link between the place of production and the place of ----------------------
consumption. By making the products available at the right time, it not
----------------------
only satisfies the current demand but also meets with the future demand.
2. It helps in moving the men, materials, machines, tools and consumables ----------------------
required in the production from the place of its production/availability ----------------------
to the place of production of further products and thus in the process
facilitates the production. ----------------------
3. By making the movement of tools of production, it facilitates all round ----------------------
development of the economy including the economically and industrially
backward areas. ----------------------
The other micro and macro economic benefits of transportation are as ----------------------
follows:
----------------------
1. Benefits from supply of transport services.
----------------------
• Income from transport operations (fares and wages)
• Access to wider distribution markets and niches ----------------------

2. Benefits due to direct transport demand. ----------------------

• Improved accessibility ----------------------
• Time and cost savings ----------------------
• Productivity gains
----------------------
• Division of labour
----------------------
• Access to a wider range of suppliers and consumers
----------------------
• Economies of scale.
3. Indirect Microeconomic ----------------------
• Rent income ----------------------
• Lower price of commodities ----------------------
• Higher supply of commodities
----------------------
4. Indirect Macroeconomic
----------------------
• Formation of distribution networks
----------------------
• Attraction and accumulation of economic activities
• Increased competitiveness ----------------------

• Growth of consumption ----------------------

• Fulfilling mobility needs ----------------------

----------------------

Transportation 361
 Notes 5.3 ELEMENTS OF TRANSPORTATION COSTS
---------------------- In any organisation, transportation cost is one of the major components
of the overall cost of the product. It thus becomes a critical financial element
----------------------
of the overall cost of operation. Therefore it is very necessary to have a proper
---------------------- understanding of the transportation costs. The transportation costs comprises of
various elements like tariff of mode of transport, cost involved in the transit of
---------------------- the goods, obsolescence costs, transit insurance cost etc.
---------------------- a) Tariff cost
---------------------- This includes cost of transportation of goods from one location to
another location. The cost involved may vary depending on the mode of
---------------------- the transportation like airways, railways, roadways etc. Further the cost
---------------------- will vary depending on the nature of product too. The cost undergoes a
upward change depending upon the urgency of the transportation. For
---------------------- example, even within transportation by road, the transportation by Gati
or faster service may be more compared to the normal transportation.
---------------------- The freight charges increase or decrease depending upon the transit time
---------------------- i.e., more the transit time, higher the tariff rates and lower the transit
time, lower the tariff. Under Indian conditions, longer the destination
---------------------- more the goods undergo transshipment thereby increasing the cost of
transportation.
----------------------
b) Cost due to transit time
----------------------
What is transported, though they are tangible products, in essence it
---------------------- is money. When the goods are transported, in fact it is money which
is blocked in the inventory. The inventory thus becomes dead during
---------------------- the transit time since neither can it be sold nor can be deployed for any
---------------------- profitable use thus leading to opportunity cost. Thus it can be seen that
it is not only the tariff cost but the inventory carrying cost adds to the
---------------------- total cost and thus becomes a significant portion of the overall cost. The
more the transit time, the more the cost and vice versa.
----------------------
For example, a organisation based at Mumbai selling products to its
---------------------- customers at Mumbai itself, it can do so at very minimum transportation.
On the other hand, if the organisation transports the goods to their
----------------------
customers at Guwahati, the transit time is going to be longer and so
---------------------- increased cost due to increase in transit time.

---------------------- c) Packaging cost

The time involved and the way the products are handled enroute,
----------------------
to protect the products for damage, wear and tear, pilferage, special
---------------------- protective packaging become a requirement which further adds to the
total transportation cost. For example, goods are transported by road from
---------------------- Mumbai to Guwahati. The goods undergo transshipment at more than
two places where they are unloaded in the transporters warehouse and
----------------------
then reloaded in different truck for onward journey. The entire operation
362 Sales and Distribution Management
 of unloading and loading is done manually and there are chances that the Notes
goods undergo damages. Therefore to save the products from damages it
calls for protective packaging. ----------------------
d) Transit Insurance cost ----------------------
Goods when transported need to be insured from loss, theft, damages etc.
----------------------
As a result, the goods need to be insured for which the cost of insurance
needs to be paid to the insurance company to cover all types risks ----------------------
associated with transportation of the goods.
----------------------
e) Obsolescence costs
Obsolescence costs include cost associated with deterioration in the ----------------------
quality and obsolescence in the physical attributes of the product. For ----------------------
example, truck carrying milk takes much longer to reach the destination;
the milk may not remain fit for consumption thus adding to the cost of the ----------------------
overall operation.
----------------------
f) Other costs
These may include costs with respect to octroi, toll charges etc. when ----------------------
goods are transported by road. ----------------------

Check your Progress 1 ----------------------

----------------------
Fill in the blanks.
----------------------
1. Tariff cost, packaging cost, obsolescence costs are the elements
______________. ----------------------

----------------------
5.4 MODES OF TRANSPORT ----------------------
a) Air Transport ----------------------
When goods are transported by air, the mode of transport is called air ----------------------
transport. This mode of transport is relatively new and the least preferred one
due to heavy cost involved. One most important advantage of this mode of ----------------------
transport however is the speed.
----------------------
Where as the other modes of transport like rail or road take considerable
time, the air transport because of its speed takes few hours to reach the destination. ----------------------
Therefore this mode of transport is used in commodities which are highly
----------------------
perishable or is used in case of meeting urgent requirements like components
in case of break down of plant and machinery. Due to globalisation and the ----------------------
growing importance of meeting the time schedules, this mode of transport is
gaining lot of importance and its usage is increasing gradually. ----------------------
Advantages of Air transport ----------------------
●● It is the fastest mode of transport. ----------------------

Transportation 363
 Notes ●● It is very useful in transporting goods and passengers to the area, which
are not accessible by any other means.
----------------------
●● It is the most convenient mode of transport during natural calamities.
---------------------- ●● It provides vital support to the national security and defense.
---------------------- Limitations of air transport
---------------------- ●● It is relatively more expensive mode of transport.
●● It is not suitable for transporting heavy and bulky goods.
----------------------
●● It is affected by adverse weather conditions.
----------------------
●● It is not suitable for short distance travel.
----------------------
●● In case of accidents, it results in heavy losses of goods, property and life.
---------------------- b) Seaways/Waterways
---------------------- These are oldest methods of transportation. When the goods are transported
by ship through water, it is called seaways transportation. In the light of the
---------------------- globalisation and integration of the world economy and growing international
---------------------- commerce, more so in the light of the development of containerisation,
transportation by sea is on the rise. Due to the economy associated with sea
---------------------- transportation, this mode is becoming increasingly popular. However one major
disadvantage of this mode is its slow speed.
----------------------
Water transport refers to movement of goods and passengers on waterways
---------------------- by using various means like boats, steamers, launches, ships, etc. With the help
of these means, goods and passengers are carried to different places, both within
----------------------
as well as outside the country. Within the country, rivers and canals facilitate
---------------------- the movement of boats, launches, etc. Since the goods and passengers move
inside the country, this type of transport is called inland water transport. When
---------------------- the different means of transport are used to carry goods and passengers on the
sea route, it is termed as ocean transport. Let us know further about these two
----------------------
types of water transport.
---------------------- I. Inland water transport
---------------------- Inland water transport use boats, launches, barges, streamers, etc., to
carry goods and passengers on river and canal routes. These routes are
---------------------- called inland waterways and are used in domestic or home trade to carry
---------------------- bulky goods. Passenger transport through waterways is not so popular in
our country. Inland water transport system exists only in few states like
---------------------- West Bengal, Andhra Pradesh, Assam, Tamil Nadu, etc.
---------------------- II. Ocean transport
Ocean transport refers to movement of goods and passengers with the
----------------------
help of ships through sea or ocean waterways. It plays an important role
---------------------- in the development of international trade. It is also used for transporting
goods and passengers in the coastal areas. Ocean transport has its fixed
---------------------- route, which links almost all the countries of the world.

364 Sales and Distribution Management

Sea transport may be of the following two types. Notes
i) Coastal Shipping - In this transport, ships ply between the main ports of
----------------------
a country. This helps in home trade and also in carrying passengers within
the country. ----------------------
ii) Overseas shipping - In this transport, ships ply between different
----------------------
countries separated by sea or ocean. It is mainly used for promotion and
development of international trade. It is economical means of transport ----------------------
to carry heavy machines and goods in bulk. Overseas transport is carried
out on fixed routes, which connect almost all the countries. In ocean ----------------------
transport, different types of ships are used to carry passengers and goods.
----------------------
These may be classified as under.
• Liners - A liner is a passenger or cargo vessel, which belongs to ----------------------
a regular shipping company. These ships ply over a fixed route
----------------------
according to a prescribed schedule or timetable.
• Tramps - A tramp is a cargo ship, which does not make regular trips ----------------------
but plies whenever cargo is offered to it. It does not follow a fixed ----------------------
route or a prescribed timetable like that of liners.
Advantages of water transport ----------------------

• It is a relatively economical mode of transport for bulky and heavy ----------------------

goods.
----------------------
• It is a safe mode of transport with respect to occurrence of accidents.
----------------------
• The cost of maintaining and constructing routes is very low as most
of them are naturally made. ----------------------
• It promotes international trade. ----------------------
Limitations of water transport
----------------------
• The depth and navigability of rivers and canals vary and thus, affect
operations of different transport vessels. ----------------------
• It is a slow moving mode of transport and therefore not suitable for ----------------------
transport of perishable goods.
----------------------
• It is adversely affected by weather conditions.
• Sea transport requires large investment on ships and their ----------------------
maintenance.
----------------------
c) Road Transport
----------------------
Roads are the means that connect one place to another on the surface of
the land. You must have seen roads in your village, in towns and cities. Not all of ----------------------
them look alike. Some of they are made of sand and some may be of chips and
cement or coaltar. You find different vehicles plying on roads like bullock carts, ----------------------
cycles, motorcycles, cars, trucks, buses, etc. All of these constitute different ----------------------
means of road transport. The means of road transport may be divided into three
types: - ----------------------

Transportation 365
 Notes i. Man driven
ii. Animal driven; and
----------------------
iii. Motor driven
----------------------
We quite often see individuals carrying goods on their head or back, in
---------------------- bicycles or on thelas, move from one place to other. People also ride a bicycle or
use rickshaw to travel short distances. We also find animal driven vehicles like
----------------------
carts (drawn by bullocks, camels, horses, donkeys, etc.) used in rural areas to
---------------------- carry crops, straw, fodder and sometimes even people. Sometimes even animals
are directly used to carry goods from one place to another.
----------------------
In areas, which are normally covered with snow throughout the year, we
---------------------- find sledges pulled by dogs used to carry both passengers and goods.
---------------------- Compared with man driven and animal-driven means of road transport,
motor driven means of transport have become more important over the years.
---------------------- This is due to their speedy movement and larger carrying capacity. Extension of
roads to every corner of the country has also enhanced the use of motor driven
----------------------
transport. The types of motor vehicles used to carry goods and passengers
---------------------- include auto-rickshaws, scooters, vans, buses, tempos and trucks, etc. In
Kolkata, tramway also forms part of road transport for carrying passengers.
----------------------
As far as cost is concerned, it lies somewhere between the air and rail
---------------------- transport. Due to increase in the road infrastructure in India, need to connect
the rural areas with the urban centers to transport the food grains and other
---------------------- commodities, road transportation and its flexibility in operation and the quality
---------------------- of responsiveness, road transport has become the lifeline of any economy.
Advantages of Road transport
----------------------
●● It is a relatively cheaper mode of transport as compared to other modes.
----------------------
●● Perishable goods can be transported at a faster speed by road carriers over
---------------------- a short distance.
---------------------- ●● It is a flexible mode of transport as loading and unloading is possible at
any destination. It provides door-to-door service.
----------------------
●● It helps people to travel and carry goods from one place to another, in
---------------------- places which are not connected by other means of transport like hilly
areas.
----------------------
Limitations of Road transport
----------------------
●● Due to limited carrying capacity road transport is not economical for long
---------------------- distance transportation of goods.
---------------------- ●● Transportation of heavy goods or goods in bulk by road involves high
cost.
----------------------
●● It is affected by adverse weather conditions. Floods, rain, landslide, etc.,
---------------------- sometimes create obstructions to road transport.

366 Sales and Distribution Management

d) Rail Transport Notes
Transportation of goods and passengers on rail lines through trains is
----------------------
called rail transport. It occupies an important place in land transport system
of our country and is the most dependable mode of transport to carry goods ----------------------
and passengers over a long distance. Besides long distance, local transport of
passengers is also provided by local trains or metro-rail in some metropolitan ----------------------
cities. Rail transport is available throughout the country except some hilly or
----------------------
mountainous regions.
In India, two types of trains are found. One is passenger train and other ----------------------
is goods train. While passenger trains carry both human beings and a limited
----------------------
quantity of goods, the goods trains are exclusively used for carrying goods
from one place to another. These trains are driven by rail engines and they use ----------------------
steam, diesel or electric power to move. Let us now discuss the advantages and
limitations of rail transport. ----------------------
Advantages of Rail transport ----------------------
●● It is a convenient mode of transport for travelling long distances. ----------------------
●● It is relatively faster than road transport.
----------------------
●● It is suitable for carrying heavy goods in large quantities over long
distances. ----------------------
●● Its operation is less affected by adverse weathers conditions like rain, ----------------------
floods, fog, etc.
----------------------
●● It is cost effective for transporting bulk commodities like coal, cement,
steel, fertilisers, petroleum products right from the place of production to ----------------------
the destination.
----------------------
Limitations of Railway transport
●● It is relatively expensive for carrying goods and passengers over short ----------------------
distances. ----------------------
●● It is not available in remote parts of the country.
----------------------
●● It provides service according to fixed time schedule and is not flexible for
loading or unloading of goods at any place. ----------------------
●● It involves heavy losses of life as well as goods in case of accident. ----------------------
5. Pipelines transport
----------------------
In modern times, pipelines are used for various purposes. Water supply
to residential and commercial areas is carried on with the help of pipeline. ----------------------
Petroleum and natural gas are also transported from one place to another through ----------------------
pipelines. This is the most convenient as well as economical mode of transport
for petroleum as well as natural gas in comparison to road and rail transport, ----------------------
provided the volume to be transported is large. But the cost of installation and
maintenance requires large capital investment. ----------------------

----------------------

Transportation 367
 Notes 5.5 MULTIMODAL TRANSPORT
---------------------- The concept of international multimodal transport covers the door-to-door
---------------------- movement of goods under the responsibility of a single transport operator. The
emergence of the container technology and of the multimodal transport concept
---------------------- came from and facilitated growing international trade. Trade and transport are
inextricably linked. Efficient transport services are a prerequisite to successful
---------------------- trading.
---------------------- International transport generally implies the use of various transport
links (interfaces and modes), each link corresponding to a transfer, storage or
----------------------
transport operation either in the country of origin, in a transit country or in the
---------------------- country of final destination.
This situation has created a number of problems over the years, as more
----------------------
and more shippers are realising that this new concept is involving the effective
---------------------- participation of various transport mode operators but does not always make
clear who is responsible for delivering cargo at destination in safe conditions,
---------------------- according to agreed schedules.
---------------------- Considering the variety of cultures, languages and commercial practices
at both ends of a trade, and the resulting complexity of assembling such an
---------------------- international transport operation, it would appear reasonable to a trader to let
---------------------- one qualified operator organise and be responsible and accountable for the
entire transport chain.
----------------------
Beginning from the present unimodal transport conditions and legal
---------------------- environment, transport operators have developed transport systems to fulfill
customers’ requirements, offering competitive services and thereby making
---------------------- trade more efficient by offering multimodal transport services to their
clients. Since the introduction of containerisation and the later development
----------------------
of EDI, international trade has increasingly demanded efficient commercial
---------------------- transactions. To take advantage of the potential offered by the new technologies,
the international trading community updated its uniform commercial practices
---------------------- regarding trading terms, letters of credit and multimodal transport documents.
---------------------- Multimodal transport implies the safe and efficient movement of goods,
where the MTO accepts the corresponding responsibility from door-to-door.
---------------------- With technological development of transport means and operations, as well as
---------------------- in communications, coupled with liberalisation in the provision of services,
more and more transport operators are able to provide such safe and efficient
---------------------- transport. These services are increasingly market-segment oriented rather than
transport mode oriented.
----------------------
The absence of international rules governing the successive carriage of
---------------------- goods resulted in peculiar problems in the matter of carriers’ responsibility and
the liability for loss of or damage to the goods occurring in the course of a
----------------------
multimodal transport operation.
----------------------

368 Sales and Distribution Management

What are the challenges ahead? Notes
The challenges ahead are two-fold:
----------------------
(1) With the globalisation of production and the liberalisation of services,
developing countries and countries in transition, more than ever, need ----------------------
more than ever to increase their capabilities in offering reliable and
----------------------
cost-effective transport and logistics services, taking advantage of
technological development through appropriate “leap-froging” into ----------------------
modern technologies and commercial practices; and
----------------------
(2) There is a world-wide need for harmonisation of the legal environment
for multimodal transport, in particular considering the development of ----------------------
new forms of international transport (combined road/rail transport and
short-sea shipping in Europe, for example). ----------------------

----------------------
5.6 CONTAINERISATION
----------------------
0ne of the elements in the multi modal transportation is containerisation.
Containerisation refers to movement of goods in containers. Generally inter- ----------------------
modal systems are structured around the use of containers. A container is a
----------------------
specially designed metal box that resembles a trailer without wheels. It generally
measures 8 feet by 8.5m feet by 20 feet or 40 feet. The 20 feet containers are a ----------------------
standard unit, with ship capacity.
----------------------
Under the containerisation concept, goods of any type are packed into a
container at any location and placed on wheels and moved either by rail or road ----------------------
to the destination. In case of international transport the containers are moved
to the port by road or rail, placed on the ship for transportation to the intended ----------------------
destination. When the ship reaches the destination port, the containers are then
----------------------
transported back to the customers either by road or rail.
Advantages of containerisation ----------------------

●● Relatively speedier mode of transportation. ----------------------

●● Due to the speedily transportation cuts down in transportation time and ----------------------
thus results in reduction in overall cost of transportation.
●● Since the goods are properly packed and sealed in metal containers, losses ----------------------
on account of theft, pilferage and deterioration in quality avoided thereby ----------------------
bringing down the insurance charges.
●● Since containerisation involves point to point loading and unloading, it ----------------------
reduces multiple handling en-route resulting in handling costs.
----------------------
●● Since the goods are already packed and sealed in sound metal containers,
it does not call additional protective packaging thereby reducing the ----------------------
costs.
----------------------
●● Since containerisation involves point to point loading and unloading,
avoids transshipments, thereby reducing the paper work and ----------------------
documentation.
----------------------

Transportation 369
 Notes
Check your Progress 2
----------------------

---------------------- State True or False.

