WOLAITA SODO UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF MARKETING MANAGEMENT

SALES MANAGEMENT AND MARKETING CHANNELS

AND LOGISTICS MANAGEMENT
MODULE CODE 05

PART I: SALES MANAGEMENT COURSE CODE MKTM-2052

PART II: MARKETING CHANNELS AND LOGISTICS MANAGEMENT
COURSE CODE MKTM-4051

Compiled by Mr. Irstu Desalegn(MBA in Marketing Management)

Email: irstudesalegn11@gmail.com

MARCH, 2023
 PART I: SALES MANAGEMENT

EXIT EXAM MODULE

COURSE CODE :- Mktm2052

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PART I:- SALES MANAGEMENT

Table of Contents
CHAPTER ONE ............................................................................................................................................... 7
Introduction to Sales Management .............................................................................................................. 7
1.1 What Is Sales Management?............................................................................................................... 8
1.2 Five Functions of Sales Managers ..................................................................................................... 10
1.3 Major Parts of an Organizational System ......................................................................................... 12
1.4 How Does One Become A Sales Manager? Begin As Sales Personnel ............................................. 15
1.5 Sales Management Skills ................................................................................................................... 15
CHAPTER TWO ............................................................................................................................................ 17
BUILDING RELATIONSHIPS THROUGH STRATEGIC PLANNING.................................................................... 17
2.1 Importance of Corporate Planning ................................................................................................... 17
2.1 Relationship Marketing and the Sales .............................................................................................. 23
CHAPTER THREE .......................................................................................................................................... 31
FORECASTING MARKET DEMAND, SALES BUDGETS, AND SALES QUOTAS ................................................ 31
3.1 Forecasting market demand ............................................................................................................. 31
3.2 The forecasting process .................................................................................................................... 34
3.3 Sales Forecasting Methods ............................................................................................................. 34
3.4 The Sales Manager’s Budget ............................................................................................................. 43
3.5 What Is A Quota? .............................................................................................................................. 45
3.6 why is Quota important .................................................................................................................... 46
3.7 Types of Quotas and Methods of Setting Sales Quotas ....................................................................... i
3.7.1 Types of quotas ............................................................................................................................. i
CHAPTER FOUR ............................................................................................................................................. ii
PLANNING FOR AND RECRUITING SUCCESSFUL SALESPEOPLE .................................................................... ii
The Importance of Selection ..................................................................................................................... v
4.2 Job Analysis ........................................................................................................................................ vi
4.3 Manpower Planning ......................................................................................................................... viii

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 4.4 Job Descriptions ................................................................................................................................. ix
4.5 Job Specifications ................................................................................................................................ x
4.7 Selecting Applicants ........................................................................................................................... xi
CHAPTER FIVE .............................................................................................................................................xiv
CHOICES IN SALES FORCE ORGANIZATION .................................................................................................xiv
5.1 Principles of sales organization ......................................................................................................... xv
5.2 Types of Sales Organization .............................................................................................................. xv
5.4 Determining the Size of the Sales Force ........................................................................................... xxi
CHAPTER SIX.............................................................................................................................................. xxiv
TRAINING THE SALES TEAM ...................................................................................................................... xxiv
6.1. What is Sales Training? ................................................................................................................... xxv
6.2 Importance of sales training ......................................................................................................... xxxiii
CHAPTER SEVEN .................................................................................................................................... xxxix
COMPENSATING (REMUNERATING) SALESPEOPLE ................................................................................ xxxix
7.1 Need for Sound Remuneration Plan ............................................................................................. xxxix
7.2 Functions of compensation (remuneration) plan ............................................................................. xli
7.3 Importance of Compensation ........................................................................................................... xli
7.4 Factors Affecting Remuneration Plan ...............................................................................................xlii
7.5 Methods of compensation/remuneration ....................................................................................... xliv
CHAPTER EIGHT.......................................................................................................................................... xlix
EVALUATION AND CONTROL OF SALESPEOPLE ......................................................................................... xlix
8.2 Performance Appraisal Processes and Procedures.............................................................................. l
8.3 Rules for Performance Appraisals ...................................................................................................lviii
CHAPTER- 9 .................................................................................................................................................. lx
PROFESSIONAL BUSINESS SELLING PROCESS ............................................................................................... lx
9.1 Prospecting ........................................................................................................................................ lx
9.2 Pre-approach.....................................................................................................................................lxii
9.3 Approach ..........................................................................................................................................lxiii
9.4 Sales Presentation............................................................................................................................ lxiv
9.5 Handling objections ......................................................................................................................... lxvi
9.6 Closing ............................................................................................................................................. lxvii

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 9.7 Follow-up and relationship building ............................................................................................... lxvii

PART II :- MARKETING CHANNELS AND LOGISTICS MANAGEMENT

Contents
CHAPTER ONE:- LOGISTICS AND CHANNEL MANAGEMENT ....................................................................... 70
1.1 Definitions of logistics ........................................................................................................................... 70
1.2. The Role & and importance of Logistics .......................................................................................... 71
1.3. Logistics Systems, Costs, & Components ......................................................................................... 73
1.4 The Output of the Logistics System: Customer Service ................................................................... 78
1.5 Four Key Areas of Interface between Logistics and Channel Management ..................................... 79
CHAPTER TWO:- TRANSPORTATION MANAGEMENT ................................................................................. 84
2.1 Basic Transport Economics & Pricing ................................................................................................ 85
2.2 Transport Decision Making ............................................................................................................... 93
CHAPTER THREE:- TRAFFIC MANAGEMENT ................................................................................................ 98
3.1 Carrier Selection................................................................................................................................ 98
3.2 Privately controlled transportation ................................................................................................ 103
CHAPTER FOUR:- MARKETING CHANNEL MANAGEMENT ........................................................................ 106
4.1 Marketing Channel Concepts .......................................................................................................... 106
4.2 Marketing Flows in Marketing Channel .......................................................................................... 107
4.3 Analyzing Marketing Channel Structures........................................................................................ 110
4.4 Channel Management, Channel Relationship & Competitive Dynamics ........................................ 114
CHAPTER FIVE: - CHANNEL PARTICIPANTS ............................................................................................... 118
5.1 An Overview of the Channel Participants ....................................................................................... 118
5.2 Producers and Manufacturers ........................................................................................................ 119
5.3 Intermediaries ................................................................................................................................. 119
CHAPTER SIX:- DEVELOPING CHANNEL DESIGHN ..................................................................................... 128
6.1 Channel Design ............................................................................................................................... 128
6.2 A Paradigm of the Channel Design.................................................................................................. 129
CHAPTER SEVEN:- CONFLICT IN THE MARKETING CHANNEL .................................................................... 145

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 7.1 Conflict versus Competition ............................................................................................................ 145
7.2 Causes of Channel Conflict.............................................................................................................. 145
7.3 Managing Channel Conflict ............................................................................................................. 148
7.4 Resolving Conflict ............................................................................................................................ 150
CHAPTER EIGHT......................................................................................................................................... 153
MOTIVATING THE CHANNEL MEMBERS ................................................................................................... 153
8.1 Finding out the Needs and Problems of Channel Members ........................................................... 154
8.2 Offering Support to Channel Members .......................................................................................... 157

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 CHAPTER ONE
Introduction to Sales Management
Chapter objectives
At the end of this unit, you should be able to:

 Know the Definition of Sales Management

 Discuss the Functions of Sales Managers
 Major Parts of an Organizational System Explain the Concept of an Event
 Know and tell How Does One Become a Sales Manager?
 Discuss Sales Management Skills
Introduction

Changes between buyers and sellers are being driven by larger societal trends affecting us all.
The proliferations of information, mobility of the workforce, ease of communication,
globalization of markets have altered the way we work and live. The guiding philosophy of the
best sales organizations today is to add value to the customer‘s business and ultimately become
the vendor of preference. To be the vendor of preference means sales organizations must change
their corporate culture. The whole firm must be customer driven, with people and processes
aligned for the central purpose of adding value to customers. The focus has to change from price
and delivery to ease of use—not only of the product itself but also in every aspect of doing
business with the seller. The sales role is changing from product developers to relationship
managers and from solution sellers to true client consultants and partners. Changes in customer
needs and the resulting recasting of the sales role have created a concurrent shift in emphasis
among benchmark agenda items of sales managers in world-class sales organizations.