1. Containerisation is a slower mode of transportation
----------------------

----------------------
5.7 FACTORS IN SELECTING MODE OF
---------------------- TRANSPORTATION
---------------------- The increasingly competitive environment in which firms must operate
has fundamentally altered the use of freight transportation services and
----------------------
infrastructure. Businesses view freight transportation as a means for better
---------------------- serving customers, for better supporting their operations and for reducing
costs. Businesses view freight transportation in terms of what it achieves for
---------------------- their firms, rather than as trucks, trains, vessels and aircraft. In fact, the actual
physical movement and routing of cargo are increasingly likely to be handled
----------------------
by a 3PL on behalf of the firm.
---------------------- Firms now seek five qualities in their freight transportation service –
reliability, transit time, efficiency and cost and damage minimisation.
----------------------
1. Reliability is defined as consistently ensuring that goods are delivered
---------------------- on the specified date at the specified time in the specified amount in
---------------------- the specified condition. Reliability is often written into contracts with
transportation providers with exacting specifications – often requiring
---------------------- meeting delivery targets close to 100 percent of the time. The penalties
can be severe, ranging from monetary fines to loss of the work.
----------------------
2. Transit Time is also a consideration. With JIT, the movement of goods
---------------------- replaced inventory and often, had to be moved quickly. However,
overnight shipment is expensive. Accordingly, with more advanced
---------------------- planning, an emphasis on reliability and better communications and
---------------------- information technology, the objective of JIT has matured and is now to
simultaneously reduce inventory and transportation costs. As long as
---------------------- shipments arrive when specified, they do not have to travel overnight.
---------------------- Reliability combined with a known transit time is sometimes referred
to as “time definite service.” Time definite service now extends from
---------------------- the highest priced commodity to the lowest priced bulk commodity. It
is a common element in inventory management for businesses. For
---------------------- transportation providers, meeting time definite service requirements can
---------------------- impact the modes and routes used. The availability of effective intermodal
connectors can also influence these choices.
----------------------
3. Efficiency refers to optimally using transportation equipment so as to
---------------------- minimise costs. Efficiency is often left to the transportation providers
to achieve. However, efficiency objectives can impact a shipper’s
---------------------- purchase and use of transportation services, including modes and routes.

370 Sales and Distribution Management

 Companies want to see their transportation equipment in constant Notes
motion, rather than sitting in traffic. For example, with a mandatory ten
hour workday, congested roadways can significantly reduce the number ----------------------
of trips that a vehicle can make. Congestion on intermodal connectors
can significantly affect the productivity of all the modes involved and ----------------------
can affect routing decisions. For example, port selection criteria equally ----------------------
consider the availability and ease of waterside access; the efficiency of
the maritime terminals and labor; and the ease and availability of inland ----------------------
connections.
----------------------
The efficiency of all modes tends to be dependent on efficient roadway
access. Roadways handle the end moves of an intermodal movement. ----------------------
Roadways also link freight facilities. For example, roadways link maritime ----------------------
terminals to rail yards that are not “on-dock.”
----------------------
In addition, many shippers, especially those who use a third party
logistics firm to handle their outbound goods movement to customers, ----------------------
also ask the 3PL to work with their suppliers to fill what would have been
an empty back haul truck movement with inbound commodities to the ----------------------
firm. This ultimately reduces the transportation cost for the firm since
----------------------
they can negotiate a “back haul allowance” with the supplier rather than
pay the cost associated with moving that freight to their firm. Efficiency ----------------------
considerations can, therefore, affect routing (in that trucks may be
routed differently to service supplier locations in addition to customer ----------------------
locations) and modal choice (since the objective is to fill a truck in both
----------------------
directions). Back haul considerations extend throughout the modes, with
trucking firms, railroads, shipping lines and air cargo carriers all seeking ----------------------
to “balance” their loads. No company wants to move equipment that is
empty. ----------------------

4. Cost has always been a consideration in freight movement that is, ----------------------
obtaining the lowest possible cost for moving goods. Central to
----------------------
business’ efforts to better manage transportation and distribution and
their acceptance of outsourcing of services has been a drive toward ----------------------
greater productivity and closer examination of the entire production and
supply chain, as well as the administrative functions. As companies face ----------------------
growing competition domestically and globally, efforts have increased
----------------------
to get total freight logistics cost down and achieve better returns on
assets. ----------------------
However, there are new considerations regarding cost. For example, ----------------------
shippers focus on the overall cost of moving a shipment from origin to
destination, regardless of the number of modes involved. The overall ----------------------
cost often now encompasses both the supply chain to a firm and the
----------------------
distribution channel to its customers. In addition, shippers now consider
cost within the framework of reliability, transit time and efficiency. Within ----------------------
this framework, reliability and quality service can be more important that
obtaining the lowest cost. ----------------------

Transportation 371
 Notes 5. Damage Minimisation and Safety is also a “given” in freight movement.
It is no use to a company, if the goods arrive damaged. Different modes
---------------------- and equipment types have different “ride” characteristics. Accordingly,
companies may select certain modes to minimise damage to shipments,
---------------------- as well as minimise delays. Similarly, shippers and transportation
---------------------- providers have become more cognisant of safety considerations in freight
movement, leading to improved driver training, new handling procedures
---------------------- and changes in equipment designs.
----------------------
Check your Progress 3
----------------------

---------------------- State True or False.

1. Efficiency refers to optimally using transportation equipment so as to
----------------------
minimise costs.
---------------------- 2. JIT requires more frequent and smaller shipments, emphasising
reliability.
----------------------

----------------------
5.8 CHANGING PRACTICES AND PRIORITIES IN
---------------------- FREIGHT TRANSPORTATION DEMAND
---------------------- The global economy is undergoing changes as dramatic as the industrial
revolution. These changing business practices are a reflection of major
----------------------
evolutions in key economic sectors, such as manufacturing and trade.
---------------------- The nature of transportation demand has also changed to meet the new
---------------------- needs of businesses and consumers. In addition, businesses now recognise that
innovative distribution systems can be a key competitive factor. Accordingly,
---------------------- transportation is now viewed as one of the crucial components of doing business.
Performance is measured in terms of reliability, transit time, efficiency and
---------------------- quality of service. Translated into infrastructure requirements, these trends
---------------------- heighten the need for effective intermodal connectors.
Changing business practices include :
----------------------
1. Departure from traditional manufacturing
----------------------
To regain their competitiveness, companies have modernised their
---------------------- manufacturing and distribution systems, as well as downsising and
restructuring their operations. Traditional manufacturing industries have
----------------------
also become more technology intensive. Manufacturers are continually
---------------------- searching for opportunities to restructure their operations, consolidate
production at fewer, lower cost locations closer to major consumer markets
---------------------- etc. Manufacturing industries increasingly also rely on multinational
production.
----------------------
In the new global economy, manufacturers must be able to efficiently
---------------------- move raw materials, partially assembled products and finished goods to

372 Sales and Distribution Management

 and from all areas of the world to remain competitive. Their logistics Notes
systems must be able to rapidly adjust to changing demand and inventories
during the various stages of the production and distribution cycle around ----------------------
the globe.
----------------------
Decentralisation of manufacturing processes additionally leads to an
increase in the total number of freight movements required for production. ----------------------
Domestically, as trucking accounts for a large share of intercity and
----------------------
metropolitan transport, this trend puts immense pressures on the roadway
system. ----------------------
2. Product shifts
----------------------
Another important trend in manufacturing is the shift from heavier, lower
value, manufacturing products towards higher value, less bulky, lighter ----------------------
products, typically associated with the use of new materials and new
----------------------
production technologies. The physical inputs of goods produced also
tend to be smaller, although many are highly valuable. Even the older, ----------------------
traditional manufacturing of durable goods now produces smaller and
less bulky products through greater use of plastic and other less bulky and ----------------------
lighter materials. These developments have important implications for
----------------------
transportation demand and the relative use of transportation modes in the
future. For example, lower volume, higher value goods increase demand ----------------------
for fast transportation of small quantities, thereby increasing demand for
air freight and truck services relative to water and rail services. ----------------------
3. Production runs and JIT ----------------------
An important cost element of traditional manufacturing has been the need ----------------------
for large volume production runs of the same product. Frequently, the
uncertainty as to demand levels results in larger or smaller-than-required ----------------------
inventory levels at certain times in the economic cycle. As the value of
products has increased, many manufacturers have adopted techniques ----------------------
that permit rapid adaptation to changes in demand. Manufacturing ----------------------
now involves smaller, shorter production runs, in many cases aimed
at specialised, differentiated market segments responding to different ----------------------
consumer preferences and tastes. Companies have adopted techniques
that permit the production of various goods with the same production ----------------------
line. These new production processes often require the ability to receive ----------------------
inputs just-in-time (JIT).
JIT is one of the most important trends in manufacturing over the past two ----------------------
decades. The JIT inventory control system was developed in response to ----------------------
the high interest rates of the 1970’s and the high inventory carrying costs
it generated. However, it continues to be increasingly used as a means ----------------------
of reducing inventory requirements and manufacturing costs. The use
of JIT is especially important in some industries, e.g., electronics and ----------------------
automobiles. More and more manufacturers are carefully scheduling ----------------------
deliveries so that parts arrive when needed – not a day before or a day
after. Through careful management of the transportation pipeline to the ----------------------

Transportation 373
 Notes assembly plant, the inventory costs in storage and transit are kept to a
minimum, thereby reducing warehouse and carrying costs. JIT requires
---------------------- more frequent, smaller shipments, emphasising reliability.
---------------------- The emphasis on reduced inventory levels, JIT delivery, quality and
quick response, means a significant change in the nature of transportation
---------------------- demand. First, it requires more frequent, smaller shipments. Secondly, it
---------------------- means that the transportation infrastructure must be able to function with
sufficient reliability, so that businesses can count on their deliveries being
---------------------- on-time, without being affected by congestion at airports, highways,
intermodal terminals or ports.
----------------------
4. Reducing the length of product cycles
----------------------
Transportation and distribution requirements are also evolving as
---------------------- companies place greater importance on reducing ‘cycle time,’ i.e., the
time that it takes for a company to respond to changes in the market. For
---------------------- example in the garment industry, seasons and changing fashions demand
---------------------- quick turnaround if a company is to remain competitive. Cycle times are
increasingly important as they provide a competitive advantage.
----------------------
Competition to reduce the time necessary for producing or distributing
---------------------- goods is as significant as price or style competition. Products that do not
move quickly through the distribution system can become obsolete, due
---------------------- to lower priced new products or changes in style. For several industries,
including auto parts, electrical components and apparel, the need for a
----------------------
reduction in time for products to move from concept to manufacturing to
---------------------- the selling floor requires more frequent and smaller size shipments, even
if transport costs are higher.
----------------------
5. ‘Lean manufacturing’
----------------------
The essence of “lean manufacturing” is low work-in-process supported
---------------------- by multi-disciplinary teams. Low work-in-process is expected to result
in quality improvement, since work-around options are limited and low
---------------------- work-in-process forces shorter cycle times, because fewer items are
---------------------- worked in parallel. The lean manufacturing model is based on many
of the underlying principles of JIT production. A critical distinction,
---------------------- however, is in the focus on low work-in-process rather than JIT delivery
as a strategic factor, so the intent is not only to have parts or intermediate
---------------------- products delivered just in time for final production, but producing those
---------------------- intermediate products just in time. A highly reliable, cost efficient
transportation system is a prerequisite for these types of operations.
----------------------
6. The emergence of high technology and knowledge-based industries
----------------------
The composition of the manufacturing sector has changed significantly.
---------------------- Basic industries have declined, as new industries have emerged. These
new industries are characterised by the ‘knowledge-intensity’ and the
---------------------- ‘technological innovation’ of their products. The physical inputs and

374 Sales and Distribution Management

 outputs of these new industries are particularly small, light, but highly Notes
valuable.
----------------------
These ‘high-technology’ industries, e.g., drugs, medical equipment and
supplies, electronic products, office and computer equipment, have been ----------------------
growing and are anticipated to continue growing at a faster rate than other
manufacturing industries. ----------------------
One characteristic of the newer manufacturing industries is that they ----------------------
are typically composed of a large number of smaller firms, with less
concentration in the larger firms than is the case in the older industries. ----------------------
These industries have a smaller production scale, smaller volumes of
----------------------
inbound materials and are particularly dependent on the latest technology
and research. As new, smaller firms, they also typically depend on other ----------------------
firms for supplies and basic services and are not as integrated in their
manufacturing and distribution processes. ----------------------
7. E-commerce ----------------------
The development of new computer, communications and related ----------------------
technologies has also created new specialised information, entertainment
and trade and business service industries. These new technologies, ----------------------
culminating in what is now referred as internet-based electronic commerce,
have huge implications for transportation demand. They facilitate ----------------------
complex multi-location and multinational production and distribution and ----------------------
will likely affect retail distribution patterns and the transportation needs
of the retail industry. ----------------------
For example, the 1998/1999 Boeing World Air Cargo Forecast noted that ----------------------
“consumers are increasingly using the Internet for home and business
purchases, fueling growth in air/truck logistic networks.” ----------------------
8. Demanufacturing/Remanufacturing ----------------------
Demanufacturing and remanufacturing are two new elements in product
----------------------
life cycles. Accordingly, they are also new elements in the logistics
chain. Demanufacturing involves the disassembling of such products as ----------------------
electronics, automobiles, and household appliances after the end of their
useful life. The disassembled parts are then recycled. In remanufacturing, ----------------------
the disassembled or retrieved parts are reused.
----------------------
Demanufacturing and remanufacturing is increasingly being used
globally. From an environmental perspective, companies are being asked ----------------------
to take fuller responsibility for their products – from their creation to
----------------------
their ultimate disposal. From a cost perspective, remanufacturing offers
an opportunity for companies to save money. As a result, laserjet toner ----------------------
cartridges can be sent back, free of charge, to the manufacturer. ‘Disposal
camera’ flash units, retrieved when the cameras are sent for photo ----------------------
processing, are reused in new disposal cameras.
----------------------
Demanufacturing and remanufacturing processes also require freight
handling – reverse logistics. Similar to the supply chains and distribution ----------------------

Transportation 375
 Notes channels which have become increasingly specialised for industry/
commodity clusters, reverse logistics is similarly customised to individual
---------------------- firms and businesses. Nevertheless, the processes add freight flows and
considerations to the transportation system.
----------------------
9. The globalisation of the economy
----------------------
With more multinational production and foreign trade, the economies of
---------------------- all countries are increasingly intertwined. In many industries, the trend has
been towards one global market. For many firms, transportation costs can
---------------------- define the economical reach of their products in the global marketplace.
An efficient transportation, logistics and distribution system can increase
----------------------
the market for a product or a a service, thereby achieving economies of
---------------------- scale that results in increased competitiveness and profitability.
10. Focusing on core competencies within a firm
----------------------
As businesses continue to pursue strategies to improve their
---------------------- competitiveness in world markets, they have simultaneously focused
---------------------- in their core competencies. As a result, increasingly businesses are
outsourcing many functions (including accounting, payroll, engineering,
---------------------- information, computer, legal, travel and other business services) in order to
reallocate their resources toward their core business. One of the functions
---------------------- being outsourced is freight distribution. In this manner, significant cost
---------------------- cuts can be achieved, redeploying capital (by not financing truck fleets
and buildings for warehousing and distribution purposes).
---------------------- Third-party logistics companies (3PL) have emerged to fulfill a range
---------------------- of distribution and logistics functions including trucking, warehousing,
billing, inventory management and fleet maintenance. Some rail, truckload
---------------------- and less-than-truckload (LTL) firms, in particular, have diversified to
provide such services; newly created logistics firms have also formed to
---------------------- serve a market niche or tailor a service to a firm’s specific needs. These
---------------------- third parties have increasing control over the flow of goods – the modes
used and the routes taken.
----------------------

---------------------- Activity 1

---------------------- Using internet and sources, find out the various types of container ports
existent in India.
----------------------

----------------------
Summary
----------------------
●● Transportation plays a critical role in our day to day lives. Transportation
---------------------- is a link between the places of production and places of consumption.
Hence a transportation system supported by proper infrastructure leads to
---------------------- tremendous opportunities for accelerating the growth of industrialisation
---------------------- of the nation.