As it has been said with changes come opportunities; the changes in customers, sales roles, and
sales management agendas are profound and represent critical knowledge for anyone pursuing a
business career. The changes bring unprecedented opportunities for sales organizations to rethink
their business models to better add value to clients in ways never before possible. Sales
management is one of the most important elements in the success of modern organizations.
When major trends emerge, such as a shift in the economy toward small to medium-sized
businesses, it is incumbent upon sales managers to react with new selling approaches. And not

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only is personal selling the most expensive component of the marketing mix for most companies,
but it is the firm‘s most direct link to the customer.

1.1 What Is Sales Management?

Sales Management was originally said to be the function of directing the efforts of the sales force
of the business. However, in the modern times the broader view of sales function is found to be
more popular with the businesses. Accordingly, the Sales Management is concerned with
development of the sales staff, managing sales related operations and implementation of sales
techniques such that sales targets of the business are accomplished effectively.
The sales management function primarily seeks to accomplish three basic functions namely sales
volume, profit maximization and growth. The authority to achieve these three goals is delegated
by the top-level management to the sales management through marketing management.
Sales management is a key function in many kinds of enterprises. Manufacturing and
wholesaling enterprises encounter a wide range of problems in sales management. Retail
institutions, small and large, have sales management problems, even though the differences
(when compared to the problems of manufacturers and wholesalers) are so great that retailing
problems (at least in the academic world) are ordinarily considered separately. But some retailers
have sales management problems more akin to those of manufacturers and wholesalers than to
those of other retailers-the automobile dealer, the real-estate broker, and the direct-to-consumer
marketer all are in this category. Firms selling intangibles, such as the insurance company, the
stockbroker, the mutual funds, and the airline, have problems in sales management. Sales
management problems exist even in companies not employing sales personnel as, for example, in
the company that uses manufacturers‘ agents (rather than its own sales personnel) to reach its
markets; indeed, the problems of managing a sales force of ―independent outsiders‖ often are
more complex than when sales personnel are on the company payroll.

―Sales Management‖ originally referred exclusively to the direction of sales force personnel.
Later, the term took on broader significance in addition to the management of personal selling.
Sales management meant management of all marketing activities, including advertising, sales
promotion, marketing research, physical distribution, pricing, and product merchandising.
American Marketing Association agreed that sales management meant ―the planning, direction,

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and control of personal selling, including recruiting, selecting, equipping, assigning,
routing, supervising, paying, and motivating as these tasks apply to the personal sales
force.‖

The American Marketing Association‘s definition made sales management synonymous with
management of the sales force, but modern sales managers have considerably broader
responsibilities. Sales managers are in charge of personal selling activity, and their primary
assignment is management of the personal sales force. However, personnel-related tasks do
not comprise their total responsibility, so we call their personnel-related responsibilities ―sales
force management.‖

Sales managers are responsible for organizing the sales effort, both within and outside their
companies. Within the company, the sales manager builds formal and informal organizational
structures that ensure effective communication not only inside the sales department but in its
relations with other organizational units. Outside the company, the sales manager serves as a key
contact with customers and other external publics and is responsible for building and
maintaining an effective distribution network.

Sales managers have still other responsibilities. They are responsible for participating in the
preparation of information critical to the making of key marketing decisions, such as those on
budgeting, quotas, and territories. They participate to an extent that varies with the company‘s
decisions on products, marketing channels and distribution policies, advertising and other
promotion, and pricing. Thus, the sales manager is both an administrator in charge of personal
selling activity and a member of the executive group that makes marketing decisions of all types.

Therefore, sales management is the attainment of sales force goals in an effective and efficient
manner through planning, staffing, training, leading and controlling organizational resources. This
definition covers the most important concepts of sales management i.e. managerial functions like
planning, staffing, training, leading and controlling of the sales force and the second is achievement
of organizational goals in an effective and efficient manner.

Scope of sales management

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1. Sales Forecasting and Budgeting: The sales managers are expected to chalk out well-
structured sales plans well in advance. She/he should estimate the expenses that will be incurred
as a result of various sales activities.
2. Sales Team Structure: The sales team is expected to perform variety of sales related
activities. The sales manager is responsible for determining and organizing the functions to be
performed by his sales team.
3. Manpower Planning and Hiring: The sales manager is required to estimate the requirement
of sales personnel in the organization. As per requirement of the organization, She/he should
plan recruitment and selection activities.
4. Sales Training: To drive effective performance from the salespeople, it is important to
impart them with the right skill sets. The sales managers are responsible for providing training
and orientation to newly hired sales candidates so as to establish a suitable match between the
know-how and job position.
5. Sales Areas: The sales manager is responsible for establishing sales goals for the team, for
this purpose she/he determines the sales quotas and identifies the sales territories. She/he further
determines the region where the company wants to sell its products depending on the
profitability of the organization.
6. Sales force Management: The sales manager is entrusted with the responsibility of
motivating the sales personnel, appraising their performance, ascertaining their remuneration and
rewards for the targets achieved. Therefore, she/he should manage the sales force in such a way
that they are driven towards the achievement of the goal.

1.2 Five Functions of Sales Managers

Sales managers work with and through individuals and groups in the company, in the sales force,
and outside the firm to accomplish their goals. The sales manager‘s main goal is to achieve the
levels of sales volume, profits and customer satisfaction desired by high levels of management. The
factors underlying a manager‘s success is achieving these goals is the ability to influence the
behavior of all parties involved in the sales process including the ability to influence salespeople to
do what they would not do on their own.

The five most important functions of sales managers are explained as under:

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A. Planning: Planning is all about deciding what is to be done in the future, with whom to do it,
how and when to do it to achieve organizational goals. It defines where the organization wants to be
in the future and how to get there.
Planning is the conscious and systematic process of making decisions about goals and activities that
an individual, group, work unit or organization will pursue in the future and the use of resources
needed to attain them.
B. Staffing: Although a good plan is important, a manager usually cannot do the job alone. He/She
must get the work done with the help of others. Therefore, the manager must be able to attract,
develop and maintain effective sales force within the organization. Staffing refers to activities
undertaken by a manager to attract, develop and maintain effective sales personnel within the
organization so as to achieve organizational goals effectively and efficiently.

C. Training: Sales managers spend much of their time training their salespeople. Training is the
effort put forth by an employer to provide the sales personnel job related culture, skills, knowledge
attitudes that result in an improved performance in the selling environment.
D. Leading: The fourth sales management function is to provide leadership for sales personnel. It is
the ability to influence other people toward the attainment of organizational objectives and goals.
Leading means communicating goals to people throughout the sales organization and infusing
people with the desire to perform at higher level.
E. Controlling: A combination of a comprehensive plans, good people, quality training and
outstanding leaders still does not guarantee success. It is also important to understand the
organization‘s past and present situations. This involves controlling, the fifth and most important
function of sales management. Controlling is monitoring sales personnel‘s activities, determining
whether the organization is on target towards its goals and making corrections as and when
necessary.

Objectives of Sales Management

From the company viewpoint, there are three general objectives of sales management: sales
volume, contribution to profits, and continuing growth. Sales executives, of course, do not carry
the full burden in the effort to reach these objectives, but they make major contributions. Top
management has the final responsibility, because it is accountable for the success or failure of

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the entire enterprise. Ultimately, too, top management is accountable for supplying an ever-
increasing volume of ―socially responsible‖ products that final buyers want at satisfactory prices.

Benefits of selling activities

There are different benefits of selling activities, which are as follows:

(1) Benefits to the society: economic growth and maximum employment are the basics for
national development. The achievement of both these goals means jobs and incomes for a
nation‘s labor-force. The number of people, who need jobs, continues to expand, and also some
jobs are being eliminated, because of the introduction of computers and abolition of obsolete
technology. If jobs are to be made available for all those, who want and expect them, the
economy must continuously expand its production of goods and services, which can only be
done by adopting sound government-policies and efficient use of people.

(2) Benefits to consumers: professional people may not know every fact of a product, but they,
at least know its major uses, limitations and benefits; so they can easily serve their customers,
quite effectively. For example, an insurance agent can analyze the hazards and risks that confront
a 5 client‘s business or home-situation, examine existing coverage and offer helpful advice, in
order to eliminate the gaps or overlaps in coverage, in addition to saving the client‘s money.

(3) Benefits to business firms; their sales-persons and customers: salespersons are owned by
their companies, while customers are the end-users of the company‘s product(s) and/or services,
all these people, in the chain of marketing, stand to benefit by sales-activities. A business firm
can be profitable only if its revenues exceed its costs.

1.3 Major Parts of an Organizational System

 Organization: a social system that is goal directed and has a deliberated structure.
 Social: being made up of two or more people.
 Goal directed: an organization is designed to achieve some outcome, such as a profit
(Xerox), educated people (college), meeting spiritual needs (Catholic church), or providing
health care (hospital).

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  Deliberated Structure: tasks are divided, and responsibility for their performance is
assigned to organization members.
Metrics of Sales Performance
 Organizational Effectiveness: the degree to which the organization achieves a stated
objective.
 Organizational Efficiency: the amount of resources used to achieve an organizational goal.

Types of Sales Managers

The following are some of the most common types of sales managers in large business
organizations:
I. Strategic, or Top, Managers: are at the top of the hierarchy and are responsible for the
entire organization. (Example: President, Chairperson, Executive Director, etc.)
II. Tactical or Middle Managers: work at middle level of the organization and are responsible
for major groups. (Example: Zone and Regional Sales Leaders)
III. Operational or First-Line Managers: are directly responsible for sales of goods and
services. (Example: Assistant District or District Sales Leader or Manager)

Types of sales person

1. Order Takers: Sales person who mainly seek repeat sales. They book customer orders and
pass on the information to relevant people in the company. They are expected to be accurate.
They are also expected to have information about when the order has been booked and when will
it be delivered to customers. They have to track the delivery date of product and should be able
to assist customer for the same.
Order takers are of three type‘s i.e. Inside order taker and field order taker.
a) Inside Order Taker: They are a part of sales office and receive sales order from different
sources like phone, mail and internet. Sales persons in retail stores are also inside order
takers.
b) Field (outside) order Taker: When a customer is not interacting in the retail store, rather
the order is placed when the salesperson has met you outside or in the field and taken order is

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 field order taker. The buyer relies and becomes dependent on field order taker to place orders
periodically.
C) Delivery Salespeople: Timely delivery of the product is the primary responsibility of
delivery salespeople. They do not try to persuade the customers to increase the order size.
Reliability of product delivery determines the probability of getting or losing the order from
the customers. Therefore, the delivery has to be made on time
2. Order Creators: The prime objective of order creator is to convince customers to buy the
company‘s products. The salesperson needs to understand customer‘s requirements and
convince him that his company‘s products serve his requirements best.
a) Missionary Salespeople: They are employed by manufacturers to sell their product to
retailers. Once the retailers are convinced they place the orders to wholesalers which
ultimately lead to company‘s sale. In some pharmaceutical and building industry, the
manufacturer hires medical representatives and architects. Medical representatives calling on
doctors cannot make a direct sale since the doctor does not buy drugs but prescribes them for
patients. Architects also act as specifies rather than buyers. In these situations, the selling
task is to educate and build goodwill for the company.
3. Order Getters: An order getter persuades a customer to make a purchase. He is a frontline
salesperson, and is in a typical selling job. He is supported by technical support staff and
merchandisers.
i. New business Salespeople: The selling tasks are to win new businesses by identifying and
selling to prospects. These salespersons should maintain good relations with current
customers who can provide leads. They should also be prepared to make a lot of cold calls
and visits.
ii. Consumer Salespeople: They sell to individual customer‘s products and services such as
cars, insurance. These salespeople have to be sensitive to customers‘ time and they should
not be insistent even when customers have declined to buy. Sensing that a customer does not
want the product is as important as sensing that he may want the company‘s product. A
consumer salesperson should be always wary of putting off the customers by being too
persistent. Exemplary behavior is imperative for consumer salespersons.
iii. Technical Support Salespeople: Where a product is highly technical and the
negotiations are complex, a salesperson may be supported by product and financial
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 specialists who can provide the detailed technical and financial information required by
customers. This may be on-going as part of a key account team or on a temporary basis with
the specialist being called into the selling situation whenever required.
iv. Merchandisers: Merchandisers advise on product display in stores, implement sales
promotions, check stock levels and maintain contact with store managers. They provide
support to the sales function in retail and wholesale selling. Salespeople serving individual
outlets are supported by merchandisers.

1.4 How Does One Become A Sales Manager? Begin As Sales Personnel
Beginning as salesperson, one passes the following stages to become a sales manager:
 Sales trainee, salesperson, and key account manager are typical career steps taken before
becoming a manager responsible for salespeople.
 District Sales Manager – managers that are responsible for usually three to ten sales people
in one district. This is the beginning managerial level.
 Regional Sales Manager – responsible for three to five sales districts.
 Zone Sales Manager – level of sales management responsible for three to five regions.

1.5 Sales Management Skills

For a sales manager to be successful, they are expected to equip themselves with the following
managerial skills:
Conceptual and Decision Skills: the cognitive ability to see the organization as a whole and the
relationship among its parts..
 Conceptual/managing skill: consists of planning, organizing, controlling, and decision making.
 Conceptual skills involve the manager's thinking and planning abilities.
 They include knowing where one's group fits into the total organization and how the
organization fits into the industry and the community.
People Skills: the manager's ability to work with and through other people and to work effectively
as a group member.
 It includes abilities to motivate, lead, communicate, team coordination, and mentoring.
 Managers spend well over half their time interacting with people. Because managers must deal
with others, they must develop their abilities to lead, motivate, and communicate effectively
with those around them.
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 The ability to get along with diverse types of people and exchange information with them is
vital for a successful management career.
 These skills are essential at all levels and in all parts of a sales organization.
Technical Skills: the abilities to perform a specialized task that involves a certain method of
process. Technical skills are the ability to perform a specialized task that involves a certain
method or process.
 Technical skills also involve specialized knowledge, analytical ability, the competent use of
tools such as computers, and techniques to solve problems in that specific discipline.
 They include the methods, techniques, and equipment involved in specific functions such as
selling, training, and recruiting.
Sales managers Responsibility
 Sales management is one of the most complex and challenging job in an organization.
 The fate of sales business organizations are determined by the capability of sales
department.
 Sales volume, revenue and profit are the life blood of an organization which are
determined by the strength of sales managers and sales force.
Basic Responsibilities of Sales mangers
 Responsibility for achieving reasonable profit on sales through marketing and sales
management expertise.
 Responsible to the sales force for representing their interests to the management
 Responsible to the customers, for maintaining best possible customer relation.

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 CHAPTER TWO

BUILDING RELATIONSHIPS THROUGH STRATEGIC PLANNING

Chapter objectives
At the end of this unit, you should be able to:

 Know the Definition of corporate planning and its importance

 Discuss Relationship Marketing and the Sales
2.1 Importance of Corporate Planning

To be effective, sales activities need to take place within the context of an overall strategic
marketing plan. Only then can we ensure that our sales efforts complement, rather than compete
with other marketing activities. Accordingly, sales strategies and management are afforded a
more holistic perspective and tend to cover the whole organization. There is no universal way of
establishing an ideal marketing plan; nor is the process simple in practice because every planning
situation is unique. The marketing plan can be portrayed as a hierarchy consisting of three levels:
 Objectives: where do we intend to go? (goals)
 Strategies: how do we intend to get there? (broadly descriptive)
 Tactics: the precise route to be taken (detailed)
In planning one critical thing that must be clearly identified is the business definition or
corporate mission that clarifies why the firm exists. As a prerequisite to the determination of
marketing plans, careful consideration should be given to defining (or re-defining) the overall
role or mission of the business. This issue is best addressed by senior management‘s asking and
answering the question: ‗What business are we in?‘ The definition of the role of a business
should be in terms of what customer needs are being served by a business rather than in terms of
what products or services are being produced.
Situation and Market Analysis/Marketing Audit
The precise content of this step in preparing the marketing plan will vary from company to
company, but will normally consist of a marketing analysis and an analysis of SWOT.
Data analyses required under the internal audit include:
 Current and recent size and growth of market. In the multi-product company this analysis
needs to be made in total, by product/market and by geographical segment.