376 Sales and Distribution Management

●● There are various methods of transportation like Road, Rail, Air; Water Notes
both inland and high seas used in international trade. Various methods
enjoy various degrees of flexibilities and advantages. ----------------------
●● Globalisation and resultant increase in domestic and international ----------------------
trade, advancement in technology have given rise to the new concept of
containerisation and multimodal transport. The concept of international ----------------------
multimodal transport covers the door-to-door movement of goods under
the responsibility of a single transport operator. The emergence of the ----------------------
container technology and of the multimodal transport concept came ----------------------
from and facilitated growing international trade. Trade and transport
are inextricably linked efficient transport services are a prerequisite to ----------------------
successful trading.
----------------------
●● One of the elements in the multimodal transportation is containerisation.
Containerisation refers to movement of goods in containers. Generally ----------------------
inter-modal systems are structured around the use of containers. A
container is a specially designed metal box that resembles a trailer ----------------------
without wheels. Under the containerisation concept goods of any type are ----------------------
packed into a container at any location and placed on wheels and moved
either by rail or road to the destination. In case of international transport ----------------------
the containers are moved to the port by road or rail, placed on the ship
for transportation to the intended destination. When the ship reaches the ----------------------
destination port, the containers are then transported back to the customers ----------------------
either by road or rail.
●● There are various factors which are resulting in the change of ----------------------
transportation demand like globalisation of the economy, focusing on the ----------------------
core competencies of the firm, the emergence of high technology and
knowledge-based industries, E-commerce, reducing the length of product ----------------------
cycles, lean manufacturing etc.
----------------------
Keywords ----------------------
●● Cycle time: Is the time that it takes for a company to respond to changes ----------------------
in the market?
----------------------
●● E-commerce: Commerce on the Internet.
●● Lean manufacturing: Is low work-in-process supported by multi- ----------------------
disciplinary teams?
----------------------
●● Third-party logistics: Handing over the entire logistics function of a
organisation to firms which fulfill a range of distribution and logistics ----------------------
functions including trucking, warehousing, billing, inventory management,
----------------------
and fleet maintenance.
----------------------

----------------------

----------------------

Transportation 377
 Notes
Self-Assessment Questions
----------------------
1. What is meant by transport? Describe its importance in business.
---------------------- 2. Describe the advantages and disadvantages of Railway transport.
---------------------- 3. Explain the various types of Road transport.

---------------------- 4. Describe and advantages and disadvantages of Air transport.

5. Discuss the various factors to be considered while selecting the mode of
---------------------- transport.
---------------------- 6. Explain the various changing practices and priorities in freight
transportation demand.
----------------------
7. What do you understand by containerisation? Discuss its advantages.
----------------------

---------------------- Answers to Check your Progress

---------------------- Check your Progress 1

Fill in the blanks.
----------------------
1. Tariff cost, packaging cost, obsolescence costs are the elements of
---------------------- transportation costs.
---------------------- Check your Progress 2

---------------------- State True or False.

1. False
----------------------
Check your Progress 3
----------------------
State True or False.
---------------------- 1. True
---------------------- 2. True
----------------------
Suggested Reading
----------------------
1. Bowersox, Logistical Management: The Integrated Supply Chain Process.
----------------------
2. Calvin, Robert J. Sales Management.
---------------------- 3. Chopra, Supply Chain Management.
---------------------- 4. Ghoshal, World Class in India. Penguin India.
---------------------- 5. Lamba, A.J. The Art of Retailing.
6. Scheuing, Kurtz, Johnson. Sales Management: Concepts, Practices and
----------------------
Cases.
----------------------

----------------------

378 Sales and Distribution Management

Distribution Channels in Services
UNIT

6
Structure:

6.1 Introduction
6.2 Distribution Channels in Services
6.3 Major Intermediaries for Service Industry
6.4 Distribution Channels in Banking Industry
6.5 Distribution Channels in Insurance Industry
6.6 Distribution Channels in Hotel Industry
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Distribution Channels in Services 379

 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Explain major intermediaries in the distribution of services
----------------------
• Discuss various distribution channels in banking services
---------------------- • Enumerate various distribution methods of distribution of insurance
---------------------- services
• Describe the distribution channels in hotel industry
----------------------

----------------------
6.1 INTRODUCTION
----------------------
The Industrial Revolution of Great Britain which took place in eighteenth
----------------------
century revolutionised the way production took place. There was change from
---------------------- man made production to mechanised production. Manufacturing being a very
complex process, it needs support of various services, to start with financial
---------------------- services to finance the business and the transportation to carry the material to
the consumption centers. Thus the Industrial Revolution gave birth to financial
----------------------
services and transport services.
---------------------- The industrial revolution led to increased production, consumption,
employment and generation of wealth. This resulted in increase in purchasing
----------------------
power and which gave rise to services like entertainment, travel, leisure. The
---------------------- ever increasing inventions and the resultant complexities in production process
and managing of larger organisations and the resulting growing importance
---------------------- of services like banking, insurance, investment and legal were pointers to the
bright future for the services industry.
----------------------
Products are tangible objects. Products have various attributes, features,
---------------------- sizes, shapes. They can be held, touched, smelt, tasted, measured etc. The
---------------------- product delivers an experience which is tangible in nature. Products can be
transported, stored, sold or consumed at a later date. Products are manufactured
---------------------- to specifications hence products tend to be standardised. There is transfer of
ownership.
----------------------
On the other hand, services tend to be intangible, heterogeneous and
---------------------- perishable and call for simultaneous production and consumption. Thus due to
the various uncertainties in the production, delivery and consumption, there is
---------------------- no transfer of ownership.
---------------------- The marketing of services and the various activities involved in it are
therefore different from the marketing of goods. The service firms therefore tend
---------------------- to be different in orientation from the firms manufacturing goods and different
---------------------- approach to various elements of marketing elements including the distribution
of their services.
----------------------

380 Sales and Distribution Management

6.2 DISTRIBUTION CHANNELS IN SERVICES Notes

All the organisations, institutions and persons participating in the process ----------------------
of distribution are known as channels of distribution. The various participants
----------------------
in the process of distribution are:
●● The service provider ----------------------
●● Intermediaries ----------------------
●● Customers
----------------------
The length of the channel or the number of participants in the process of
distribution will vary from service to service. There are certain types of services ----------------------
in which the channel would be the shortest. For example the services of a doctor
----------------------
or a lawyer. Where as there are services like tour and travels which involve the
agents as the intermediaries or in certain services like shares and real estate, we ----------------------
know that the agents and brokers act as intermediaries.
----------------------
The broad options for the marketers in distribution of services are as
follows: ----------------------
Form of Channel Type of service ----------------------
Direct Sales Accounting Services
----------------------
Producer-Consumer Management Consultancy Services
Design and Technical Services ----------------------
Dieting Services ----------------------
Eye care Services ----------------------
Hair Fashioning Services
----------------------
Health care Services
Legal Services ----------------------
Agents or Brokers Insurance services ----------------------
Producer-Agent-Consumer Tour and Travel Services
----------------------
Hotel Reservation Services
Ticketing Services ----------------------
Advertising Services ----------------------
Seller & Buyer Agent & Broker Stocks and Shares Brokers
----------------------
Commodity Brokers
Real Estate ----------------------

Agent-Consumer Holding and Investment ----------------------

Franchises and Contracted Services Fast Food Services ----------------------
Deliveries Car Rental Services
----------------------
Dry Cleaning Services
Source: Services Marketing, Concepts, Applications and Cases by M.K.Rampal and S.C.Gupta ----------------------

Distribution Channels in Services 381

 Notes 6.3 MAJOR INTERMEDIARIES FOR SERVICE
----------------------
INDUSTRY

---------------------- The major intermediaries used in distribution of services are:

1. Franchises
----------------------
2. Electronics
----------------------
3. Agents/Brokers
---------------------- Now let us discuss these intermediaries in detail.
---------------------- 1. Franchising

---------------------- Types of franchise

A franchise is an agreement or license between two parties which gives
----------------------
a person or group of people (the franchisee) the rights to market a product or
---------------------- service using the trademark of another business (the franchisor).
The franchisee has the rights to market the product or service using the
----------------------
operating methods of the franchisor. The franchisee has the obligation to pay the
---------------------- franchisor certain fees and royalties in exchange for these rights. The franchisor
has the obligation to provide these rights and generally support the franchisee.
---------------------- In this sense, franchising is not a business or an industry, but a method used by
businesses for the marketing and distribution of their products or services. Both
----------------------
franchisor and franchisee have a strong vested interest in the success of the
---------------------- brand and keeping their customers happy.
Typically there are two types of franchise methods. There is ‘business
----------------------
format franchising’ and ‘product and trade name franchising’.
---------------------- a) Business Format Franchising
---------------------- Business format franchising offers a variety of services to the franchisees.
They provide the franchisee use of trademarks and logos, as well as a complete
---------------------- system of doing business. They will assist the franchisee with site selection,
---------------------- interior layout and design, hiring and training, advertising and marketing,
product supply and more. The franchisee pays an up front franchise fee and
---------------------- agrees to pay continuing royalties to the franchiser that help the franchiser
provide research, development and support for the entire system.
----------------------
There are many examples of business format franchising, including -
---------------------- fast food restaurants, automotive services, estate agents, convenience stores,
recruitment agencies, hairdressers etc.
----------------------
This type involves three characteristics:
----------------------
i) The franchisee sells goods or services which meet the franchisor’s quality
---------------------- standards (in cases where the franchisee operates under the franchisor’s
trade mark, service mark, trade name, advertising or other commercial
---------------------- symbol designating the franchisor (‘mark’) or which are identified by the
franchisor’s mark.
----------------------

382 Sales and Distribution Management

ii) The franchisor exercises significant assistance in the franchisee’s method Notes
of operation, and
iii) The franchisee is required to make a payment to the franchisor or a person ----------------------
affiliated with the franchisor at any time before the stipulated time after ----------------------
the business opens.
----------------------
b) Product and Trade Name Franchising
Product and trade name franchising generally is associated with industries ----------------------
such as automotive, petroleum and soft drink. This type of franchising does not
----------------------
include royalty fees. The franchiser provides trademarks and logos, national
advertising campaigns, but most importantly, product. ----------------------
This type, also offers three characteristics:
----------------------
i) The franchisee sells goods or services which are supplied by the franchisor
or a person affiliated with the franchisor. ----------------------
ii) The franchisor assists the franchisee in any way with respect to securing ----------------------
accounts for the franchisee, or securing locations or sites for vending
machines or rack displays, or providing the services of a person able to ----------------------
do either.
----------------------
iii) The franchisee is required to make a payment to the franchisor or a person
affiliated with the franchisor at any time before or within six months after ----------------------
the business opens.
----------------------
Advantages of franchising
----------------------
For a franchised network to be successful in the long term, both the
franchisor and the franchisees must derive from the arrangement solid and ----------------------
enduring benefits which otherwise would not be readily available to them.
Although the expectations of the franchisor and all franchisees within a network ----------------------
tend to converge, their perceptions of the advantages to be gained from the
----------------------
arrangement will differ somewhat, as the following paragraphs show.
Advantages form the franchisor’s viewpoint ----------------------
An entrepreneur who considers the expansion of his business has various ----------------------
options open to him, including the establishment of branches, entering into joint
venture agreements, contracting with distributors or setting up a network of ----------------------
franchisees. ----------------------
To set up branches or to a lesser extent perhaps, enter into joint venture
operations, would entail a large investment in infrastructure and working capital. ----------------------
Both options would also make huge demands on management time and have ----------------------
the potential to create HR problems as well. The appointment of distributors
would address many of these problems, but control would be lost. ----------------------
A franchise network enables the entrepreneur to realise his expansion ----------------------
plans on the basis of an investment made by franchisees. Those franchisees,
having made a substantial investment in their own businesses, can be relied ----------------------
upon to maximise market penetration and operational efficiencies on an ongoing
basis and to deal with emergencies as they arise. ----------------------

Distribution Channels in Services 383

 Notes But while franchisees can be expected to finance and manage their own
outlets, the franchisor retains overall control over the brand and its development
---------------------- in the widest sense of the word. As a result, expansion can proceed at a much
faster pace than would otherwise be possible, enabling the franchisor to achieve
---------------------- national market penetration and increased market share whilst benefiting from
---------------------- the resulting economies of scale.

---------------------- Advantages from the franchisee’s viewpoint

By commencing operations under the umbrella of an established
----------------------
franchisor, using his trademark and operating in accordance with tried and tested
---------------------- operational principles, members of a franchise network are effectively insulated
from the many mistakes, new entrepreneurs are apt to make, especially during
---------------------- the start-up phase.
---------------------- Once operational, and by utilising the ‘store opening package’ most
franchisors have in place, franchisees can expect to gain a reasonable share of
---------------------- their local market and achieve break even more quickly than would otherwise
---------------------- be the case.
On an ongoing basis, access to the large company infrastructure
----------------------
maintained by the franchisor and accessible to franchisees, will enable
---------------------- franchises to concentrate on the management of their businesses and build
lasting relationships with customers while the franchisor takes care of the
---------------------- ‘bigger picture’. Franchisors services will typically include brand building,
marketing and operational guidance and control. Furthermore, economies of
----------------------
scale, listed earlier in this article as a franchisor benefit, will benefit franchisees
---------------------- as well, especially in two areas:

---------------------- ●● Group marketing efforts will see to it that the impact of every advertising
rand is maximised. By way of example, an advertising spend of Rs. 5000
---------------------- per month, when pooled with similar contributions by say, 50 members
of a network, creates a sizable marketing fund, while Rs. 5000 spent in
----------------------
isolation by an independent operator is unlikely to make any impact at all.
---------------------- ●● The combined purchasing power of the network will help franchisees to
---------------------- secure preferential deals with key suppliers. Although this will vary from
industry to industry, it is not at all uncommon that savings achieved by
---------------------- franchisees through access to bulk deals pay the lion share of ongoing
franchise fees. One more advantage comes to mind, intangible perhaps
---------------------- but of no less importance. It can be best summed up by the well-worn
---------------------- phrase ‘To be in business for yourself but not by yourself’.
Disadvantages for the franchisee’s viewpoint
----------------------
Cost: Franchisees are expected to pay an up front fee as well as ongoing
----------------------
fees. Setup costs, to may be above average, as the franchisor, having invested
---------------------- a great deal of money into the development of the corporate image, will not
permit shortcuts. On the other hand, discerning consumers may well be attracted
---------------------- by an image exuding professionalism all-round and break even may be reached

384 Sales and Distribution Management

sooner. In a similar vein, the cost of ongoing fees will be offset by bulk purchase Notes
advantages and benefits flowing from the franchisor’s support mechanism.
----------------------
Controls: Although franchisees own the infrastructure of their businesses,
they are contractually bound to adhere to the franchisor’s operational guidelines. ----------------------
For an individual determined to ‘do it it his way’, this can be a source of constant
irritation. ----------------------
Restriction on the sale of the business: An independent operator is free to ----------------------
sell his business whenever he wants to and to whomever he chooses. He does
not need to concern himself with the suitability of the purchaser to operate the ----------------------
business according to the franchisor’s guidelines; it is simply a matter of willing
----------------------
seller / willing buyer. Franchisees, on the other hand, will find that the franchise
agreement places restrictions on them in this regard. ----------------------
The flip side is that a ‘branded’ business may be easier to sell and may
----------------------
even command a higher price.
Franchisor failure: Franchising is often likened to a marriage and there ----------------------
is some justification in this statement. Generally speaking, franchisees are ----------------------
bound to the franchisor “for better or worse”. Should the franchisor make a bad
business decision, franchisees’ success chances could be severely hampered. ----------------------
It is well worth nothing that the franchisor/franchisee relationship is not ----------------------
intended to be a partnership in a legal sense. Should the franchisor go out of
business, franchisees’ assets can normally not be touched by the franchisor’s ----------------------
creditors. In any event, cases of franchisor failure are extremely rare and should
the unthinkable really happen, there would be nothing to stop franchisees from ----------------------
grouping together and carrying on ‘business as usual’. ----------------------
Disadvantages from the franchisor’s viewpoint
----------------------
Suitability of the business: Contrary to statements bandied about by
overenthusiastic promoters of franchising, not every type of business can be ----------------------
franchised. The franchisor’s personality traits and the corporate culture of the
----------------------
business to be franchised must also be considered before this important step is
taken. ----------------------
Initial costs: Far from being a ‘get-rich-quick’ scheme, the establishment
----------------------
of a bona fide franchise operation will demand a significant investment in the
form of development costs. And once early franchisees are operational, they ----------------------
will need an awful lot of “hand-holding”, precisely at a time when their sales
figures will typically still be low. This will impact on the franchisor’s income ----------------------
stream from management services fees and is likely to cause initial losses in the
----------------------
operation of the support structure.
As soon as a reasonable number of franchises are up and running and ----------------------
early franchisees begin to mature, the franchisor’s income flow will become ----------------------
increasingly attractive.
Reduced flexibility: Once the decision to franchise has been made, it ----------------------
is extremely difficult to reverse it and at operational level, franchisees look ----------------------

Distribution Channels in Services 385

 Notes towards their franchisor for direction. Frequent changes in policy will lead to
confusion, followed by and erosion of confidence.
----------------------
Problem franchisees: Franchisees who made a significant investment in
---------------------- their businesses cannot be treated like managers and simply fired if they fail to
perform.
----------------------
To maintain the network’s morale intact, struggling franchisees will
---------------------- have to be given ‘intensive care’ before the decision is taken to terminate their
agreements. This can be frustrating, time-consuming and costly. The antidote to
---------------------- this particular problem? Careful franchisee selection - it is unlikely to eliminate
---------------------- the problem, but it will go a long way towards keeping it manageable!
Some Franchising Examples
----------------------
Product/Service Category Sample Franchises Domino’s
----------------------
Fast Food McDonald’s Wimpy’s
----------------------
Education Aptech NIIT
---------------------- CMC
---------------------- STG
Tulec
----------------------
Courier Overnite Express DHL
---------------------- Fedex
---------------------- Hotels Holiday Inn Radisson
Beauty Parlors Shehnaz
----------------------
Source: Services Marketing, Concepts, Applications and Cases by M.K.Rampal and S.C.Gupta
----------------------
2. Electronic Channels
----------------------
During the last decade there have been several inventions and advancement
---------------------- in the information and telecommunication technology, which has changed our
lives for better. Due to these inventions and advancements, marketer, on their
---------------------- part are in a position to devise better and faster methods of distribution of
services resulting in value addition and convenience to the consumers at large.
----------------------
Distribution of services through the electronic channels is without
---------------------- any direct human interaction since services are distributed through a service
---------------------- distribution system. This calls for a pre designed service and a system to deliver
it. Delivery services through ATMs, call centers can be quoted as examples of
---------------------- this.
---------------------- Advantages of electronic channels are as follows:

---------------------- a) Being able to conduct business 24 x 7 x 365

Electronic channels can operate every day. The physical storefront does
----------------------
not need to be open in order for customers and suppliers to be doing
---------------------- business with you electronically.