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 Analysis of customer needs attitudes and trends in purchasing behavior.
 Current marketing mix.
 Competitor analysis, including an appraisal of:
 Current strategy
 Current performance, including market share analysis
 Their strengths and weaknesses
 Expectations as to their future actions
As well as analyzing existing competition, potential new entrants should be appraised. The
external audit consists of an analysis of broad macro-environment trends: Political, Economic,
Socio-Cultural and Technological Legal factors, and Ecological factors. Both internal and
external audits are deliberate and detailed coverage of the internal and external elements. They
can be carried out by people within marketing or from other departments and, most importantly,
they must have the backing of top management as they are central to both the marketing planning
and corporate planning horizons of the company.

Analysis of Strengths/Weaknesses, Opportunities and Threats (SWOT)

Here management must make a realistic and objective appraisal of SWOT analysis.
Opportunities for the future of a business and threats to it stem primarily from factors outside the
direct control of a company and in particular from trends and changes in the macro environment.
It is important to recognize that the determination of what constitutes an opportunity/ threat, and
indeed the appraisal of strengths and weaknesses, must be carried out concurrently. A SWOT
analysis is not a lengthy set of statements; it is simply a number of bullet points under each
heading. It should be short and uncomplicated.

Statement of Objectives
Company can now determine specific objectives and goals that it wishes to achieve. These
objectives, in turn, form the basis for the selection of marketing strategies and tactics. A
company may have several objectives. Although marketing objectives usually tend to support
business objectives, business and marketing objectives may also be one and the same. It should
be pointed out that there are several types of objectives, such as financial and corporate
objectives. Additionally, objectives may be departmental or divisional. However, regardless of

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the type or format, each objective requires its own strategy. Sales objective is part of a
company's marketing plan, in which common goals are identified by the marketing team,
including profit margins, revenue targets, advertising, distribution partners and targeted
demographics. Sales management entails numerous objectives which are executed by sales
managers. There are mainly three such objectives: sales volume, contribution to profits and
continuous growth.
Objectives are needed in a number of areas – production objectives, financial objectives, etc. In a
market-driven company, marketing objectives are the most important as they reflect
customer needs and how the company can satisfy these. In a market-driven company,
marketing plans come first in the overall corporate planning process. The objectives of other
areas must then be consistent with marketing objectives. In addition to this element of
consistency, objectives should be expressed unambiguously, preferably quantitatively, and with
an indication of the time span within which the objectives are planned to be achieved. The
acronym SMART describes the requirement for such objectives: Specific, Measurable,
Achievable, Realistic and Time related.

Marketing plans are often categorized as being short range, intermediate range and long
range. Furthermore, the different planning categories are ultimately related to each other –
achieving long-term objectives require first that intermediate and short-term objectives be met.

The following criteria are necessary for setting objectives:

1) Ensure objectives focus on results: Because the effects of marketing activity are essentially
measurable, should enable the quantification of marketing achievement.
2) Establish measures against objectives: Return on investment.
3) Where possible have single themes for each objective: Imprecise objectives such as
‗reduce customer defections by 20 percent through best-in-class service‘ are not acceptable.
4) Ensure resources are realistic: Best practice
5) Ensure marketing objectives are integral to corporate objectives: This is indisputable,
because there will be a serious mismatch if corporate objectives differ from marketing
objectives.

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  Determine Sales and Market Potential and Forecast Sales

A critical stage in the development of marketing plans is the assessment of market and sales
potential followed by the preparation of a detailed sales forecast. Market potential is the
maximum possible sales available for an entire industry during a stated period of time.
Sales potential is the maximum possible portion of that market which a company could
reasonably hope to achieve under the most favorable conditions. Finally, the sales forecast is
the portion of the sales potential that the company estimates it will achieve. The sales forecast is
an important step in the preparation of company plans. Not only are the marketing and sales
functions directly affected in their planning considerations by this forecast, but other
departments, including production, purchasing and human resource management, will use the
sales forecast in their planning activities. Sales forecasting, therefore, is a prerequisite to
successful planning.

 Generating and Selecting Strategies

In general terms, strategies encompass the set of approaches that the company will use to achieve
its objectives. This step in the process is complicated by the fact that there are often many
alternative ways in which each objective can be achieved. Although several strategies may be
evaluated, only one strategy can be employed, giving rise to the formula: one strategy per
objective. For example, an increase in sales revenue of 10 percent can be achieved by increasing
prices, increasing sales volume at the company level (increasing market share) or increasing
industry sales. At this stage it is advisable, if time consuming, to generate as many alternative
strategies as possible. In turn, each of these strategies can be further evaluated in terms of their
detailed implications for resources and in the light of the market opportunities identified earlier.
Finally, each strategy should be examined against the possibility of counter-strategies on the part
of competitors. We begin by supposing that the objective is to maximize profit from dealings
with established customers.

Strategy 1: Targeting: To the marketer, targeting is equivalent to segmentation.

Segmentation/targeting strategy may be based on any or all of the following:

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 Value (value of goods purchased)
 Customer preference
 Life stage (status of relationship between supplier and customer
 Segments must be potentially profitable
 Segments are not mutually exclusive
 Segments are not stable.

Strategy 2: Pricing: In line with the classic marketer‘s approach, the following pricing
strategies may be adopted:
 Make short-term tactical reductions  Elevate perceived quality
 Establish price premiums
Thus, the classic principle of elevating the perceived quality of a brand so that it can command a
higher selling margin may be adopted. Additionally, a discount has more value if the worth of
what is being discounted is understood.

Strategy 3: Customer retention: Because advanced technology enables suppliers to track the
progress of an enquirer or customer, focus is increasingly shifting from mere product
profitability to the profitability of customer relationships. However, customer profitability will
be determined by:

 The cost of acquisition

 The losses of customers or would-be customers at various key stages in the relationship.
Key stages in the customer relationship could be revised as:
 enquiry
 conversion to customer
 repeat purchase
 up-trade
 threatened dormancy
 Recovery.
 Preparing the Marketing Program: The first step in the preparation of this program is the
determination of the marketing mix. Detailed decisions must be made with respect to product
policy, pricing, promotion and distribution. Care should be exercised to ensure that the
various elements of the marketing mix are integrated, i.e. that they work together to achieve
company objectives in the most effective manner.

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 Allocating resources – budgeting: Having made detailed decisions with respect to the
elements of the marketing mix, the next step is to assemble a budget for each of these
elements. In most companies limited resources ensure that managers from the different
functional areas have to compete for these scarce resources. It is likely that much discussion
will take place between those responsible for each element of the marketing mix. In addition,
it may be found that initial marketing objectives, strategies and detailed plans for the
marketing program to achieve the forecast level of sales may, in the light of financial and
other resource constraints, be unrealistic. In this event modifications to the original plan may
have to be made. It should be noted that at this stage an estimate can be made of both costs
and revenues and a forecast profit and loss statement prepared.
 Implementation: The procedure so far should have resulted in the preparation of a detailed
document setting out what is to be done, when it will be done, who is responsible and
estimated costs and revenues, as well as agreed time frames for the various activities in the
plan. Once approved, details of the marketing plan should be communicated to everyone
involved. This communication is an essential and sometimes neglected aspect of marketing
planning. Many companies have elaborate marketing plans that are not implemented because
key people have not been informed or have not agreed the proposed plan.
 Control: finally, the plan should contain an outline of the control mechanisms that will be
applied. This should include details of major objectives and key parameters in the
measurement of the degree of success in achieving the objectives, thereby enabling
corrections and modifications to be made as the plan unfolds. This control part of the
marketing plan should specify what is to be measured, how it is to be measured and what
data are required for measurement. It may also include details of what action is to be taken in
the light of deviations from the plan. This contingency planning is a key feature of any
planning process, recognizing as it does that plans need to be flexible in order to
accommodate possible unforeseen or unpredictable changes in the market.