386 Sales and Distribution Management

b) Access the global marketplace Notes
The internet spans the world and it is possible to do business with any
business or person who is connected to the internet. Simple local businesses ----------------------
such as specialist record stores are able to market and sell their offerings ----------------------
internationally using e-commerce. This global opportunity is assisted by
the fact that, unlike traditional communications methods, users are not ----------------------
charged according to the distance over which they are communicating.
----------------------
c) Speed
Electronic channels allow messages to traverse the world almost ----------------------
instantaneously. There is no need to wait weeks for a catalogue to arrive ----------------------
by post.
d) Market space ----------------------
Electronic channels operate is the global market. This facilitates wider ----------------------
reach for the organisations.
----------------------
e) Opportunity to reduce costs
The Electronic channels make it very easy to ‘shop around’ for products ----------------------
and services that may be cheaper or more effective than we might otherwise
----------------------
settle for. Electronic channels help in bypassing the intermediaries and
thereby reducing the prices to the end consumers. From the organisations ----------------------
point of view, the organisations can reach customer globally thereby
reducing costs from them. ----------------------
f) Efficient applications development environment ----------------------
Applications can be more efficiently developed and distributed because
they can be built without regard to the customer’s or the business partner’s ----------------------
technology platform. Application updates do not have to be manually ----------------------
installed on computers. Rather, Internet-related technologies provide this
capability inherently through automatic deployment of software updates’. ----------------------
g) Allowing customer self service and ‘customer outsourcing’ ----------------------
People can interact with businesses at any hour of the day that it is
convenient to them, and because these interactions are initiated by ----------------------
customers, the customers also provide a lot of the data for the transaction ----------------------
that may otherwise need to be entered by business staff. This means that
some of the work and costs are effectively shifted to customers; this is ----------------------
referred to as ‘customer outsourcing’.
----------------------
3. Agents and brokers
Agents and brokers are a critical element in the distribution channel for ----------------------
services. Many service products as indicated above use brokers and agents as
----------------------
intermediaries’ Agents and brokers do not take title of the goods. In services,
their basic function is to sell services, for which they get a commission from the ----------------------
service provider.
----------------------
a) Service Provider Agents
They work for two or more related service from non-competing service ----------------------

Distribution Channels in Services 387

 Notes providers in a defined geographical territory. For example a travel
agent represents Jet Airways and undertakes the booking for passengers
---------------------- travelling by Jet Airways for a fee or commission and also provides
booking for tour related services for a tour operator.
----------------------
b) Selling Agents
----------------------
Selling Agents sell full range of services of a service provider and
---------------------- are responsible for all aspects of marketing of those services under a
contractual agreement. In fact they are empowered to negotiate on behalf
---------------------- of the service providers. They perform the function of wholesaling
without taking the title of the product. They usually work for small firms.
----------------------
For example a travel agent who is authorised selling agent of a hotel
---------------------- may negotiate a block booking on behalf of the hotel under contractual
obligation.
----------------------
c) Brokers
---------------------- Brokers do not have any affiliation with any particular service provider.
---------------------- They specialise in certain areas, for example a broker specialising in
selling real estate, bring the buyer and the seller together to negotiate the
---------------------- deal. For example we see brokers in the real estate industry who assist the
buyers and the sellers in selling properties like flats, shops, bungalows’,
---------------------- premises on rent etc. For the service the broker renders he is entitled for a
---------------------- commission as mutually agreed upon.
Benefits of using brokers/agents
----------------------
●● Results in reduction in selling costs.
---------------------- ●● Since the brokers and agents are widely available, the services can be
---------------------- made widely and easily available to the consumers.
●● Since the agents and the brokers have in-depth knowledge of the local
---------------------- markets, the selling and marketing strategies can be tailor made to suit to
---------------------- the local conditions.
●● The brokers and agents represent multiple service providers. As such they
---------------------- are in a position to provide services of the customer’s choice.
----------------------
Check your Progress 1
----------------------

---------------------- State True or False.

1. Franchisor and franchisee have a strong vested interest in the success
----------------------
of the brand and keeping their customers happy.
----------------------

---------------------- 6.4 DISTRIBUTION CHANNELS IN BANKING INDUSTRY

---------------------- Traditionally the distribution of banking services has been through the
bank branches. Over the years we have seen the pathetic conditions of banking
---------------------- services. However over the years there has been gradual change in the orientation.

388 Sales and Distribution Management

In India, with competition heating up in the banking industry and the increase Notes
in the number of private and foreign banks in the post liberalisation era, all
players in this market are gearing up their supply chain management processes ----------------------
for better customer acquisition and retention. Most of these new private sector
banks and the foreign banks are handicapped by the lack of a strong branch ----------------------
network as compared to their public sector counterparts to distribute their ----------------------
products or services.
----------------------
In the absence of such a network, the market place has seen the emergence
of a lot of innovative services by the players to increase their market share ----------------------
and reduce their cost of service delivery through direct distribution strategies
of Non-Branch Delivery. All these are using ‘homebanking’ as the key ‘pull’ ----------------------
factor to wean customers away from the well-entrenched public sector bank.
----------------------
Technology is enabling banks to provide the convenience of ‘anytime-
anywhere’ banking to increasingly demanding customers. Banks are now ----------------------
reengineering the way in which their services can be ‘distributed’ to their
----------------------
customers. The earlier brick-and-mortar branch is no longer sufficient,
technology is now taking banks to the homes and offices, 24 hours a day, 365 ----------------------
days a year through ATMs, phone banking and PC banking.
----------------------
Therefore, the financial supply chain is undergoing a fundamental strategic
change. In this paper, the four major category of players, in the Indian banking ----------------------
sector, i.e. Public Sector Banks, Private Sector Banks, Financial Institutions like
----------------------
ICICI and IDBI and Foreign Banks have been studied to identify competitive
strategies followed by each to get into the Non-Branch Delivery Business. ----------------------
Developmental Banks, Rural Banks and Co-operative Banks have been left out
of the scope of this study, since this is not their area of focus. ----------------------
Customer's Bank's ATM ----------------------
ATM Card Other Bank's Network ----------------------
Shared ATM Control

Credit Card Merchant Branch

----------------------
Customer Customer's Account(s)
Debit Card Merchant with on Bank's Computer ----------------------
Point-of-sale terminal
Telephone ----------------------
Personal Computer
----------------------
Branch
Automated Loan Machine ----------------------
Vitrual Branch
----------------------
Fig. 6.1 : Channels of distribution for bank services (Typical)
----------------------
Source: Services Marketing, Concepts, Applications and Cases by M.K.Rampal and S.C.Gupta

Automated Teller Machines (ATM) ----------------------

ATMs though operational in the country for quite some time, are expected ----------------------
to make a big head-way in India. It has been estimated that there are around
400,000 ATMs worldwide out of which 100,000 are located in Japan alone. The ----------------------

Distribution Channels in Services 389

 Notes latest generation networked ATMs allow the user to perform up to 150 kinds of
transactions ranging from simple cast withdrawals and deposits, to fund transfer
---------------------- to trading in stocks to buying mutual funds to something mundane like payment
of electricity bills, booking air-tickets and making hotel reservations.
----------------------
Virtual bank
----------------------
Multimedia technology has been quite effective in bringing the banking
---------------------- services to the door-step of its customers. The Customer Activated Terminal
(CA]) or Kiosk is an interactive multimedia display unit, housed in a small
---------------------- enclosure, typically consisting of a computer workstation, monitor, video disk
player and a card reader. It allows the customers to browse through information
----------------------
and use the available banking services at their own speed. Some banks are
---------------------- thinking of establishing ‘virtual’ branches where a customer can walk through
the door; explore services by touching parts of the screen and at any time call
---------------------- up a member of the bank staff by video conferencing. While the banks do not
need to invest heavily in real estate for setting up such a branch, the customer
----------------------
gets the benefit of ‘one-stop banking’ at a convenient location.
---------------------- Home banking
---------------------- Smart phones with screen built-in modems and programmable
microprocessors let the customer access a variety of financial services from
---------------------- home.
---------------------- Electronic Funds Transfer at Point of Sale (EFTPOS)
---------------------- While travelers’ cheques meant ‘pay-now-buy-later’ and credit cards had
‘buy-now-pay-later’ advantages, EFTPOS or debit cards signify ‘buy-now-pay-
---------------------- now’ but without cash transaction. The user presents his ATM card when he
buys goods and the EFTPOS system immediately debits his bank account.
----------------------
Smart Cards
----------------------
The ‘processor’ type Smart Cards with in-built integrated circuits (ICs) or
---------------------- micro-chips offer a wide range of transactional opportunities even from remote
areas. The Smart Cards are extensively being used for employee ‘clocking in’,
---------------------- withdrawing cash from ATM, using pay-phones, payment of various bills etc.
---------------------- Electronic Data Interchange (EdI)

---------------------- EDI typically denotes paperless financial transactions across the

locations. EDI is fast becoming the norm for inter-company transactions and
---------------------- also for procurement of bought-out items from the suppliers. The companies
can now operate their bank accounts through corporate banking terminals in
---------------------- their own offices which are linked to the bank computers. Companies can thus
---------------------- carry out transactions like transferring funds, managing its cash flow, opening
letters of credit etc. without any paper work. Singapore has established Trade-
---------------------- Net to facilitate electronic submission of trade documents by traders to various
Govt. agencies and the response of these agencies to the sender. It has reduced
---------------------- document processing time from one day to 15-30 minutes and the estimated
---------------------- savings are of the order of $ 1 billion annually.

390 Sales and Distribution Management

distribution channel Strategy of UTI Notes

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------
----------------------

----------------------
Fig. 6.2: Multi Channel Retail Banking
Source: PPT-Customer focus banking-the UTI experience-Hemant Kaul,
----------------------
Sr. Vice President, Retail Banking, UTI.
----------------------
6.5 DISTRIBUTION CHANNELS IN INSURANCE ----------------------
INDUSTRY
----------------------
Agents
----------------------
Today’s insurance agent has to know which product will appeal to the
customer and also know his competitor’s products in the same space to be an ----------------------
effective salesman who can sell his company, the product and himself to the
customer. To the average customer, every new company is the same. Perceptions ----------------------
about the public sector companies are also cemented in his mind. While the
----------------------
public sector companies are able to attract agents, they continue to suffer from
high attrition rates due to indiscriminate agent appointment. ----------------------
The most successful of these companies’ tied agents are hardly of the elite
----------------------
variety of salesman. They are still the neighbourhood do goobers - the postman,
the schoolteacher, and the shopkeeper - who know the people and are themselves ----------------------
known in the community. The challenge here is the lack of knowledge of the
competitive market and the inability to do intelligent comparisons with the ----------------------
competitor’s products. Educating and training these agents is a serious challenge
----------------------
for the insurance company.
Bancassurance ----------------------
Bancassurance is the distribution of insurance products through a bank’s ----------------------
distribution channels. It is a service that can fulfill both banking and insurance
needs at the same time. Bancassurance as a concept first began in India when ----------------------

Distribution Channels in Services 391

 Notes the insurance industry opened up to private participation in December 1999.
There are basically four models of bancassurance:
----------------------
●● Distribution alliance between the insurance company and the bank.
---------------------- ●● Joint venture between the two companies.
---------------------- ●● Mergers between a bank and insurer.

---------------------- ●● Bank builds or buys own insurance products.

Most of the bancassurance operations fall in the first model.
----------------------
How does it help?
----------------------
●● Every insurance company wants to grow quickly to reduce painful
---------------------- start-up expense overruns. Banks with their huge networks and large
customer bases give insurers an opportunity to do this efficiently.
----------------------
●● It gives the companies an opportunity to tap the rural sectors. Selling
---------------------- insurance through traditional methods in these sectors falls very expensive.
A tie up with a bank with an appropriate customer base can give an insurer
---------------------- a cheap access to these areas.
---------------------- ●● Bancassurance enables to have a huge pool of skilled professionals.
---------------------- ●● The margins of the banks in their core lending business are declining
sharply. Opportunities like bancassurance augment their income.
----------------------
●● Bancassurance enables to develop a sales culture within the bank. It helps
---------------------- to change the traditional mindset of banking companies.

---------------------- Though a relatively new concept, ban assurance has been a phenomenal
success in most of the cases. Currently banks are not just lending organisations
---------------------- but are emerging as more diverse financial institutions. The distribution of
insurance products through banks has been beneficial to both insurance and
---------------------- banking companies as well as the customers.
---------------------- Invisible Insurer
---------------------- In this model, the insurance company or its representative is not the entity
marketing the products. The insurance cover is sold by an automobile/credit
----------------------
card company as an add-on product leveraging the brand of the retailer. The
---------------------- risk is carried by the insurance company, which underwrites it. Products like
creditor insurance, automobile insurance, and credit card related insurance
---------------------- could be distributed using this channel. This model can be adopted in all market
segments for the lines of business mentioned. It is already prevalent in some
----------------------
areas like credit card insurance and crop insurance for agricultural loans.
---------------------- Products like creditor insurance, automobile insurance and credit card
---------------------- related insurance could be distributed using this channel. What makes these
arrangements attractive is the low distribution cost and captive customer base.
---------------------- However, repeat business or renewal of business cannot be assured. In the life
segment, group creditor insurance may be the most suitable product for this
---------------------- channel.

392 Sales and Distribution Management

Brokers Notes
This will be a new experience for the insurance customer, accustomed to
----------------------
brokers in financial services, real estate, and travel and tourism. For historical
reasons the image that ‘broker’ carries in the minds of the customer is not very ----------------------
favourable. Thus the new breed of insurance brokers faces the challenge of
establishing credibility. The positives are that brokers in the urban arena can ----------------------
attract the elite and the upper middle class customer. Brokers represent the
----------------------
customer and will sell the products of more than one company. They seek to
determine the best fit for the client and can effectively address the mind block ----------------------
faced by the public about the various companies. This is applicable in the case
of life insurance for the high-end and corporate/group segment. ----------------------
In the non-life segment, broking is not entirely new, as reinsurance brokers ----------------------
were arranging exotic covers. For individual customers also, with a wide range
of competitive products, the broker can get a good deal. The corporate broking ----------------------
companies will have to play a prominent role. ICICI Prudential Insurance and ----------------------
HDFC Standard Life Insurance have already partnered with NGOs to sell some
low cost insurance in rural areas. However, the challenge lies in establishing ----------------------
regulations that protect the customer and attract the right players into the
brokerage market rather than creating another middlemen segment eroding the ----------------------
premium. ----------------------
Work Site Marketing
----------------------
With changes in human resources management polices and compensation
packages, group products or work site products do have a definite market that ----------------------
cannot be ignored.
----------------------
Here the advantages would be:
----------------------
●● Captive customer base
----------------------
●● Potential to sell individual insurance and group insurance
●● High trust factor ----------------------

●● High hit ratio for the intermediaries ----------------------

The challenges would be the cost effectiveness, product customisation ----------------------
and efficient post sales servicing, which would determine continued business.
Technology has a key role to play in worksite marketing to ensure cost benefits. ----------------------
Banks and financial institutions have been successfully marketing credit cards
----------------------
and other financial products using this channel. If not an identical model a
similar approach can be used for selling insurance. ----------------------
Internet ----------------------
Though India is joining the fast growing breed of net users, using net for
----------------------
transactions has not yet caught up. Though a few banks provide online banking,
the usage is still a small fragment. The insecurity associated with transactions ----------------------
over the net is still an inhibiting factor. At present most of the insurance
companies have product information and/or illustrative tools on the web. It will ----------------------

Distribution Channels in Services 393

 Notes take considerable time before web evolves into a means for direct selling of
insurance in the current scenario. In the Indian market, where insurance is sold
---------------------- after considerable persuasion even after face-to-face selling, the selling over the
net, which must be initiated by the client, would take some more time. While the
---------------------- technology capability is there, improvements in bandwidth and infrastructure
---------------------- are needed. Also needed are simpler products where auto-underwriting is
feasible.
----------------------
Automobile insurance, one of the segments of insurance purchased ‘off
---------------------- the shelf’ in India, would be the ideal segment to start with. On the life side,
term assurance for standard lives with simplified underwriting is a possibility.
---------------------- These channels by themselves will not be able to overcome the mindset of the
people, but rather can only be enablers for the human channels.
----------------------

---------------------- Check your Progress 2

----------------------
Fill in the blanks.
---------------------- 1. ________________ refers to the distribution of insurance products
---------------------- through a bank’s distribution channels.

----------------------
6.6 DISTRIBUTION CHANNELS IN HOTEL INDUSTRY
----------------------
Traditionally in the absence of any reservation, the customer would
---------------------- directly visit the hotel and seek accommodation. In case of upcountry
---------------------- destinations within the country like ours the customers would approach the
hotel for accommodation over telephone or through telegram or alternatively
---------------------- through the travel agent.

---------------------- However due to revolution in the information and communication

technology the distribution channels of the hotel industry have undergone total
---------------------- transformation. Now in addition to the traditional way of distribution of its
services, hotels are making use of the latest technology and more and more
---------------------- implementing Electronic Distribution Channels.
---------------------- Electronic Distribution Channels are the electronic ways in which
customers can find and book your hotel. Technically speaking, the telephone
---------------------- could be considered an electronic distribution channel, but normally its not.
---------------------- Electronic distribution channels are usually seen as those that involve the
Internet or GDS system, or those that involve intermediaries who use the
---------------------- Internet or GDS system.
---------------------- The following chart gives an overview of the various electronic distribution
channels and how customers use them to find and book your hotel.
----------------------
How People use Electronic Distribution Channels to Find and Book your
---------------------- Hotel.