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 2.1 Relationship Marketing and the Sales

Relationship marketing plays a significant role in modern sales management. Companies have
realized the benefits of practicing a relational approach to selling rather than a transactional one.
Many markets are volatile or have long product life-cycles that make the practice of relationship
selling challenging. This far-sighted quotation from 1954 came from Peter Drucker- There is
only one valid definition of business: to create customers. It is the customer who determines
the nature of the business. Consequently, any business has two basic functions: marketing
(customer orientation) and innovation.
The importance of the customer remains clear. Gummesson, who, in his classic article, claims
that ‗customer focus‘ not only ‗compels management to realize the firm‘s primary responsibility
– to serve the customer‘, but also ‗to recognize that customer knowledge is paramount to
achieving market orientation‘. Customer-focused quality is now essential because it involves a
change from an operations-centered to a customer-targeted activity. As the move towards a
global economy quickens, so customers demand quality in terms of their relationships with
sellers, with increased emphasis being placed on reliability, durability, ease of use and after-sales
service. Modern value chain analysis uses customers as its starting point. This leads to the
modern notion of customer care. Customer care is a philosophy which ensures that products or
services and the after-care associated with serving customers‘ needs at least meets, and in most
cases exceeds, expectations. Today‘s customers have more choice than ever before and demand
high levels of service and care.
Marketing should, however, integrate new customers into a company by developing a positive
relationship between them and the company‘s designers and ensure that they interact with
consumers, which is central to the notion of customer care. IT is important in maintaining
customer relationships. As companies look to possible customer needs for technological
advancements, communication tools provide opportunities for creating long-term, close
relationships.
Christopher, Payne and Ballantyne, in their text on the subject of relationship marketing absorb
the TQM ideas of bringing together quality, marketing and customer service. Although there
is no singular consensus on what relationship marketing constitutes, the general agreement is that
relationship marketing means that organizations must be designed to enable them to pick

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up changes in the marketplace on a continuing basis, and this is where the quality chain
must be anchored. This is the essence of what is termed business process re-engineering, and
this was initiated by Toyota who based its pioneering just-in-time (JIT) manufacturing system
around the needs of customers. Work was reorganized to accommodate a variety of customer
preferences in terms of the fastest possible response time and it is a system that delivers input
to its production site at the rate and time it is needed. It thus reduces inventories within the firm
and is a mechanism for regulating the flow of products between adjacent firms in the distribution
system channel.

A more modern term that describes JIT is lean manufacturing, and in this context it is argued that
in a well-synchronized lean manufacturing system, customer demands can be met and profits
maintained or increased through a reduction in stockpiles and inventory levels which do not gain
in value as they await the production process. In fact, they cost the organization money in terms
of financing an unproductive resource. In such a system the supplier and manufacturer
relationship is critical and close associations must be developed. Typically, this means a
reduction in the number of suppliers to a single source and long-term relationships. In such
situations the role of salespeople is not to sell, but to provide a tactical liaison between their
customers‘ buyers, manufacturers and their own production department.

From Relationship Marketing To Relationship Selling

Additional value can be secured in buyer–supplier relationships by focusing on the supply chain.
From a purchasing perspective this involves an integrated approach between suppliers,
customers and manufacturing. The most important feature of buyer–seller transactional
relationships tends to revolve around price; indeed, negotiation is one of the key issues in sales
presentations. However, a new view has emerged, based on the notion of open accounting. This
kind of agreement is only possible when long-term relationships between buyers and sellers
have been established in typical lean production situations. Here, price negotiation does not
feature in buyer–seller transactions because each side sees the other‘s price make-up. Buyers
have access to the seller‘s accounts in terms of the cost build-up for components or materials
being supplied, along with labor costs and overheads that have been incorporated into the cost of
such products. As the term open accounting suggests, complete open access is afforded.

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Equally, suppliers will have access to the manufacturer‘s accounts to conduct a similar analysis.
A mutually acceptable margin for profit will then be agreed between the buyer and supplier so,
in effect, the pricing element of the marketing mix has now become redundant. This suggests
that certain tactics are needed to implement relationship marketing. A more holistic concept
requires a detailed understanding of the consumer‘s value chain from raw material supply
right through the extractions and production processes to delivery to the end-customer.
This type of marketing involves strategic thinking that accompanies the modern view of
marketing brought about as a result of reverse marketing. It is contended that relationship selling
concerns the tactical features of securing and building up the relationships implicit in
relationship marketing.

Thus, what establishes a firm‘s competitive advantages is an ability to serve customers‘

present and future needs. Role of marketing is changing. Selling is often viewed as a tactical
arm of the marketing function and its role is also changing. As Johnston shows, selling and sales
management are now being approached from a relationship-based approach. In addition to
the changes that have being identified so far, the marketing environment is changing in other
ways. The increased abundance of channels had led to potential customers being dispersed into a
wide variety of media audiences. Accordingly, the media are segmenting audiences more
narrowly and, hence, it is increasingly difficult to reach a wide audience through the same
medium. Thus, in order to inform and persuade customers as well as to retain them, methods
other than mass advertising ought to be given prominence.

Further, the increase in competition and a greater variety of choice among customers in business
and consumer markets, coupled with increasing affluence in the past two decades, has meant that
customers have become more sophisticated and demanding. Even when products offered are
satisfactory, customers still seek and exercise their right to go from one supplier to another to
purchase products they need either at a better price, or merely to experience change and variety.
Thus, brand loyalty has become more difficult to sustain. Meanwhile, as the effectiveness of
above-the-line media diminishes, so it will become a less attractive form of promotion for
advertisers. Consequently, suppliers are considering different ways of keeping customers loyal to
survive and prosper. There is an accelerating move towards below-the-line activity as more cost-

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effective campaigns can now be mounted through precisely targeted direct marketing
approaches.

This has led to more effective ways of generating sales leads. ‗Push‘ rather than ‗pull‘
promotional techniques have become increasingly popular and, of course, a ‗push‘ promotional
strategy is very much a concern of the sales function. While many suppliers, in particular
retailers, have turned to such tactical devices as loyalty cards, other more visionary companies
have adopted a more strategic and philosophical approach to gaining customer loyalty through
designing relationship marketing programs. This, in turn, implies a general increase in customer
care programs that can be viewed as an effective means of customer retention. Companies, which
might have viewed the unique selling proposition as being their ‗winning card‘ when dealing
with customers in the past, now have to adopt more of a small business philosophy by staying
adjacent to customers in terms of understanding their needs and looking after them post-sale.

An expanded role for the modern salesperson includes: servicing, prospecting, information
gathering, communicating and allocating. Some of the views of this enlarged role have been
extended into what can now be regarded as a modern view of the tactics of relationship selling.

 Tactics of Relationship Selling

Customer retention constitutes a prime objective of relationship selling. This can only be
achieved in an organizational selling situation by having full regard to customers‘ needs and by
working to form long and trustworthy relationships. In such situations it can be seen that the
length of time individual salespersons stay in particular posts is now increasing since buyers
generally stay in their positions almost twice as long as field salespeople. This new tendency
has given rise to the associated concept of internal marketing. Just as in the case of external
customers, internal marketing focuses on long-term relationships and employee retention
within companies. As buyers become more proactive in the marketplace under the system of
reverse marketing, so their lifestyle is becoming more akin to that of field salespersons. Although
there is pressure to purchase effectively, this is different from the pressure to sell in terms of
reaching sales targets and quotas in a given period. At the same time, the role of the field
salesperson is now becoming different as under reverse marketing situations there is a different
type of pressure from that experienced in transactional marketing situations. Pressure under
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reverse marketing focuses on the longer-term goal of customer retention rather than the
achievement of sales targets and quotas.

In reverse marketing situations the traditional sales commission system is disappearing and being
replaced by a higher basic salary plus bonuses shared by an expanded sales team whose ranks
have been swelled by the concept of the part-time marketer. Thus the role of selling is partially
carried out by production, quality and finance people, among others, whose increasingly
proactive roles with customers mean that they also contribute to the sales function.

Motivating employees is vital to achieve as highly as possible the goals. Thus, support
mechanisms such as training programs that enable employees to do their jobs to the best of
their abilities are becoming of prime importance. The importance of features such as
determination, self-motivation, resilience and tenacity, while still important when establishing
long-term relationships, might well be overtaken by the greater relevance of features such as
acceptability, attention to detail and a general ability to ‗get along‘ with people on a long-
term basis. The ‗cut and thrust‘ traditionally associated with field selling positions is being
supplanted by a calmer environment of working together as a team that includes members of
both the salesperson‘s own company and the buyer‘s company. Additionally, the attitude of the
buyer or customer towards the salesperson needs to be considered. For instance, liking a
specific salesperson will positively affect a buyer‘s attitude towards the products recommended
by that person. However, caution must be exercised when interpreting selling relationships, as
friendliness might be misinterpreted as assuming that a long-term affiliation has been established
and that business will automatically follow, which is not necessarily the case.

At a more practical level, the following two activities, which traditionally tend to be regarded as
ancillary to the task of selling, are becoming more important.

A. Information Gathering
Information gathering in terms of collecting market information and intelligence is becoming an
increasingly important part of the task of selling. Such information gathering feeds into the
company‘s marketing information system. A company‘s marketing information system has three
inputs: marketing research, market intelligence and the company‘s own internal accounting

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system. These are inputs into the marketing information system which captures the data on a
database. Marketing research is provided by the marketing department from primary and
secondary research and from commissioned survey data. The company‘s internal accounting
system relates to sales analyses by customer purchases over periods of time by customer group,
geographical area, size of order, and by any other combination that may be required. Market
intelligence relates to information about competitors and the products and services they supply,
plus information on how they generally ‗perform‘ with their customers. It also relates to the
company‘s own customers.
Much of this intelligence comes from the company‘s own employees from executives, engineers,
research personnel and more directly from field sales personnel who are extremely good
collectors of market information and intelligence. The responsibility of salespeople as collectors
of such information is expanding and information technology skills are increasingly important as
individual salespeople interact in terms of input to and output from the MkIS as part of their
routine activities. There is, of course, an output from the MkIS and this contributes to the
strategic marketing planning system. Business in general is now more strategic and long term,
and the MkIS is the principal data input into strategic marketing plans.

The role of individual salespeople is becoming of more strategic value as their regular reports are
incorporated into the MkIS, which in turn inputs into the organization‘s longer-term marketing
plans. A formalized process for reporting this information is an essential part of a contemporary
marketing information system. It has already been mentioned that salespeople should be
encouraged to send back information that is relevant to the marketing of the company‘s products

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to head office. In a lean manufacturing situation, the role of information gathering should be seen
to be a prime part of the organizational salesperson‘s task. It is widely acknowledged that the
most effective form of marketing research is the personal interview, and conducting research in
this way provides the most accurate information as the interviewer is speaking directly with
customers.

It can, however, be an expensive form of interview because interviews take place at multiple
times and locations. However, this expense is already covered when salespeople, as opposed to
separate organizational marketing researchers, are encouraged to use the sales interview to gather
marketing research data. It is also higher quality information as the salesperson has already
established a rapport with the customer, so responses will be more candid. A number of
advantages are associated with personal interviews in terms of being able to ask detailed
questions, an ability to ask follow-up questions and the ability to use visual aids or samples.
Respondents can be chosen who specifically comprise the target audience and they can also be
called after the interview to verify or clarify what has been said in the research interview.

When monitored adequately, this process should be dynamic because interaction with customers
is ongoing. The added benefits of such an integrated process include the following:

Reducing selling costs achieved through using information derived from the MkIS. New
business response provides information to improve future targeting and, through experience
of what works and what does not, improves the productivity of subsequent advertising and
sales promotion.
More sales per customer, achieved through using customer case histories, leading to:
 Better identification and categorization of customers;
 Better segmentation and targeting;
 Better presentation of relevant offers.
Superior business forecasting achieved by analyzing ‗campaign‘ and customer case
history data, using past performance as a guide to future performance; and because the errors
in past activities need not be repeated, efficiency should be subject to continuous
improvement (control).

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B. Servicing
Servicing is an area in which the role of the salesperson has become invaluable. This includes a
certain amount of first-line servicing, so product application is important as well as product
knowledge. What we refer to here is servicing in the broader sense of serving customers on
a highly individualistic basis. The phenomenon of field sales personnel staying longer in such
positions provides them with more time to acquire such skills. Servicing also includes the
provision of technical advice in relation to such matters as levels of quality, arranging after-sales
service, establishing improved customer care programs, and even offering consultancy services.

More practical matters, such as agreeing delivery schedules, expediting individual orders
and, occasionally, progressing payment for orders supplied, also feature in this context. In
lean manufacturing situations the salesperson‘s company is an integral part of the supply chain,
which stretches not only forwards to the end-customer, but also backwards towards the sources
of prime manufacture, so buyers often need information from the salesperson‘s suppliers as part
of the process of supply chain integration (SCI). Communication skills have always been an
important part of the field salesperson‘s armory, but under traditional marketing such skills have
been honed in such a way as to win orders through ‗telling them what they want (or need) to
know‘. Under reverse marketing situations, communications skills are still essential, but the
customer–salesperson dyad is now more in terms of ‗equals‘ than of an ‗us and them‘
situation.

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 CHAPTER THREE
FORECASTING MARKET DEMAND, SALES BUDGETS, AND SALES QUOTAS
Chapter objectives
At the end of this unit, you should be able to:

 Know the Definition Forecasting Market Demand

 The Forecasting Process
 Discuss Sales Forecasting Methods
 Discuss The Sales Manager‘s Budget
 Discuss What is Quota
 Discuss importance Quotas

Introduction

Sales potentials are quantitative estimates of the maximum possible sales opportunities present in
particular market segments open to a specified company selling a good or service during a stated
future period. They are derived from market potentials after analyses of historical market share
relationships & adjustments for changes in companies‘ and competitors‘ selling strategies &
practices.
A firm‘s sales potential and its sales forecast are not usually identical-in most instances; the sales
potential is larger than the sales forecast. There are several reasons for this: some companies do
not have sufficient production capacity to capitalize on the full sales potential, other firms have
not yet developed distributive networks capable of reaching every potential customer, others do
not attempt to realize their total sales potentials because of limited financial resources, and still
others, being more profit oriented than sales oriented, seek to maximize profitable sales and not
possible sales. The estimate for sales potential indicates how much a company could sell if it has
all the necessary resources and dictates how much a company with a given amount of resources
can sell if it implements a particular marketing program.

3.1 Forecasting market demand

Demand forecasting is the process of using predictive analysis of historical data to estimate and
predict customers‘ future demand for a product or service. Demand forecasting helps the
business make better-informed supply decisions that estimate the total sales and revenue for a
future period of time.

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 Demand forecasting allows businesses to optimize inventory by predicting future sales. By
analyzing historical sales data, demand managers can make informed business decisions about
everything from inventory planning and warehousing needs to running flash sales and meeting
customer expectations.
It is a technique for estimation of probable demand for a product or services in the future. It is based
on the analysis of past demand for that product or service in the present market condition. Demand
forecasting should be done on a scientific basis and facts and events related to forecasting should be
considered.
Therefore, in simple words, we can say that after gathering information about various aspect of
the market and demand based on the past, an attempt may be made to estimate future demand. This
concept is called forecasting of demand.

For example, suppose we sold 200, 250, 300 units of product X in the month of January, February,
and March respectively. Now we can say that there will be a demand for 250 units approx. of
product X in the month of April, if the market condition remains the same.

Forecasting is a technique for making predictions of the direction of future trends based on the
analysis of past and present data. Businesses use forecasting to determine how to allocate
their budgets or plan for expected expenses for an upcoming period of time.
Basically, it is a decision-making tool that helps businesses cope with the impact of the future‘s
uncertainty by analysing historical data and trends. It is a planning tool that enables businesses
to chart their next moves and create budgets that will hopefully cover whatever uncertainties may
occur.
Forecaster uses data for carried out forecasting methods can either get from primary sources or
secondary sources.
 Primary sources: Primary sources provide first-hand information, gathered directly by the
person or organization that is doing the forecasting. They usually collect the data from various
questionnaires, focus groups or interviews and, although all the information is difficult to gather
and integrate, the direct way of acquiring the data makes primary sources the most trustworthy.
 Secondary sources: Secondary sources provide information that already collected and processed
by a third-party organization. Receiving the data in an organized and arranged way makes the
forecasting process easier.