----------------------

394 Sales and Distribution Management

 Notes

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------
----------------------
Fig. 6.3 : Electronic distribution Channels in Hotel Industry
----------------------
Telephone, Fax & E-mail
Bookings by telephone and fax are not normally considered as electronic ----------------------
distribution channels, but they are and not only because they are electronic ----------------------
devices. Customers can use several communication channels when making one
reservation. For example, many people will find your hotel on the internet, but ----------------------
telephone you to make the reservation.
----------------------
Search Engines
----------------------
Most customers who are looking for hotel accommodation via the internet
begin their search using a search engine. 86% of all Internet searches are done ----------------------
using one of four main search engines. These are Yahoo! (26 percent), Google
(23 percent), AOL (20 percent), MSN (17 percent). Other search engines include ----------------------
Alta Vista, Ask Jeeves, Alltheweb, Looksmart, Lycos, etc.
----------------------
People also search the internet using directories, which are compiled
by humans and organised into specific categories. Search engines, on the ----------------------
other hand, automatically find, list and deliver website links, without human
----------------------
involvement.
When somebody uses a search engine to look for accommodation in your ----------------------
area they will find either your hotel’s website or a travel intermediary. Since
----------------------
you pay a com mission or discount on every booking made through a travel
intermediary it is to the hotels advantage that they find your hotels website first. ----------------------
Since very few people will look past the first three pages of search engine results
it is important to optimise your website for the search engines and promote it ----------------------
properly so that it shows up high on the list of search engine results. A good
----------------------
hotel website listed in the top of the results for keywords concerning the hotels
destination can result in a spectacular increase in bookings. ----------------------

Distribution Channels in Services 395

 Notes Other Websites
Some people looking for accommodation online will find your hotel’s
----------------------
website through links from other websites. Local community websites,
---------------------- websites with information about your destination, websites from local suppliers
and businesses, websites dealing with ancillary aspects of your business (such
---------------------- as weddings), and other websites can all include links to your hotel’s website
and thus send potential customers your way. Needless to say, the more links to
----------------------
your hotel’s website from relevant other websites the better. Links from other
---------------------- websites to your own will also help your hotel’s website to move further up the
rankings of search engine results.
----------------------
Hotels Website
----------------------
Hotels website is by far the most important part of your online presence
---------------------- and your best chance of attracting business from the internet without having to
pay commissions. People find your website through search engines or via other
---------------------- websites.
---------------------- Online Booking Services
---------------------- An online booking service is a company that takes bookings from you
over the internet from your own website - and charges you a commission for
---------------------- each booking. The advantage of an online booking service is that they make
it easier for hoteliers to accept bookings from their own websites. The main
----------------------
disadvantage - and it is a big disadvantage - is that you will pay a commission for
---------------------- every booking made from your own site. This means that effective marketing of
your hotel online will result in bigger cheques payable to your online booking
---------------------- service. This is why having your own booking software on your own website is
much preferable.
----------------------
As use of the internet grows the share of the market for hotel rooms
---------------------- booked through travel agents is gradually declining.
---------------------- GDS Systems
---------------------- GDS is the worldwide computer system. 600,000 Travel Agents
worldwide use to book travel. Originally created by the airline industry, these
---------------------- systems now provide a means for travel agents to book hotels, rental cars and
---------------------- other travel services as well as airline tickets. Several Internet travel sites also
use GDS Systems to enable their users to find and book hotels. GDS Systems
---------------------- can be an important source of new business. However, since the hotel will pays
a commission on every booking taken via GDS it is to the hotels advantage to
---------------------- encourage the regular customers to use more direct methods where possible.
---------------------- The four major GDS systems are Sabre, Galileo, Amadeus and WorldSpan.
GDS Representatives
----------------------
A GDS representative is a company that will put you on the GDS system,
---------------------- usually for a sign-up charge plus a commission on each booking made through
---------------------- the system.

396 Sales and Distribution Management

Travel Websites Notes
Travel websites are websites that act as intermediaries between your
----------------------
customers and your hotel. They market themselves as ‘One Stop Shops’ where
a traveller can find and book all of their accommodation and other travel needs. ----------------------
Some Travel websites require that you register your hotel directly with them
while others use a GDS system to get hotel details and to make bookings. ----------------------
In all cases however, you will have to pay commissions on bookings taken
----------------------
this way. Often the main advantage that Travel websites have is their skill in
Internet marketing, which often places their site ahead of yours in search engine ----------------------
rankings.
----------------------
Travel Agents
Travel agents booking hotel rooms for their customers will usually find ----------------------
your hotel via the GDS system. After determining the customers needs they will
----------------------
search the system using the appropriate search criteria and key words. They
will then be presented with a list of hotels matching those criteria and make ----------------------
their choice from there. To attract bookings from travel agents it is important to
have a GDS presence and to promote your hotel effectively on the GDS system. ----------------------
Some travel agents may also contact the hotel directly or make bookings via
----------------------
your hotel’s website (if the hotel can accept bookings via its website). If you
get many bookings from a particular travel agent it is to your advantage to ----------------------
encourage that travel agent to book with you directly. The hotel still has to pay
the travel agent’s commission but the hotel will save the GDS commission. ----------------------
Intermediaries ----------------------
An intermediary is any company that sits between you and your customers ----------------------
and collects a commission for every booking they pass on. Intermediaries,
especially Internet intermediaries, can seriously decrease the hotels revenues if ----------------------
the hotel depends excessively on them. Intermediaries often block-buy rooms at
large discount, selling them through other intermediaries and having a disastrous ----------------------
effect on your prices. The general rule is that intermediaries should be used only ----------------------
where absolutely necessary.
Reservation Call Centers ----------------------

Reservation call centers provide a centralised telephone reservation ----------------------

service through which your customers can find and book hotel rooms. They
----------------------
generally operate 24 hours a day and most use professionally trained telephone
operatives. While the services offered and the fee structures vary among ----------------------
different Reservation call centers, you will generally pay a commission on each
reservation received this way. ----------------------

----------------------

----------------------

----------------------

----------------------

Distribution Channels in Services 397

 Notes
Check your Progress 3
----------------------

---------------------- Fill in the blanks.

1. Travel websites are websites that act as ___________ between the
----------------------
customers and the hotel.
----------------------

---------------------- Activity 1
----------------------
Visit IRDA website and find out the composition of life insurance business
---------------------- done through various distribution channels in India.s

----------------------
Summary
----------------------
●● The marketing of services and the various activities involved in it are
----------------------
different from the marketing of goods. The service firms therefore need to
---------------------- be different in orientation from the firms manufacturing goods and have
different approach to various elements of marketing elements including
---------------------- the distribution of their services.
---------------------- ●● All the organisations, institutions and persons participating in the
process of distribution are known as channels of distribution. The
---------------------- various participants in the process of distribution are 1) service provider
---------------------- 2) Intermediaries 3) Customers.
●● The major intermediaries used in distribution of services are: 1) Franchises
----------------------
2) Electronic and 3) Agents/Brokers.
----------------------
●● The banking industry in addition to the traditional distribution of their
---------------------- services through the bank branches, due to evolution in information
and communication technology are more and more adopting electronic
---------------------- channels of distribution like Automated Teller Machines (ATM), Virtual
Bank, Home Banking, Electronic Funds Transfer at Point of Sale
----------------------
(EFTPOS), Electronic Data Interchange (EDI), smart cards etc.
---------------------- ●● The insurance industry in additional to the traditional agent as a selling
---------------------- intermediary are going into more and more innovative methods of
distribution of insurance services like work site marketing, internet,
---------------------- invisible insurer, brokers etc.

---------------------- ●● The hotel industry thanks to the revolutionary changes in the

communication technology are bracing more and more electronic
---------------------- channels of distribution like Telephone, Fax & E-mail, search engine,
other websites, hotels websites, Online Booking Services, Online
----------------------
Booking Services, GDS systems, Travel Websites, travel agents, call
---------------------- centers etc.

398 Sales and Distribution Management

 Keywords Notes

----------------------
● GDS Representatives: A GDS representative is a company that will put
you on the GDS system, usually for a sign-up charge plus a commission ----------------------
on each booking made through the system.
----------------------
● Bancassurance: Is the distribution of insurance products through a
bank’s distribution channels. ----------------------
● Invisible Insurer: The insurance cover is sold by an automobile/credit ----------------------
card company as an add-on product leveraging the brand of the retailer.
● Franchise: A franchise is an agreement or license between two parties ----------------------
which gives a person or group of people (the franchisee) the rights to ----------------------
market a product or service using the trademark of another business (the
franchisor). ----------------------

----------------------
Self-Assessment Questions
----------------------
1. What is franchising? Discuss the types and benefits of franchising.
----------------------
2. Discuss the advantage of electronic channels.
3. Explain the benefits of using brokers/agents. ----------------------

4. Explain the distribution channels in: ----------------------

a. Banking industry. ----------------------
b. Insurance industry.
----------------------
c. Hotel industry
----------------------
5. Draw diagrams of distribution channels of Banks and Hotels.
----------------------
Answers to Check your Progress
----------------------
Check your Progress 1 ----------------------
State True or False.
----------------------
1. True
----------------------
Check your Progress 2
Fill in the blanks. ----------------------
1. Bancassurance refers to the distribution of insurance products through a ----------------------
bank’s distribution channels.
----------------------
Check your Progress 3
Fill in the blanks. ----------------------

1. Travel websites are websites that act as intermediaries between the ----------------------
customers and the hotel.
----------------------

Distribution Channels in Services 399

 Notes
Suggested Reading
----------------------
1. Bowersox, Logistical Management: The Integrated Supply Chain Process.
---------------------- 2. Calvin, Robert J. Sales Management.
---------------------- 3. Chopra, Supply Chain Management.

---------------------- 4. Ghoshal, World Class in India. Penguin India.

5. Lamba, A.J. The Art of Retailing.
----------------------
6. Scheuing, Kurtz, Johnson. Sales Management: Concepts, Practices and
---------------------- Cases.
----------------------

----------------------

----------------------
----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

400 Sales and Distribution Management

Distribution Planning and Control
UNIT

7
Structure:

7.1 Introduction
7.2 Customer Service Levels
7.3 Developing Customer Service Policy
7.4 The Total Distribution Concept
7.5 Requirements of a Distribution Planning and Control System
7.6 Inventory Planning and Control
7.7 Transport Planning and Control
7.8 Warehouse Capacity Planning
7.9 Distribution Resource Planning and Control
7.10 Just-in-Time
7.11 Material Requirement Planning
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading

Distribution Planning and Control 401

 Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Define customer service levels
----------------------
• Name the elements of customer service policy
---------------------- • Discuss the total distribution concept
---------------------- • Specify the requirement of distribution planning and control system
---------------------- • Discuss the inventory planning and control and transport planning and
control
----------------------
• Describe warehouse capacity planning
---------------------- • Elaborate on Just-in-time
----------------------
---------------------- 7.1 INTRODUCTION
---------------------- Physical Distribution includes all activities involved in planning,
implementing, and controlling the physical flow of raw materials, in-process
---------------------- inventory, and finished goods from point-of-origin to point-of-consumption.
The main activities include customer service, inventory control, material
----------------------
handling, transportation, warehousing and storage.
---------------------- Thus, it is suggested that physical distribution has two components:
materials management and marketing logistics. Materials management is
----------------------
concerned with physical supply operations such as procurement and the storage
---------------------- and movement of raw materials to and through processing into a finished product.
Marketing logistics deals with the transfer of finished goods to intermediaries,
---------------------- final buyers and end-users.
---------------------- Physical distribution is often viewed as a necessary support system for
the organisation’s marketing program. However, there is an alternative and
---------------------- more creative perspective which can be taken and that is to see an efficient
---------------------- physical distribution system as a potent marketing tool in its own right, and one
which is capable of creating a competitive advantage for the organisation. An
---------------------- organisation which is able, for instance, to supply a wide variety of products
speedily at specified times help reduce the inventory holding costs of the
---------------------- intermediaries being served. Thus, the level of interest in the way physical
---------------------- distribution is managed is explained by its potential as a powerful marketing
instrument, the opportunity to realise significant savings in marketing costs and
---------------------- by the importance of physical distribution to customer service levels.

----------------------
7.2 CUSTOMER SERVICE LEVELS
----------------------
The level of customer service provided by a company is part of the
---------------------- marketing mix. In some instances, a company offers an exceptionally high

402 Sales and Distribution Management

level of customer service as the principal means of differentiating itself from Notes
competitors. Customer service levels are as pertinent to the intermediaries
which the agribusiness serves. ----------------------
For many customers the level of customer service provided by any ----------------------
enterprise is as important as any other attribute which it may possess, including
the excellence of its products. There are aspects of customer service which have ----------------------
little to do with physical distribution, such as the after-sales service, warranties
and the handling of customer complaints, but a large part of customer service ----------------------
is affected through the physical distribution function. A wide range of criteria ----------------------
may be used in evaluating the service level offered by an agribusiness but these
are likely to include: ----------------------
●● timeliness of delivery ----------------------
●● order size and assortment constraints
----------------------
●● order cycle time, i.e., time interval between order placement and delivery
●● percentage of items out of stock ----------------------
●● percentage of times an item cannot be supplied from stock (or within a ----------------------
prescribed number of days from order placement)
----------------------
●● percentage of orders filled accurately
●● percentage of orders arriving in good condition ----------------------
●● ease and flexibility of order placemen and ----------------------
●● Competitors’ service levels.
----------------------
Maintaining high levels of customer service carries heavy costs and
can only be justified when doing so results in marketing opportunities which ----------------------
otherwise would not be realised. At the same time, the logistics manager
must monitor the effects of operating a given level of customer service on ----------------------
profitability. This means considering the trade-offs between the costs involved ----------------------
and the service level offered. It is possible, after all, to provide a level of service
above that required or appreciated by the customer. There is likely to be no ----------------------
discernable difference in the service levels of two suppliers, one of whom is
able to immediately supply a spare part from stock on 99 of 100 occasions and ----------------------
another who is able to supply from stock on 97 of 100 occasions. ----------------------

7.3 DEVELOPING A CUSTOMER SERVICE POLICY ----------------------

Given the need to deliver a level of customer service which is acceptable ----------------------
to the market and the level of cost which can be incurred in doing so, it is ----------------------
important to approach the establishment of a customer service policy in a
systematic way. A six-step procedure is recommended as follows: ----------------------
1. Identify the key aspects of service: This step involves determining ----------------------
which aspects of service are important to customers, otherwise resources
can be misdirected. It is also necessary to find out how customers measure ----------------------
service levels. Marketing research and the organisations’ sales force can
help in identifying key service elements and how these are measured. ----------------------

Distribution Planning and Control 403

 Notes 2. Establish the relative importance of each aspect of service : It is
likely that aspects of customer service will vary in their importance to
---------------------- customers and an organisation will wish to concentrate its resources on
those which really matter to the customer. Again, marketing research can
---------------------- help ascertain the key service elements upon which to focus.
---------------------- 3. Determine how, if at all, the key aspects of service, and their relative
---------------------- importance, vary in different market segments : The process of
segmenting a market is based upon a recognition that customers vary
---------------------- in their needs and wants. So, too, might their assessment of what are
important aspects of customer service.
----------------------
4. Assess current organisational competitiveness on customer service, in
---------------------- each market segment : Customers and potential customers can be asked to
make comparisons, on the key service elements, between the organization
----------------------
and its main competitors in each major segment of the market.
----------------------
5. Develop cost-effective customer service packages for each of the main
---------------------- market segments : Targets should be established for each element of the
service packages, e.g. 80 percent of parts will be available from stock
---------------------- or will be dispatched within 3 working days, a minimum of 98 out of
100 orders will be delivered without damaged items, 90 percent of all
----------------------
orders will be delivered complete. Such standards have to be based upon
---------------------- a careful assessment of the organisation’s capabilities, the attendant costs
and what is acceptable to customers.
----------------------
6. Establish monitoring and control procedures : Once standards have
---------------------- been established, the organisation must put into place monitoring systems
to check on what is actually being achieved so that remedial action can be
---------------------- taken at an early stage. Feedback on the levels of service being achieved
---------------------- should be given to personnel involved in delivering the service. Such
feedback can be a powerful motivation.
----------------------

----------------------
7.4 THE TOTAL DISTRIBUTION CONCEPT

---------------------- The total distribution concept and the total cost approach are widely
applied by managers of physical distribution. They are based on the notion
---------------------- that all elements of physical distribution are so interdependent that a decision
made about one element will impact on some or all the others. Thus, for
---------------------- example, the decision to reduce the number of depots operated by a grain
---------------------- merchant may well reduce costs associated with staffing, wastage, and
inventory levels but will also increase transportation costs. The real question
---------------------- is whether the savings in one area match exceed or fall short of the increased
costs in another.
----------------------
Since, in general, physical distribution managers appreciate that their
---------------------- challenge is to minimize the total costs of the distribution system, rather than
the costs of a particular element they tend to employ the total cost concept. To
---------------------- this end, management must calculate the trade-offs between three categories of

404 Sales and Distribution Management

cost: transportation costs, order processing costs and stockholding costs. Figure Notes
7.1 shows the general relationship between these different categories of cost.
----------------------

Total distribution cost (S)

Total distribution costs
----------------------

Total distribution cost (S)

st
ntory co
Total distribution
Invecosts ----------------------
e costs
Storag osts
em c
rSyycsotst ----------------------
Invento Unit
e costsdelivery co
Storag osts sts
System
c
----------------------
No. of warehouse Unit d
eliver
y cost
s ----------------------
No. of warehouse
Fig. 7.1: The components of the total costs attached to physical ----------------------
distribution
----------------------
Storage costs: Due to of economies of scale a large warehouse can be
operated at a lower cost than can several smaller warehouses. These economies ----------------------
include the fact that larger warehouses are often better able to achieve better ----------------------
utilisation of space and equipment, overheads incurred in a large warehouse can
be spread over a higher throughput of stock items and the amount of money tied ----------------------
up in stock tends to be less for a large depot than for several smaller warehouses.
In addition, each separate site will require its own management team and this ----------------------
increases distribution costs further. ----------------------
At some point, however, diseconomies of scale set in and the single
central warehouse becomes less attractive in financial terms. This happens, for ----------------------
instance, when depots reach a size where they are difficult to manage and the ----------------------
distances between the warehouse and many of the organisation’s customers is
so great that transport costs rise to unacceptable levels and the level of service ----------------------
to the customer is adversely affected.
----------------------
As figure 7.1 shows increasing the number of warehouses will, almost
invariably, increase storage costs but this may be necessary to meet customer ----------------------
Total storage cost (S)

expectations with a minimum standard of service.