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 Commonly used terms in forecasting
 Market potential:- The maximum achievable sales in a particular industry in a certain
geographic area for a specific period. The level of sales in a particular industry in a
certain geographic area over a certain period of time.
 Sales potential:- The maximum achievable sales of a particular stock keeping unit
(SKU) or product or product category or the entire firm in a certain geographic area for
a specific period.
 Sales forecast:- The expected level of sales of a particular SKU or product or product
category or the entire firm in a certain geographic over a certain period of time.
 Sales target:- A sales goal the salesperson/company is expected to reach. Sales targets
should be informed by the sales forecast. The sales target is usually used as a
motivational tool for various stakeholders in the company.
 Operational plan:-A set of managerial actions that aim to achieve the sales forecast. It
should be noted that from a forecast preparer‘s point of view underestimating the
forecast is as detrimental as overestimating it as they are usually ‗rewarded‘ on accuracy
Features of Forecasting
Here are some features for making a forecast:
1. Involves future events
Forecasts are created to anticipate future possibilities, scope, etc making them important for
product planning.
2. Based on past and present events
Forecasts are based on points of view, intuition, guesses, as well as on actual facts, figures, and
other related data. All the factors that go into forming a forecast reflect to some extent what
happened with the business in the past and what is likely to occur in the future.
3. uses forecasting techniques
Most organizations use the quantitative method, particularly in the planning and budgeting
process.

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 3.2 The forecasting process

Armstrong (2001a) outlined the stages of forecasting as follows:

1. Formulate problem;
2. Obtain information;
3. Select methods;
4. Implement methods;
5. Evaluate methods;
6. Use forecasts.
Importance of Sales Forecasting
A sales forecast is important for at least five reasons

1) A sales forecast becomes a basis for setting and maintaining a production schedule—
manufacturing.
2) It determines the quantity and timing of needs for labor, equipment, tools, parts, and raw
materials—purchasing, personnel.
3) It influences the amount of borrowed capital needed to finance the production and the
necessary cash flow to operate the business—controller.
4) It provides a basis for sales quota assignments to various segments of the sales force—sales
manager.
5) It is the overall base that determines the company's business and marketing plans, which are
further broken down into specific goals—marketing officer.

3.3 Sales Forecasting Methods

A sales forecasting method is a procedure for estimating how much of a given product (or
product line) can be sold if a given marketing program is implemented. No sales forecasting
method is fool proof, each is subject to some error. Some methods are unsophisticated, such as
the jury of executive opinion or the poll of sales force opinion. Others involve the application of
sophisticated statistical techniques, such as regression analysis or econometric model building
and simulation. Two sales forecasting methods may be either sophisticated or unsophisticated,
depending upon how they are used-the projection of past sales and the survey of customers‘
buying plans.

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 Well-managed companies do not rely upon a single sales forecasting method but use several. If
different methods produce roughly the same sales forecasts, then more confidence is placed in
the results. But if different methods produce greatly different sales forecasts, then the sales
situation merits further study.

A. Qualitative/ Survey Forecasting Methods

I. Grass Roots: Grass roots forecasting builds the forecast by adding successively from the
bottom. The assumption here is that the person closest to the customer or end use of the
product knows its future needs best. Though this is not always true, in many instances it is a
valid assumption, and it is the basis for this method. Forecasts at this bottom level are
summed and given to the next higher level. This is usually a district warehouse, which then
adds in safely stocks and any effects of ordering quantity sizes. This amount is then fed to the
next level, which may be a regional warehouse. The procedure repeats until it becomes an
input at the top level, which, in the case of a manufacturing firm, would be the input to the
production system.

II. Market Research: Firms often hire outside companies that specialize in market research to
conduct this type of forecasting. You may have been involved in market surveys through a
marketing class. Certainly you have not escaped telephone calls asking you about product
preferences, your income, habits, and so on. Market research is used mostly for product
research in the sense of looking for new product ideas, likes and dislikes about existing
products, which competitive products within a particular class are preferred, and so on.
Again, the data collection methods are primarily surveys and interviews.
III. Panel Consensus: In a panel consensus, the idea that two heads are better than one is
extrapolated to the idea that a panel of people from a variety of positions can develop a more
reliable forecast than a narrower group. Panel forecasts are developed through open meetings
with free exchange of ideas from all levels of management and individuals. The difficulty
with this open style is that lower employee levels are intimidated by higher levels of
management. For example, a salesperson in a particular product line may have a good
estimate of future product demand but may not speak up to refute a much different estimate
given by the vice president of marketing. The Delphi technique was developed to try to

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 correct this impairment to free exchange. When decisions in forecasting are at a broader,
higher level (as when introducing a new product line or concerning strategic product
decisions such as new marketing areas) the term executive judgment is generally used. The
term is self-explanatory: a higher level of management is involved.
IV. Historical Analogy: The historical analogy method is used for forecasting the demand for a
product or service under the circumstances that no past demand data are available. This may
specially be true if the product happens to be new for the organization. However, the
organization may have marketed product(s) earlier which may be similar in some features to
the new product. In such circumstances, the marketing personnel use the historical analogy
between the two products and derive the demand for the new product using the historical data
of the earlier product. The limitations of this method are quite apparent. They include the
questionable assumption of the similarity of demand behaviors, the changed marketing
conditions, and the impact of the substitutability factor on the demand.
V. Delphi Method/Executives Opinion: As we mentioned under panel consensus, a statement
or opinion of a higher-level person will likely be weighted more than that of a lower-level
person. The worst case in where lower level people feel threatened and do not contribute
their true beliefs. To prevent this problem, the Delphi method conceals the identity of the
individuals participating in the study. Everyone has the same weight. A moderator creates a
questionnaire and distributes it to participants. Their responses are summed and given back to
the entire group along with a new set of questions. The step-by-step procedure is 1) Choose
the experts to participate. There should be a variety of knowledgeable people in different
areas. 2) Through a questionnaire (or e-mail), obtain forecasts (and any premises or
qualification captions for the forecasts) from all participants. 3) Summarize the results and
redistribute them to the participants along with appropriate new questions. 4) Summarize
again, refining forecasts and conditions, and again develop new questions. 5) Repeat Step
4 if necessary. Distribute the final results to all participants. The Delphi technique can
usually achieve satisfactory results in three rounds. The time required is a function of the
number of participants, how much work is involved for them to develop their forecasts, and
their speed in responding.
VI. Sales Force Composite: an approach to forecasting that obtains the opinion of sales
personnel concerning future sales.
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 B. Time-Series Methods

In many forecasting situations enough historical consumption data are available. The data may
relate to the past periodic sales of products, demands placed on services like transportation,
electricity and telephones. There are available to the forecaster a large number of methods,
popularly known as the time series methods, which carry out a statistical analysis of past data
to develop forecasts for the future. The underlying assumption here is that past relationships
will continue to hold in the future. The different methods differ primarily in the manner in
which the past values are related to the forecasted ones. A time series refers to the past recorded
values of the variables under consideration. The values of the variables under consideration in a
time-series are measured at specified intervals of time. These intervals may be minutes, hours,
days, weeks, months, etc. In the analysis of a time series the following four time-related factors
are important.
I. The Naive Methods: The forecasting methods covered under this category are
mathematically very simple. The simplest of them uses the most recently observed value in
the time series as the forecast for the next period. Effectively, this implies that all prior
observations are not considered. Consider the demand data for 8 years as given. Use these
data for forecasting the demand for the year 1991 using the three naïve methods described
earlier.
Year Actual Sales

1983 100

1984 105

1985 103

1986 107

1987 109

1988 110

1989 115

1990 117

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 Solution: The forecasted demand for 1991, using the last period method = actual sales in 1990 =
117 units.

II. Simple Moving Average Method: When demand for a product is neither growing nor
declining rapidly, and if it does not have seasonal characteristics, a moving average can be
useful in removing the random fluctuations for forecasting. Although moving averages are
frequently centered, it is more convenient to use past data to predict the following period
directly. To illustrate, a centered five-month average of January, February, March, April and
May gives an average centered on March. However, all five months of data must already
exist. If our objective is to forecast for June, we must project our moving average- by some
means- from March to June. If the average is not centered but is at forward end, we can
forecast more easily, though we may lose some accuracy. Thus, if we want to forecast June
with a five-month moving average, we can take the average of January, February, March,
April and May. When June passes, the forecast for July would be the average of February,
March, April, May and June. Although it is important to select the best period for the
moving average, there are several conflicting effects of different period lengths. The longer
the moving average period, the more the random elements are smoothed (which may be
desirable in many cases). But if there is a trend in the data-either increasing or decreasing-the
moving average has the adverse characteristic of lagging the trend. Therefore, while a shorter
time span produces more oscillation, there is a closer following of the trend. Conversely, a
longer time span gives a smoother response but lags the trend. The formula for a simple
moving average is:
Ft=At-1+At-2+At-3+...+At-n

Where, Ft = Forecast for the coming period, n= Number of period to be averaged and

At-1, At-2, At-3 and so on are the actual occurrences in the past period, two periods ago, three
periods ago and so on respectively.