----------------------
Total storage cost (S)

----------------------

----------------------
Number of depots
----------------------
Number of depots ----------------------

Fig. 7.2: The effect of increasing the number of warehouses upon total ----------------------
storage costs ----------------------
Transportation costs: As can be seen in figure 7.2 , the increase in storage
costs may be offset, either in whole or in part, by savings made in transportation ----------------------
costs As the number of warehouses increases, unit transport costs decline due to ----------------------
lower mileages being travelled by delivery vehicles.

Distribution Planning and Control 405

 Notes

Total transport cost ($)

----------------------

----------------------

----------------------

---------------------- No. of warehouses

---------------------- Fig. 7.3: The effect of increasing the number of warehouses on total
transport costs
----------------------
For most manufacturers and producers, transportation is the major
---------------------- physical distribution cost.
---------------------- Inventory carrying costs: The cost of maintaining sufficient stocks to
meet any level of demand is usually prohibitive. Instead, the firm seeks to reach
----------------------
a balance between inventory carrying costs and an acceptable level of customer
---------------------- service.

---------------------- Among the chief determinants of inventory carrying costs are:

●● The greater the number of locations at which stock is held, the greater the
----------------------
level of stocks and carrying costs.
---------------------- ●● Longer order cycles result in higher stocks, and vice versa and
---------------------- ●● As the product portfolio increases so does the amount invested in stocks.
---------------------- With respect to the effect of increasing the number of warehouses located
in various areas, this would be, as was said earlier, to increase stock holding
---------------------- costs.
----------------------
Check your Progress 1
----------------------

---------------------- Fill in the blanks.

---------------------- 1. One of the steps in the _______________ in developing customer

service policy is establishing monitoring and control procedures.
----------------------

---------------------- 7.5 REQUIREMENTS OF A DISTRIBUTION PLANNING

---------------------- AND CONTROL SYSTEM

---------------------- Supplies can be made against specific requirements or for stock. This
section deals with supplies made for stock and this offers many challenges.
----------------------
●● Product availability must be ensured while overstocking must be avoided
---------------------- despite the changes in the market - new products by competitors which
make the existing products of the suppliers obsolete, a sudden spurt in
---------------------- demand, transportation problems, promotions and deals.

406 Sales and Distribution Management

●● Customers are not willing to readily give information on their sales and Notes
stocks.
----------------------
●● The product moves through various levels and to different supply points.
At each point, safety stocks have to be maintained to take care of the ----------------------
uncertainties that exist.
----------------------
●● Seasonality in supply and demand result in lumpy orders.
----------------------
●● Determining the lot sizes requires integrating the needs of the
manufacturing and distribution systems. The economic lot size may ----------------------
be different for buying, manufacturing, packing, shipping, selling and
stocking. For example, the economic lot size for shipping may be a truck ----------------------
or a container load which may be too much for the buyer. ----------------------
●● Stock replenishments must also consider rejects, repairs, changes in safety
----------------------
stock levels and stocking policies, end of season sales, price changes,
technological and packaging changes. ----------------------
●● Lead time and variations in the lead times have a bearing on the safety ----------------------
stocks which are maintained.
----------------------
●● Shelf life of individual lots and expiry dates has to be kept track of.
----------------------
The distribution and logistics system must facilitate both quick information
and material flow so as to reduce obsolescence and wastage, lead times, lot ----------------------
sizes and safety stocks and stock outs. This involves the following:
----------------------
1. Inventory Management
----------------------
a. Suppliers Inventory Management System
----------------------
b. Customer Inventory Management System
----------------------
2. Transportation capacity planning
3. Warehousing capacity planning ----------------------

----------------------
Check your Progress 2 ----------------------

State True or False. ----------------------

1. For most manufacturers and producers, transportation is not a major ----------------------
physical distribution cost.
----------------------

7.6 INVENTORY PLANNING AND CONTROL ----------------------

----------------------
The management of inventory can have a major impact upon the
profitability of an organisation. If inventory levels are too low then there is the ----------------------
risk of stock outs, i.e., the inability to meet an order. This can result in a loss
of revenues, profits and customer goodwill. On the other hand if the inventory ----------------------

Distribution Planning and Control 407

 Notes levels are too high then the organisation can experience cash flow problems
since so much of its capital is tied up in stocks. When inventory levels are high
---------------------- then there is also an increased risk of spoilage, pilferage and obsolescence.
---------------------- Managing stocks involves balancing two sets of costs: Inventory carrying
costs and order processing costs. Consider the position of a company making
---------------------- a range of biscuits and breads. For such a company wheat will be a major raw
material. The company could be so anxious to secure supplies of this vital
----------------------
component of its finished products that it is prepared to place a single order for
---------------------- its total requirement for the next year. However, this course of action would
maximize the bakery’s inventory carrying costs, comprised of costs of capital,
---------------------- storage charges, insurance, depreciation, obsolescence and shrinkage. As Fig.
7.4a illustrates inventory carrying costs increase in line with the average stock
----------------------
held.
---------------------- Since production within a bakery tends to be a batch process, the company
---------------------- could adopt an alternative approach and place orders large enough to ensure
that wheat stocks are only just sufficient to meet the requirements for the next
---------------------- batch, i.e., a just-in-time approach. This would minimize the bakery’s inventory
carrying costs but would mean placing a large number of orders and so order
---------------------- processing costs would be maximized.
---------------------- Order processing costs include monitoring residual stocks, selecting a
supplier (which could mean having to compare a number of alternatives), raising
----------------------
and processing a purchase order, checking goods inwards and processing payment.
---------------------- Figure 7.4b indicates that if the bakery elected to place small order for wheat they
would have to place a number of orders over the year and so order processing
---------------------- costs would be high. The same figure shows that order processing costs decline as
the size of the orders increases and the number of orders placed declines.
----------------------
The optimal order size is determined by studying how these two sets of
---------------------- costs interact. Figure 7.4c depicts the total inventory cost which is, of course,
---------------------- the sum of inventory carrying costs plus order processing costs. The optimal
order size is at point Q, i.e., the lowest point on the total cost curve commonly
---------------------- referred to as the economic order quantity (EOQ).
---------------------- The Economic Order Quantity

---------------------- (a) Inventory carrying costs (b) Order processing costs (c) Economic order quality

----------------------
Cost per unit ($)

Cost per unit ($)

Cost per unit ($)

----------------------

----------------------

----------------------
o
---------------------- Order quantity Order quantity Order quantity

----------------------
Fig. 7.4a Fig. 7.4b Fig. 7.4c
408 Sales and Distribution Management
Calculating the economic order quantity Notes
The calculation of the economic order quantity involves only simple
----------------------
mathematics. The following nomenclature may be used:
Let ----------------------

O = the cost of placing a order ----------------------

Q = quantity ordered ----------------------
N = number of times that quantity is ordered, ----------------------
S = Q × N (i.e., the total number of units demanded)
----------------------
C = cost per unit per annum
----------------------
Order processing costs = O × N
----------------------
Average carrying costs = C × Q/2
----------------------
Total costs = (O × N) + C × Q/2
Since NQ = S then N = S/Q ----------------------

Total costs = OS/Q + CQ/2 ----------------------

Therefore EOQ = vOS/C ----------------------
It will quickly be realised that the EOQ model, as just described, is an ----------------------
over-simplification of the real world. It does not incorporate such realities as
the variation in sales volumes over time, variable lead times between order ----------------------
placement and delivery, discounts for purchasing in larger quantities and the
need for safety stocks. If the EOQ model is to be useful in practice then it must ----------------------
be adapted to cope with these variables. ----------------------
Order cycles and sales fluctuations: There are two basic approaches to
----------------------
incorporating sales volume variations in inventory management models: fixed
order quantities and fixed order times. A fixed order quantity system allows ----------------------
time between orders to vary whilst the EOQ is held constant. A fixed order time
system allows the size of orders placed to vary but the times between orders are ----------------------
fixed. Where the fixed order time system is applied, EOQ does not determine
----------------------
the order size. Instead, a forecast is made of demand over the next lead time and
the size of the order to be placed is determined accordingly. ----------------------
Both these approaches have their advantages and the choice between them ----------------------
is entirely dependent upon the circumstances of the particular organisation. For
instance, a supermarket chain might organise the scheduling of its transport ----------------------
fleet so as to minimise delivery costs. This could mean that each retail outlet
is given a fixed delivery date for receiving orders. In these circumstances each ----------------------
store must place orders on a fixed time schedule but can vary its order quantities ----------------------
for each item. Where transport costs are not an overriding consideration then
the same supermarket chain could apply a system of fixed order quantities but ----------------------
varying periods of order placement, because order processing and inventory
carrying costs outweigh transport costs. ----------------------

Distribution Planning and Control 409

 Notes It sometimes happens that an organisation will apply one system at the
retail level and the other at the warehouse level. Consider, for example, the
---------------------- position of a large food retailer with multiple retail outlets and several regional
warehouses. With each warehouse serving a number of large retail outlets the
---------------------- variation in sales is likely to be greater at store level than at warehouse level
---------------------- (the downward fluctuations in some stores will be compensated by upward
swings in others). Where this is the case, a fixed order quantity system could be
---------------------- imposed at the warehouse level whilst a fixed order time system applies at the
retail level.
----------------------
Bulk purchase discounts: Where discounts are received for placing orders
---------------------- of a given size these must be taken into account because they affect the EOQ. The
organisation has to conduct a trade-off analysis in order to determine whether
----------------------
the ‘savings’ accrued from placing larger orders and the lower order processing
---------------------- costs due to the need to place fewer orders, outweigh the additional inventory
carrying costs. The additional carrying costs are calculated as follows:
----------------------
Additional inventory carrying costs = C (Q2 - Q1)/2
----------------------
Where
---------------------- Q1 is the EOQ before taking any quantity discount into consideration, and
---------------------- Q2 is the EOQ after taking any quantity discount into consideration.
---------------------- The savings accrued from placing fewer orders and incurring lower order
processing costs are calculated as follows:
----------------------
OS/Q1 - OS/Q2
----------------------
A comparative analysis of the two sources of savings, those from bulk
---------------------- discounts and those from lower order processing costs- against the additional
inventory carrying costs will guide management as to whether a quantity
---------------------- discount should be taken or not.
---------------------- Safety stocks: Inevitably, there will be occasions when demand exceeds
expectations. If an organisation has not anticipated this eventuality then a stock
----------------------
out will occur. If the item is a raw material or component then production will
---------------------- be interrupted and this will add to production costs. If the item is a finished
good then customers will be adversely affected and their goodwill and custom
---------------------- may be lost altogether. Since the costs of a stock out are potentially great,
organisations usually plan to carry a safety stock as a buffer between supply
----------------------
and demand levels.
---------------------- Decisions relating to the levels of safety stocks involve a trade-off between
---------------------- additional inventory carrying costs and the costs of a stock out. If customers are
likely to place the order elsewhere then the cost of a stock out is the contribution
---------------------- to fixed costs (i.e., the sales revenue minus the variable costs). If customers are
lost forever, as a result of the stock out, then the cost is the present value of the
---------------------- discounted stream of expected future contributions on orders lost.
----------------------

410 Sales and Distribution Management

Supplier inventory management system Notes
The supplier plans production based on direct feed-back from the market.
This is done through the following methods: ----------------------

1. Orders are booked by the field sales force by directly contacting the ----------------------
distributors, dealers, wholesalers, etc. Orders booked form the basis for
----------------------
sales forecasts for the next month and future months.
2. Market surveys are conducted to establish the demand, customer needs ----------------------
and preferences - what is needed.
----------------------
3. Surveys of retail outlets determine the actual product movement and
whether the primary sales to the distributors and others really reflect the ----------------------
actual customer demand or whether inventories are building up in the
----------------------
pipe-line.
The production plan for the month for each time is worked out as shown ----------------------
below. For every product, each size and each type of packaging in which it is
----------------------
required will constitute separate items.
For each item comments ----------------------

Opening stock at the The starting point has to be some place from where ----------------------
beginning of the month timely and reliable information can be obtained.
(say at supplier’s) ----------------------
Warehouse across the This could be the suppliers’ or the distributor’s ----------------------
total area being served warehouse. Normally manufacturers try to
achieve zero month end inventory in their ----------------------
godowns and ship all the production to the
----------------------
distributor.
Forecasted sales for the Forecasting is done in number of ways: Using ----------------------
coming month (made by statistical techniques like exponential smoothing
the supplier) Target set for the month + backlog, if any ----------------------
Estimate of sales considering special marketing ----------------------
actions like advertising, sales promotions,
appointments of new dealers etc. ----------------------
To realize the forecast, selling effort will be
required by the supplier’s sales person. If sales ----------------------
are not as per forecast, the inventory builds up at ----------------------
the suppliers end.
Closing inventory (at the Supplies to be made = forecasted sales - opening ----------------------
suppliers warehouses) inventory + closing inventory
----------------------
Supplies to be made Closing inventory figures must be taken into
during the month account. ----------------------
(worked out by the
supplier) ----------------------
Planned change in the product, packaging and ----------------------
price.
Shelf life and expiry dates. ----------------------

Distribution Planning and Control 411

 Notes The drawbacks of this system are:
1. There is heavy expenditure on selling and travel to collect the orders and
----------------------
realise the sales forecasts/targets made by the supplier.
---------------------- 2. There is a lead-time between receiving the order and the manufacture and
supply.
----------------------
3. To bridge this gap, safety stocks have to be maintained to provide quick
---------------------- replenishment.
---------------------- 4. Safety stocks may not be adequate, when demands are lumpy because
of seasonality, price changes, and non-availability of the product from
---------------------- competition.
---------------------- 5. The supplier has the responsibility of maintaining the pipeline inventories.
This gets complicated because of the variety of the product and sizes and
---------------------- the large number of outlets, limited product shelf life and expiry dates.
---------------------- 6. Production planning gets complicated because orders do not all come in
at one time, the flow being determined by the movement of the sales
---------------------- persons in the field. Either the supplier has to wait till the total market is
---------------------- covered or else work on partial and incomplete information.
7. Accuracy of forecasts is not analysed to determine how forecasting
----------------------
techniques can be improved and better forecasts obtained in the future
---------------------- months.
Customer inventory management system
----------------------
The simplest and most commonly adopted system is the ORDER POINT
---------------------- SYSTEM – when the stocks reach the order point, replenishment is called for.
---------------------- The order point may be monitored through visual control or through stock
cards. In the visual control system, when the stocks physically reach a point,
---------------------- action is initiated. The point may be zero stock or quantity equal to the order
---------------------- point may be separately kept and when this has to be issued, fresh ordering is
done. The latter is also called “the two bin” system – one bin containing the
---------------------- normal supplies and the other carrying a quantity equal to the order point level.

---------------------- The quantity to be ordered is determined by estimating the lead time

for replenishment and the sales during the lead time. However, there may be
---------------------- variations both in the lead time and the sales. To ensure that there is no stock
out, the order point is so fixed that it takes care of the normal average sales
---------------------- during the lead time + a safety stock which will take care of any fluctuations.
---------------------- Order point = (lead time) * (normal rate of issue or sale during the lead
time) + (safety stock).
----------------------
The drawbacks of this system are individual items at different locations
---------------------- which may reach the order point level at different times. If each such signal is to
be handled separately, there will be a tremendous amount of activity and paper-
----------------------
work generated, because ordering, manufacturing, and supplying are not done
---------------------- in economic lots but in very small quantities.

412 Sales and Distribution Management

 Notes
Check your Progress 3
----------------------
Fill in the blanks. ----------------------
1. _______________ are conducted to establish the demand, customer
----------------------
needs and preferences.
----------------------
7.7 TRANSPORT PLANNING AND CONTROL ----------------------
A critical issue in the management of physical distribution activities is ----------------------
whether the organisation should own transport facilities or hire them. There
are three types of carriers which an organisation might choose between when ----------------------
deciding how to ship its product; private carriers, common carriers and contract ----------------------
carriers. Where a company owns and operates its own transport fleet it is termed
a private carrier. This fleet is not usually available to any party other than the ----------------------
owner. Common carriers are available to any party wishing to transport goods.
Common carriers charge standard rates which are published and freely available ----------------------
to anyone who is interested. A contract carrier serves individual shippers on a ----------------------
medium to long-term basis. The contract usually extends over a specified period
with an option to renew the contract. ----------------------
Calculating the cost of owning transport vehicles ----------------------
In order to make a decision as to whether the organisation should purchase
its own transport vehicles or use a common or contract carrier, the costs of ----------------------
ownership must be calculated. The two elements of transport costs are the fixed ----------------------
costs and the operating costs. Some costs are incurred irrespective of whether
the vehicles are actually moving or not. These fixed costs include such items as ----------------------
vehicle license duties, insurance and interest due on loans obtained to purchase
vehicles. Operating, or running, costs are a function of the distances travelled ----------------------
by the vehicle and include fuel, tyres and repair and maintenance costs. A list of ----------------------
fixed and operating costs appears in the table below.
----------------------
Fixed and operating costs of owning transport vehicles
Fixed Transport Costs Operating Costs ----------------------
Administration Driver’s overtime payments ----------------------
Depreciation on vehicles*
----------------------
Fuel
Driver’s basic wage Oil & other lubricants ----------------------
Driver’s license fees Repairs and maintenance ----------------------
Garaging fees Tyres
----------------------
Insurance on vehicle
Interest on loans ----------------------
* Depreciation is partly a function of distances travelled by the vehicle. ----------------------

Distribution Planning and Control 413

 Notes A simple approach to calculating the depreciation on a vehicle would be:

---------------------- Purchase Cost - Scrap Value

estimated physical life
----------------------
Alternatively, if the organisation has a policy of replacing vehicles by
---------------------- selling them off at set intervals then the formula becomes:
---------------------- Purchase Cost - estimated resale value
---------------------- estimated period of ownership

---------------------- It can be seen that only the purchase price and perhaps the estimated
period of ownership, if the firm has a set replacement policy, will be fixed
---------------------- figures whereas the others will need to be estimated. In these circumstances it is
sometimes useful to obtain estimates of depreciation from other sources. These
----------------------
might include:
---------------------- ●● vehicle distributors, although these may tend to be optimistic or even
---------------------- exaggerated
●● other vehicle operators
----------------------
●● vehicle insurers and/or
----------------------
●● Financial institutions who give loans for the purpose of purchasing
---------------------- vehicles.
---------------------- Unitisation in physical distribution

---------------------- There are two aspects of unitisation of physical loads and these are
palletisation and containerization. Both palletisation and containerization serve
---------------------- to reduce damage to agricultural and food products whilst these are in transit,
and to increase the efficiency of the distribution system as a whole.
----------------------
In international trade, there is a widespread adoption of a standard pallet
---------------------- size of 100cm × 120cm. Any exporter who ignores this standard when trading
---------------------- with countries that have adopted the standard will probably incur additional
costs because of the need to repalletise the load. The argument in favour of a
---------------------- standard pallet size is simply that the operations of each of the parties in the
physical distribution system will be more efficient if they all work to a common
---------------------- pallet size. Ships, Lorries, rail freight cars, aircraft holds and warehouses can
---------------------- be designed to handle the standard pallet size and achieve maximum utilisation
of space15.
----------------------
The introduction of trailer size containers has allowed various forms of
---------------------- transportation to integrate their services since these units are interchangeable
between different modes of transport. Containerization has made possible the
---------------------- transfer of loads between ships direct on to road and rail-based carriers and, of
course, between road and rail. The main advantages of containerization are the
----------------------
minimization of damage to the goods, little or no pilferage and handling times
---------------------- reduced to 50 percent of those achieved with other systems.

414 Sales and Distribution Management

Vehicle Scheduling and Routing Notes
Distribution is usually a sizeable component of total marketing costs.
----------------------
Moreover, the costs of procuring and operating transportation are generally
high, sometimes prohibitive as this is often a very scarce resource. It follows ----------------------
that if transport facilities can be managed efficiently this can have a dramatic
effect upon total marketing costs and the effectiveness of the firm’s marketing ----------------------
system.
----------------------
In turn, the efficiency and effectiveness achieved with the logistics
operations of an enterprise are greatly influenced by the routing and scheduling ----------------------
of the vehicles available. Slater16 defines the problem of optimizing the
----------------------
performance of the transport function in terms of load planning as follows:
“Load planning is a method or technique used to match existing customer ----------------------
orders with vehicles and available manpower by the generation of routes or
----------------------
schedules for vehicles. The efficiency of these routes or schedules determines
the operating cost for the transport fleet and the potential customer service level ----------------------
offered by the company.”
----------------------
The composition of total transport costs
Thus, the motivation to work on maximizing the efficiency of vehicle ----------------------
routing and scheduling lies in the potential to contain total transport costs whilst ----------------------
also retaining control over the level of services provided to customers. Where
the enterprise operates a fleet of vehicles then load planning has the potential to ----------------------
minimize total mileage whilst maximizing operating times, thereby enabling the
organisation to reduce the size of its fleet or increase the number of customers/ ----------------------
area of territory covered, or some compromise between the two. ----------------------
Total Transport Cots
----------------------

----------------------
Capital Variable Capital Variable Capital Variable
costs costs costs costs costs costs ----------------------

Of ----------------------
space associated tools and associated Insurance associated
----------------------

Interest and training Interest training costs Interest and training ----------------------

Depreciation Consumables Consumables Leasing Consumables

----------------------
Telephone Tyres charges Documentation
----------------------
Interest Maintenance Uniforms
----------------------
charges Damaged repairs Interest charges
Breakdowns
----------------------
Returbishing
----------------------
Interest charges
----------------------

Distribution Planning and Control 415

 Notes Transportation costs comprises of several major elements. Nonetheless, it
can be readily seen that vehicle scheduling efficiencies, or a lack of them, will
---------------------- have a major effect on total costs. In particular, load planning will impact upon
the cost of fuel, labour, maintenance and vehicle depreciation.
----------------------
Any manager charged with responsibility for the efficient operation of the
---------------------- transportation function will have a diverse range of factors to consider. These
include the nature of the customers to be served, the vehicles available, labour
----------------------
force, company policies, the physical characteristics of loads, the environment
---------------------- and vehicle scheduling methods.
Factors affecting vehicle scheduling
----------------------
Manpower Characteristics Vehicle Company Characteristics
----------------------
Characteristics
---------------------- Number of men Number of Customer service policy
vehicles
----------------------
Type of license held Type of vehicle Vehicle operating policy
---------------------- (mix in fleet)
---------------------- Training level Maintenance/ Vehicle load capacity
repair needs policy
----------------------
Union operating restrictions Carrying capacity Product characteristics
---------------------- Hours of work Height/width Depot locations
---------------------- Shift patterns Return load policy
---------------------- Rota patterns Operational target levels
Customer Characteristics Environmental Routing and scheduling
---------------------- Characteristics
---------------------- Order patterns Road pattern Techniques adopted
---------------------- Locations relative to depots Road works Legal requirements
Delivery point features Climatic
----------------------
conditions
---------------------- Earliest/latest delivery times Legal restrictions
---------------------- Day/night delivery
Return load availability
----------------------
Slater goes on to illustrate how these factors are sequenced and how they
----------------------
interact, to impinge upon vehicle scheduling decisions.
---------------------- Formulating the load plan
---------------------- Emphasises the principal objectives of vehicle routing and scheduling,
i.e., the delivery of a given level of customer service, with maximum efficiency
---------------------- and at minimum cost.
----------------------

416 Sales and Distribution Management

 Operational Factors Notes

Customer Environmental Company ----------------------

Characteristics Characteristics Characteristics ----------------------
Day-to-day operational characteristics ----------------------
Vehicle availability and type mix Manpower availablity and characteristics ----------------------
Routing and scheduling method ----------------------
Load plan ----------------------
Customer service level Cost and efficiency ----------------------
Fixed and variable routing systems ----------------------
At their most basic level, vehicle scheduling and routing methods are
----------------------
dichotomous: fixed routes and variable routes. In a ‘fixed route’ system, vehicles
follow a prescribed route each day and customer orders for that day are matched ----------------------
to the delivery route. The advantage of this system, to the customer, is that
he/she knows the day and time of delivery, and he/she can plan accordingly. ----------------------
On the other hand, the system does not accommodate customers who require
----------------------
immediate delivery, unless by chance the vehicle was scheduled to be in their
vicinity the same day or the day after the order was placed. In terms of efficiency, ----------------------
the ‘fixed route’ system has fundamental shortcomings. It will only periodically
happen that vehicle capacity and order levels, for a given day, will match exactly. ----------------------
On most occasions, vehicle capacity will be under-utilised or over-subscribed.
----------------------
The ‘variable route’ system is more customer oriented. This approach
seeks to develop routes which match customer order patterns and is capable ----------------------
of amendment to meet fluctuations in day-to-day demand levels. Operating
----------------------
efficiency is improved since the number of drivers and vehicles on the road
each day is determined by that day’s order level and so total mileage and ----------------------
variable transport costs are minimized. However, there can be disadvantages of
this system to customers since they are not always sure of the time and/or day ----------------------
of delivery.
----------------------
It is sometimes possible to adopt a hybrid approach where a ‘variable
route’ system is operated within fixed geographical areas. Such an approach ----------------------
yields the benefits of both the fixed and variable routing system. Unfortunately, ----------------------
it does not overcome the problems of orders exceeding transport capacity,
vehicle breakdowns or absenteeism on the part of drivers. ----------------------
Vehicle scheduling tools ----------------------
Vehicle scheduling can be a simple paper exercise or can become so
complex that computer based mathematical models have to be used. Having ----------------------
a transport supervisor or manager plan the delivery schedule on the basis of a ----------------------
detailed knowledge of each driver’s capabilities, the geographical area and the
particulars of the customers have inherent advantages. However, fleets quickly ----------------------

Distribution Planning and Control 417

 Notes become too large for individual personnel to produce scheduling plans which
maximize efficiency and effectiveness at minimum cost. Moreover, in highly
---------------------- competitive markets, physical distribution costs have to be carefully managed
if the marketing margin is not to be entirely eroded. Thus, to some point, most
---------------------- organisations will have to give consideration to applying mathematical models
---------------------- to vehicle scheduling decisions. In most instances, these mathematical models
will prove unready unless they are manipulated by a computer.
----------------------
There are a number of standard computer ‘packages’ available for
---------------------- the task of vehicle scheduling. The earliest versions of these packages were
fairly inflexible in that they had certain in-built assumptions. Typical, an
---------------------- understandable, assumption might include vehicle capacity limitations, driver’s
---------------------- time limitations, customer earliest/latest delivery times, etc. These computerized
models did not incorporate all of the constraints placed upon the logistics
---------------------- operations of an enterprise. For instance, programmers could not anticipate
how transport personnel would react to the ‘imposition’ of a mathematically
---------------------- calculated route that tests no cognizance of their local knowledge and experience
---------------------- or the idiosyncratic wishes of some customers.
This being the case, programmers were unable to build in all of the
----------------------
factors which should be taken into account when designing a delivery route.
---------------------- As a consequence, computer generated vehicle schedules were sometimes
sub-optimal, sometimes unrealistic and often resented by those who had to
---------------------- implement them. To improve computer-based routing, interactive computer
scheduling has been introduced. Interactive computer scheduling allows the
----------------------
transport manager to alter any of the parameters in the mathematical model
---------------------- in line with his/her view of the real situation. Thus, contemporary computer-
based vehicle scheduling models combine the manager’s knowledge with
---------------------- the computer’s ability to process complex mathematical models, quickly, to
produce flexible schedules.
----------------------
Vehicle scheduling models
----------------------
There are a range of models which can be applied to vehicle scheduling.
---------------------- In this text, the savings method, the simplified delivery service model and the
---------------------- TRANSIT model will be briefly described. It is beyond the scope of this text to
deal with the more complex computer-based scheduling models.
----------------------
Savings method: Clark and Wright’s17 “savings method” is perhaps
---------------------- the best known of all the vehicle scheduling models and can be applied either
manually or via a computer. Suppose that retailers A and B, who are separated
---------------------- by x kilometers, both receive maize meal from National Foods’ depot at O.
----------------------

----------------------

----------------------

----------------------

418 Sales and Distribution Management

 Retailer A Notes

----------------------

a ----------------------
x km
----------------------

----------------------
b
National Foods Retailer B ----------------------
Depot
----------------------
Fig. 7.5: The savings method ----------------------
The distances between the depot at O and retailers A and B are a and b
----------------------
respectively. If two vehicles were used to make the two deliveries separately,
the total distance traveled would be 2a + 2b. Alternatively, if only one vehicle ----------------------
were used to make the two deliveries the distance covered over the round-trip is
a + b + x. The saving achieved by assigning one vehicle to the round trip would ----------------------
be (2a + 2b) - (a + b + x) = a+b - x. More generally, the savings method formula
----------------------
is denoted as:
Sij = doi + doj - dij ----------------------
where, ----------------------
Sij = distance saved by linking together any two delivery points i and j. ----------------------
doi = distance between depot O and delivery point i
----------------------
doj = distance between depot O and delivery point j
----------------------
dij = distance between the delivery points i and j
Where there are more than two delivery points a matrix of distances saved ----------------------
is developed. This matrix displays the distances between all delivery points and
----------------------
between the depot, or factory, or farm, and each delivery point. The first link to
be chosen will be the one showing the largest saving, given two deliveries. The ----------------------
sum of the orders for these two deliveries will be checked against the vehicle
capacity and drivers’ time constraints. If the initial linking leaves spare vehicle ----------------------
and driver capacity then it might be possible to add other delivery points to the
----------------------
link by selecting the next biggest saving. Again a check is carried out to ensure
that neither vehicle capacity nor drivers’ time constraints is exceeded by the ----------------------
new combination of deliveries. The process continues to the point where all
deliveries are scheduled or the available vehicles are fully utilised. ----------------------
To better understand the method of calculating the savings accrued from ----------------------
linking deliveries, consider the hypothetical data in figure.
----------------------

----------------------

----------------------

Distribution Planning and Control 419

 Notes

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

---------------------- Fig. 7.6: Applying the savings method to a vehicle scheduling problem
---------------------- (Note: Numbers in brackets indicate the order size)
Maximum driving day : 8 hours
----------------------
Maximum Working Day : 11 hours
----------------------
Average speed : 30kph
---------------------- Maximum Vehicle Capacity : 100 units
---------------------- Multi-trip turn-around time : 30 minutes
---------------------- Delivery time per unit : 2 minutes
First route selected: OCDO is 67km with 88 (units) = 5.16 hours
----------------------
Second route selected: OABO is 54 km with 82 units = 4.53 hours
----------------------
Total Working time for both routes (including turn-around time) = 10.19 hours
---------------------- Total Driving Time for both routes = 4.03 hours
---------------------- O
O
---------------------- 23 A A
23 A A
11 20 B 14 B
---------------------- 11 20 B 14 B
24 40 30 C 7 15 C
24 40 30 C 7 15 C
---------------------- 18 25 27 25 D 16 2 17 D
18 25 27 25 D 16 2 17 D
---------------------- Distance Matrix (km) Savings Matrix (km)
Distance Matrix (km) Savings Matrix (km)
---------------------- Fig. 7.7: The savings method matrices
---------------------- The savings matrix shows that route O - C - D - O gives the maximum
savings in terms of distance to be travelled (17 km). To service this route 88
----------------------
units of product have to be carried and this is well within the vehicle’s carrying
---------------------- capacity. It would take 5.16 hours to complete this route (2.23 hours driving and
2.93 hours to unload the 88 units). Once this route has been completed, retailers
---------------------- A and B are left awaiting delivery. The O - A - B - O route takes 4.53 hours
to complete and can be undertaken within the time and capacity constraint.
----------------------

420 Sales and Distribution Management

Indeed, as the data in figure 7.7 shows, both routes can be completed within the Notes
same working day.
----------------------
The simplified delivery service model
The SDS model involves the geographical division of the marketing ----------------------
territory into sub-areas. Each sub-area is identified by an alphanumeric code
----------------------
(e.g., D2). The alpha part of the code indicates a main route from the depot into
a particular sales area and the numeric component breaks that sales area into ----------------------
suitably sized sub-areas. These sub-areas are often but not always delineated
by physical boundaries such as rivers, valleys, mountains, etc. Consideration is ----------------------
also given to the number of customers in each area categorization used for the
----------------------
purpose of the simplified delivery service.
----------------------

----------------------

----------------------
----------------------

----------------------

----------------------

----------------------

----------------------
Fig. 7.8: The simplified delivery service
As orders are received, a log is built up for each delivery point sub-area. ----------------------
Vehicle loads are built up starting at the remotest sub-area and working inwards ----------------------
to the depot.
----------------------
The individual responsible for vehicle scheduling will only start to
combine loads intended for different sub-areas when those territories are in ----------------------
close proximity to the depot (e.g., A1 to G1). The principal advantage of SDS is
that the delivery system is made more efficient by following convenient routes ----------------------
which minimize delays caused by continually crossing difficult terrain. It is a
----------------------
method that is especially well suited to developing countries where roads are
often poor. ----------------------
Transit ----------------------
Transit is an acronym for Time Routing and Scheduling of Industrial
----------------------
Transport. Like SDS, TRANSIT makes use of maps. The sales territory is
overlaid with a grid with each square representing 10km square are allocated; ----------------------
as are driving times are allocated within each square. When this is done the
scheduler follows a set procedure: ----------------------

1. Orders are sorted for each 10 km square. ----------------------

2. The 10km square furthest from the depot is identified. ----------------------

Distribution Planning and Control 421

 Notes 3. The remotest 10km square is further divided into 1km squares and the
orders re-sorted for each of these.
----------------------
4. The scheduler begins to build up a load for the furthest 1km square.
---------------------- 5. As the orders are re-sorted, the total time required is calculated by adding
together the driving time and the loading/unloading times for each
----------------------
delivery point and the driving time to the next delivery point.
---------------------- 6. The scheduler moves on to build up the load for the next most remote
10km square and so on.
----------------------
The TRANSIT method tends to produce good, efficient and effective
---------------------- delivery times and make full use of the available vehicles. The routes themselves,
---------------------- however, are rarely as good as those produced by SDS because they take no
account of natural barriers and difficult cross-country terrain.
---------------------- Computer-based vehicle scheduling
---------------------- Although having the benefit of simplicity, manual methods of vehicle
scheduling tend to be inefficient. The task is mentally taxing and schedules are
---------------------- prone to making mistakes, resulting in a sub-optimal schedule. This has given
---------------------- impetus to the development of computerized models for vehicle scheduling.
The advantages of computer based scheduling include speed, accuracy
----------------------
and the potential to interface vehicle scheduling models with other components
---------------------- of the overall management information system (e.g., stock control, invoicing,
sales analysis).
----------------------
The main disadvantages are that the software is complex, and is
---------------------- therefore expensive, and, of course, it requires a computer with a math’s
co-processor to run the model.
----------------------
Another disadvantage is that because of the complex algorithms involved
---------------------- in the model, most managers will not understand it well enough to correct data
input errors. That is, the non-mathematical manager will fail to recognise errors
---------------------- in the schedules produced by the model. Robson, however, puts a strong case
---------------------- for computer - based vehicle scheduling when he says that:
Transport Capacity Planning
----------------------
Minimum transportation cost is achieved when the transport is used to the
---------------------- full: full wagon, container or truck load.
---------------------- The techniques for ensuring capacity loading are as follows:
1. Consolidation of orders so that a full wagon load or container-load
----------------------
shipment can be made.
---------------------- 2. Combining the shipments with others in the area.
---------------------- 3. Having ‘Open Orders’ on the ‘bread-and-butter’ items so that these can be
loaded to the maximum extent possible. Once the special items have been
---------------------- considered, the balance space is given to such ‘open order’ items. Open
---------------------- orders may have a value restriction on them.

422 Sales and Distribution Management

4. Establishing the capacity of the transporting vehicle by actual measurement Notes
of the physical dimensions and determining the maximum number of
packages it can contain. Careful planning can give a 5% - 105 saving in ----------------------
transportation costs.
----------------------
5. As a corollary to (4), designing the dimension of the outer package so as
to obtain the best utilisation of shipping space. ----------------------
6. For material, loaded onto trucks, having a cross bar at the loading dock to
----------------------
show up to what height the truck can be loaded. This is to take care that
height restrictions on the route are not exceeded. ----------------------
7. Loading heavy material along with light material to get best utilisation of
the space. ----------------------
8. Loading mix optimisation considering the gross weight or dimension of ----------------------
individual packages.
9. For a full shipload of bulk cargo like ore or coal (to minimize the freight ----------------------
cost) matching to be made among the following: ----------------------
• The capacity of the vessel.
----------------------
• The load to be carried.
• The nearness of the empty vessel to the loading point. ----------------------
• The availability and travel time, i.e., the total lead time from booking
----------------------
the vessel till discharge of the cargo.
• The route normally followed and the return and onward loads, if any. ----------------------
10. If the loading point and the weight bridge are at different places, ----------------------
establishing methods to ensure capacity loading before the truck / wagon
moves to the weighbridge. This is important for cargo handled loose and ----------------------
in bulk. If this is not done, vehicles may be under or overloaded calling
for extra handling to bring them to the correct weight. ----------------------

----------------------
Check your Progress 4
----------------------
Fill in the blanks. ----------------------
1. Distribution is usually a sizeable component of ______________. ----------------------
2. The simplified delivery service model (SDS) involves the
_______________ of the marketing territory into subareas. ----------------------

----------------------

7.8 WAREHOUSE CAPACITY PLANNING ----------------------

Warehouse planning is required to meet the following objectives: ----------------------

1. Minimum handling at the warehouse. ----------------------
2. Easy identification and movement by lots, i.e., separate access to each
individual lot even if the product is the same. ----------------------
3. When shelf life and expiry dates are critical, following the FIFO principle ----------------------
(First In First Out).

Distribution Planning and Control 423

 Notes 4. Optimum utilisation of space.
5. Easy movement of men, material and equipment.
----------------------
6. Minimum storage and handling costs are measured in terms of space
---------------------- (cubic meters) or by weight (tones) handled.
---------------------- 7. Ability to take care of the peak loads.

---------------------- 7.9 DISTRIBUTION RESOURCE PLANNING AND

---------------------- CONTROL
---------------------- With the drawbacks of the present system which need to be overcome on
one hand, and the capabilities of the computer on the other, new systems are
---------------------- being evolved like D.R.P. (Distribution Resource Planning) and QR/CR (Quick
---------------------- Response and Continuous Replenishment.) The features of these systems are as
follows:
---------------------- 1. Stock Keeping Units (SKUs) are determined as the nodal points. These
---------------------- could be the warehouse of distributors, stockiest or dealers.
2. Sales forecasts from these units are made each week and projected into
----------------------
the future. These are made by the SKUs unlike in the present system
---------------------- where forecasting is done by the supplier.
3. The available inventories from the SKUs are worked out considering:
----------------------
• Opening inventories
----------------------
• Customer orders for current and future deliveries.
----------------------
• Replenishments from the inventory stocking locations (ISL)
---------------------- These may be directly from the supplier or from the distributor or
wholesaler, e.g., ISL (supplier) -> SKU distributor.
----------------------
• Lead times for manufacturing and transit.
---------------------- • Modes of transport and constraints such as shipments to be in truck
---------------------- loads or minimum three-quarters of a truck load.
• Safety stock policies of SKUs and ISLs.
----------------------
• Warehouse capacity and restrictions if any.
----------------------
• Investment constraints, e.g., restrictions on the value of any single
---------------------- shipment.

---------------------- The benefits from this system are:

1. The total picture across the entire area served is obtained at any given
---------------------- time - say at the beginning or end of the week.
---------------------- 2. There is a direct link between the inventory control system of the supplier
and the customer.
----------------------
3. Changes are made more frequently and are in tune with the market
---------------------- developments. Action is pro-active - planning ahead instead of reactive -

424 Sales and Distribution Management

 racing the stocks, reacting to the inventory-level reaching the order point Notes
just in time.
----------------------
Because of this, stock outs can be eliminated by anticipating in advance
when stocks will reach the order point and taking anticipatory action. This can ----------------------
be explained by an example:
----------------------
Example
Order point - 150 units (av. consumption during lead time + safety ----------------------
stock)
----------------------
Average sales - 200 units/ month
----------------------
Lead time - 2 weeks
Safety stock - Average one week’s supply or 50 units ----------------------

Order quantity - 400 units. ----------------------

Order Point System ----------------------
Weeks ----------------------
0 1 2 3 4 5 6 7 8
----------------------
Opening Stock 280
----------------------
Sales - - 30 70 100 100 - 30 70
Order Release - - - - 400 - - - - ----------------------
Order arrival - - - - - - 400 - - ----------------------
Lost orders (20)
----------------------
Closing stock 280 280 250 180 80 - 400 370 300
----------------------
DRP System
Weeks ----------------------
0 1 2 3 4 5 6 7 8 ----------------------
Opening Stock 280
----------------------
Expected Sales - - 30 70 100 100 - 30 70
Order Release - - - 400 - - - - - ----------------------

Order arrival - - - - - 400 - - - ----------------------

Lost orders Nil ----------------------
Closing stock 280 280 250 180 80 380 380 350 280
----------------------
4. Inventory investment can be reduced by anticipating periods of low sales.
This can be explained by an example: ----------------------
Example ----------------------
Data same as given in the above example under (3). ----------------------
Order Point System
----------------------

Distribution Planning and Control 425

 Notes Weeks
---------------------- 0 1 2 3 4 5 6 7 8
Opening Stock 280
----------------------
Sales - 100 50 - 50 - 30 70 100
----------------------
Order Release - - 400 - - -
---------------------- Order arrival - - - - 400 -
---------------------- Closing stock 280 180 130 130 80 80 50 380 280

---------------------- Av. stocks 314 units

DRP System
----------------------
Weeks
----------------------
0 1 2 3 4 5 6 7 8
---------------------- Opening Stock 280
---------------------- Expected Sales - 100 50 - 50 - 30 70 100
Order Release - - - - - 400 - - -
----------------------
Order arrival - - - - - - - 400 -
----------------------
Closing stock 280 180 130 130 80 80 50 380 280
---------------------- Av. stocks 180 units
---------------------- Note: Stocks not required in one location can be diverted to where there is need.
---------------------- 5. Through bar coding, the sales of individual items can be tracked and
appropriate action taken based on the sales trends- fast or slow movement.
----------------------
6. Ordering, invoicing and payments are controlled on a month-to-month
---------------------- basis rather than on an order-to-order basis. Control is against the weekly
schedules. There is consolidation of the ordering process - all items for all
---------------------- locations are reviewed at the same time. Re-ordering is not dependent on
---------------------- items reaching the re-ordering level or on sales persons collecting order
for the field.
---------------------- 7. Demand uncertainty is reduced as more customers attempt to forecast
---------------------- their requirements.
8. Operating costs are reduced and production stability is increased.
----------------------
9. It results in better service to the customers. Sales persons can concentrate
---------------------- on problem solving, developing new customers and identifying new
opportunities rather than on routine order taking.
----------------------
10. Shipping and warehousing capacity planning is improved.
----------------------
Note: The term SKU (Stock Keeping Unit) is sometimes also used to indicate
---------------------- an item which is stocked.

----------------------

426 Sales and Distribution Management

7.10 JUST-IN-TIME Notes

The purpose of JIT is to eliminate all production activities which do not ----------------------
directly add value to the product. The just-in-time (JIT) concept was developed
----------------------
with manufacturing in mind but it has implications for distribution. Whilst the
organizations that have implemented this system tend to be large enterprises, ----------------------
the system also has implications for the smaller and middle-sized firms who
may be their competitors, suppliers or customers. ----------------------

JIT has four specific objectives : ----------------------

●● the production of goods that the customer wants ----------------------
●● the production of goods when the customer wants them ----------------------
●● the production of perfect quality of goods and
----------------------
●● the elimination of waste (in labour, inventory movement, space, etc.).
----------------------
JIT ensures, for example, that components and raw materials arrive at the
manufacturer’s or processor’s factory at the precise time they are required for ----------------------
production or processing. For JIT to work there has to be good coordination of
----------------------
production schedules between suppliers and manufacturers/processors so that
both parties can satisfy demand whilst carrying mini stocks. ----------------------
The implementation of a JIT program usually has a number of ----------------------
complementary elements. The most common are:
----------------------
Pull scheduling Where production is a function of ‘demand pull’ rather than
‘schedule push’. This means that only the actual materials ----------------------
required for a production run are drawn from suppliers and
this eliminates inventories; ----------------------
Mixed Products are only processed or manufactured as orders are ----------------------
production received for them. This eliminates stocks, improves cash
flow and allows capacity to be switched to producing what ----------------------
is currently in demand; ----------------------
Fast set up times Investment is made in systems and equipment which allow
almost continuous production of different products; ----------------------
Preventative Ensures unbroken production; ----------------------
maintenance
----------------------
Revised plant Redesigned to minimize handling and movement;
layout ----------------------
Total quality Systems for identifying and rectifying defects at source;
----------------------
control
Supplier liaison The extension of JIT to suppliers. ----------------------
Organisations marketing to enterprises which have adopted JIT will find ----------------------
that new opportunities and challenges are created. The most likely effects of
JIT are: ----------------------

Distribution Planning and Control 427

 Notes Strict quality control The buyer will expect the supplier to have already
carried out a pre-delivery inspection of the materials
----------------------
or components. This reduces the buyer’s costs since,
---------------------- in theory; part of the quality control task is passed to
the supplier. In addition, the quality standard is likely
---------------------- to be high or the economies promised by JIT will not
be realized;
----------------------
Frequent and reliable To keep inventory to a minimum, manufacturers will
---------------------- ask;
---------------------- Deliveries For frequent, perhaps daily, deliveries. They will also
insist that suppliers adhere precisely to the agreed
---------------------- delivery times and may apply penalties for early as
well as late deliveries;
----------------------
Relocation It may be necessary for suppliers to relocate their
---------------------- production and/or warehouse facilities to be close to
customers in order to consistently meet orders placed
----------------------
at very short notice;
---------------------- Investment in new It may be necessary to invest in modern, and expensive,
---------------------- Technology Production technology to match the quality targets of
the customer. Even if this is not the case, investment in
---------------------- computer systems and communications equipment will
---------------------- almost certainly be necessary so that the supplier and
industrial customer can coordinate their management
---------------------- systems to the extent required to achieve the goals of
JIT;
----------------------
Single supplier JIT requires suppliers and customers to work closely
---------------------- on;

---------------------- Arrangements Cost control, product development and design,

improvements in production methods and so on. It is
---------------------- therefore common to find that adopters of JIT have
reduced the number of suppliers with which they deal
---------------------- with. Sometimes they rely on a single supplier with
---------------------- whom a long-term relationship has been developed;
Value engineering JIT simultaneously pursues cost reduction and quality
---------------------- improvement. To this end, a customer will closely
---------------------- examine its own business operations and will also
require suppliers to seek ways of reducing their own
---------------------- costs whilst maintaining or even improving the quality
of their supplies.
----------------------

----------------------

----------------------

428 Sales and Distribution Management

 Notes
Check your Progress 5
----------------------
Fill in the blanks. ----------------------
1. The purpose of ______________ is to eliminate all production
----------------------
activities, which do not directly add value to the product.
----------------------

Activity 1 ----------------------

----------------------
Visit the nearest beverages distributor and note down the vehicle route
planning followed for distribution in the city. ----------------------

----------------------
7.11 MATERIAL REQUIREMENT PLANNING
----------------------
The materials requirement planning system (MRP) most commonly ----------------------
found in modern manufacturing or processing concerns is based on the
Japanese Kanban system. MRP is a computerized inventory control system ----------------------
intended to minimize the investment in manufacturing/processing materials and
components, consistent with matching production levels to current demand. ----------------------

The word Kanban translates as ‘visible record’ which may be a ticket, ----------------------
job or route card, or a computer code. A computer is used to plan production
over several periods and using the Kanban system automatically triggers the ----------------------
production or purchase of components or materials at the time they are required ----------------------
for the manufacturing or processing of the finished product.
----------------------
All materials or components are lodged in specially designed containers
which have two Kanban cards attached to them. Those responsible for the ----------------------
production or supply of the material or the component will make use of the
P-Kanban whereas the users of those materials or components will use the ----------------------
C-Kanban (C = conveyance). Each container is conveyed between the work areas
----------------------
of the materials/parts producers and users with one kanban being exchanged for
another along the way. The production of a part can only be undertaken if there ----------------------
is a P-Kanban to authorise it. In the absence of a P-Kanban the workforce will
engage in other activities such as cleaning, maintenance, training etc. ----------------------
The Kanban system removes the need for managers to forecast (or guess) ----------------------
what level of materials or parts must be held in stock to meet production/
processing requirements and thereby reduces inventories. Kanban is intended ----------------------
to work within the context of a just-in-time production program. Oakland says
----------------------
that:
“A JIT program can succeed without a Kanban-based operation, but ----------------------
Kanbans will not function effectively independently of JIT.”
----------------------

----------------------

Distribution Planning and Control 429

 Notes Materials Requirement Planning (MRP) has been extended into
Manufacturing Resource Planning (MRP II). MRP II represented a move
---------------------- towards an integrated approach to the entire manufacturing process. Distribution
Requirement Planning (DRP) applies the techniques of MRP II to warehousing
---------------------- and transportation activities.
----------------------
Summary
----------------------
●● Physical Distribution includes all activities involved in planning,
---------------------- implementing, and controlling the physical flow of raw materials,
---------------------- in-process inventory, and finished goods from point-of-origin to point-
of-consumption. The main activities include customer service, inventory
---------------------- control, material handling, transportation, warehousing and storage.

---------------------- ●● Total distribution costs involve both materials management and physical
distribution. An efficient system of materials management can be a potent
---------------------- marketing instrument, as can an efficient physical distribution system.
As well as helping to control costs, these two areas of management
---------------------- can contribute greatly to the level of customer service achieved by the
---------------------- organisation. The level of service offered by an organisation can be as
important, sometimes more important, to its prospective customers
---------------------- than any other attribute which it might possess. The levels of service
are very much influenced by procurement costs, inventory carrying
---------------------- costs, and transportation costs. Management needs to understand the
---------------------- interrelationships between these categories of cost and to develop an
understanding of the trade-offs that must be made between them.
----------------------
There are a number of current developments in the field of logistics
---------------------- management which are likely to have a major impact on the way in which
this function is managed in the future. These developments include: the drive
---------------------- by retailers to account for direct product profitability, the move towards
just-in-time materials and product supply and the evolving methodology
----------------------
of materials requirement planning.
---------------------- ●● Inventories are a major cost element in the management of physical
distribution and as such must be carefully controlled. Managers are
----------------------
required to find the economic balance between order processing costs
---------------------- and stockholding costs. At the same time, they need to consider order
cycles, fluctuations in demand and the size of the safety stock required. In
---------------------- transport management the key issues relate to the efficient and effective
scheduling and routing of vehicles. Three of the most commonly used
----------------------
models are the savings method, the simplified delivery service model
---------------------- and TRANSIT. Each of these is aimed at reducing the time and cost of
delivery and the improvement of customer service levels.
----------------------

----------------------

----------------------

430 Sales and Distribution Management

 Keywords Notes

----------------------
● Demand Pull: This means that only the actual materials required for a
production run are drawn from suppliers and this eliminates inventories. ----------------------
● Economic order quantity: Economic order quantity (also known as the
----------------------
Wilson EOQ Model or simply the EOQ Model) is a model that defines
the optimal quantity to order that minimizes total variable costs required ----------------------
to order and hold inventory.
----------------------
● Kanban: Visible record which may be a ticket, job or route card, or a
computer code. ----------------------
● Materials requirement planning: MRP is a computerized inventory ----------------------
control system intended to minimize the investment in manufacturing/
processing materials and components, consistent with matching ----------------------
production levels to current demand.
----------------------

Self-Assessment Questions ----------------------

1. Discuss the parameters for developing a customer service policy. ----------------------

2. What are the requirements of a distribution planning and control system? ----------------------
3. Explain the concept of Economic Order Quantity with illustration. ----------------------
4. Identify the various elements of transportation cost with the help of the
diagram. ----------------------

5. Discuss various techniques of capacity loading ----------------------

6. Discuss in detail the concept of Just-in time. ----------------------
7. Explain the terms ‘fixed and variable routing systems’.
----------------------

Answers to Check your Progress ----------------------

Check your Progress 1 ----------------------

Fill in the blanks. ----------------------
1. One of the steps in the six-step procedure in developing customer service ----------------------
policy is establishing monitoring and control procedures.
----------------------
Check your Progress 2
----------------------
State True or False.
1. False ----------------------

----------------------

----------------------

----------------------

Distribution Planning and Control 431

 Notes Check your Progress 3
Fill in the blanks.
----------------------
1. Market surveys are conducted to establish the demand, customer needs
---------------------- and preferences.
---------------------- Check your Progress 4
---------------------- Fill in the blanks.

---------------------- 1. Distribution is usually a sizeable component of total marketing costs.

---------------------- 2. The simplified delivery service model (SDS) involves the geographical
division of the marketing territory into subareas.
---------------------- Check your Progress 5
---------------------- Fill in the blanks.
---------------------- 1. The purpose of Just in Time (JIT) is to eliminate all production activities,
which do not directly add value to the product.
----------------------

---------------------- Suggested Reading

---------------------- 1. Bowersox, Logistical Management: The Integrated Supply Chain Process.
---------------------- 2. Calvin, Robert J. Sales Management.
3. Chopra, Supply Chain Management.
----------------------
4. Ghoshal, World Class in India. Penguin India.
----------------------
5. Lamba, A.J. The Art of Retailing.
---------------------- 6. Scheuing, Kurtz, Johnson. Sales Management: Concepts, Practices and
---------------------- Cases.

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

----------------------

432 Sales and Distribution Management