The data in the first two columns of the following table depict the sales of a company. The first
two columns show the month and the sales. The forecasts based on 3, 6 and 12 month moving
average and shown in the next three columns. The 3 month moving average of a month is the
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average of sales of the preceding three months. The reader is asked to verify the calculations
himself.

The 6 month moving average is given by the average of the preceding 6 months actual sales. For
the month of July it is calculated as July‘s forecast = (Sum of the actual sales from January to
June) / 6

= (450 + 440 + 460 + 410 + 380 + 400) / 6

= 423 (rounded)

For the forecast of January by the 12 month moving average we sum up the actual sales from
January to December of the preceding year and divide it by 12.

Characteristics of Moving Averages

 The different moving averages produce different forecasts.

 The greater the number of periods in the moving average, the greater the smoothing effect.
 If the underlying trend of the past data is thought to be fairly constant with substantial
randomness, then a greater number of periods should be chosen.
 Alternatively, if there is thought to be some change in the underlying state of the data, more
responsiveness is needed, therefore fewer periods should be included in the moving average.
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 Limitations of Moving Averages
 Equal weighting is given to each of the values used in the moving average calculation,
whereas it is reasonable to suppose that the most recent data is more relevant to current
conditions.
 An n period moving average requires the storage of n – 1 values to which is added the latest
observation. This may not seem much of a limitation when only a few items are considered,
but it becomes a significant factor when, for example, a company carries 25,000 stock items
each of which requires a moving average calculation involving say 6 months usage data to
be recorded.
 The moving average calculation takes no account of data outside the period of average, so
full use is not made of all the data available.
 The use of the unadjusted moving average as a forecast can cause misleading results when
there is an underlying seasonal variation.
III. Weighted Moving Average: Whereas the simple moving average gives equal weight to each
component of the moving average database, a weighted moving average allows any weights
to be placed on each element, providing, of course, that the sum of all weights equals 1. For
example, a department store may find that in a four-month period, the best forecast is derived
by using 40 percent of the actual sales for the most recent month, 30 percent of two months
ago, 20 percent of three months ago, and 10 percent of four months ago. If actual sales
experience was
Month 1 Month 2 Month 3 Month 4 Month5

100 90 105 95 ?

The forecast for month 5 would be

F5 = 0.40(95) + 0.30(105) + 0.20(90) + 0.10(100)

= 38 + 31.5+ 18+ 10

= 97.5

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 The formula for the weighted moving average is

Ft=W1At-1+W2At-2+W3At-3+…. +WnAt-n

Where Ft = Forecast for the coming period, n = the total number of periods in the forecast.

wi = the weight to be given to the actual occurrence for the period t-i

Ai = the actual occurrence for the period t-i although many periods may be ignored (that
is, their weights are zero) and the weighting scheme may be in any order (for example, more
distant data may have greater weights than more recent data), the sum of all the weights must
equal 1.

Suppose sales for month 5 actually turned out to be 110. Then the forecast for month 6 would be

F6 = 0.40(110) + 0.30(95) + 0.20(105) + 0.10(90)

= 44 + 28.5 + 21 + 9

= 102.5

Choosing Weights: Experience and trial and error are the simplest ways to choose weights. As a
general rule, the most recent past is the most important indicator of what to expect in the future,
and, therefore, it should get higher weighting. The past month's revenue or plant capacity, for
example, would be a better estimate for the coming month than the revenue or plant capacity of
several months ago. However, if the data are seasonal, for example, weights should be
established accordingly. For example, sales of air conditioners in May of last year should be
weighted more heavily than sales of air conditioners in December. The weighted moving
average has a definite advantage over the simple moving average in being able to vary the effects
of past data. However, it is more inconvenient and costly to use than the exponential smoothing
method, which we examine next.

IV. Exponential Smoothing: In the previous methods of forecasting (simple and weighted
moving average), the major drawback is the need to continually carry a large amount of
historical data. As each new piece of data is added in these methods, the oldest observation is
dropped, and the new forecast is calculated. In many applications (perhaps in most), the most

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 recent occurrences are more indicative of the future than those in the more distant past. If this
premise is valid – ―that the importance of data diminishes as the past becomes more distant‖ -
then exponential smoothing may be the most logical and easiest method to use. The reason
this is called exponential smoothing is that each increment in the past is decreased by (1-α).
If α is 0.05 for example, weights for various periods would be as follows (α is defined
below):
Characteristics of Exponential Smoothing
 Greater weight is given to more recent data
 All past data are incorporated there is no cut-off point as with moving averages
 Less data needs to be stored than with the longer period moving averages.
 Like moving averages it is an adaptive forecasting system. That is, it adapts continually
as new data becomes available and so it is frequently incorporated as an integral part of
stock control and production control systems.
 To cope with various problems (trend, seasonal factors, etc) the basic model needs to be
modified
 Whatever form of exponential smoothing is adopted, changes to the model to suit
changing conditions can simply be made by altering the α value.
 The selection of the smoothing constant α is done through trial-error by the
researcher/analyst. It is done by testing several values of α (within the range 0 to 1) and
selecting one which gives a forecast with the least error (one can take standard error). It
has been found that values in the range 0.1 to 0.3 provide a good starting point.
One statistical technique for short-range sales forecasting, exponential smoothing, is a type of
moving average that represents a weighted sum of all past numbers in a time series, with the
heaviest weight placed on the most recent data. To illustrate, consider this simple buy widely
used form of exponential smoothing-a weighted average of this year‘s sales is combined with the
forecast of this year‘s sales to arrive at the forecast for next year‘s sales. The forecasting
equation, in other words, is

Next year‘s sales= α (this year‘s sales) + 1- α) (this year‘s forecast)

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The ―a‖ in the equation is called the ―smoothing constant‖ and is set between 0.0 and 1.0. If, for
example, actual sales for this year came to 320 units of product, the sales forecast for this year
was 350 units, and the smoothing constant was 0.3, the forecast for next year‘s sales is

(0.30) (320) + (0.7) (350) = 341 units of products

Determining the value of ―α‖ is the main problem. If the series of sales data changes slowly, ―α‖
should be small to retain the effect of earlier observations. If the series changes rapidly, ―α‖
should be large so that the forecasts respond to these changes. In practice, ―α‖ is estimated by
trying several values and making retrospective tests of the associated forecast error. The ―α‖
value leading to the smallest forecast error is then chosen for future smoothing.

Linear Regression Analysis

Linear regression is useful for long-term forecasting of major occurrences and aggregate
planning. For example, linear regression would be very useful to forecast demands for product
families. Even though demand for individual products within a family may vary widely during a
time period, demand for the total product family is surprisingly smooth.

Regression can be defined as a functional relationship between two or more correlated variables.
It is used to predict one variable given the other. The relationship is usually developed from
observed data. The data should be plotted first to see if they appear linear or if at least parts of
the data are linear. Linear regression refers to the special class of regression where the
relationship between variables forms a straight line

3.4 The Sales Manager‘s Budget

Sales budgets and control help to monitor sales performance. They also help to maintain and
improve the efficiency of sales operations. A budget is a financial plan and tool of control. In a
sales budget, resources are allocated to achieve the sales forecast. It states what and how much
each salesperson will sell. It also spells out what and how much will be sold to the different
classes of customers. A budget is an estimate of sales, either in units or value and the selling
expenses likely to be incurred while selling. Once the budget is accepted in terms of estimated
sales, expenses and profit figures, the actual results are measured and compared against the
budgeted figures. It is an instrument of planning that shows how to spend money to achieve the

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targeted sales. A budget also anticipates a particular level of profit. Budgeting is a short-term
exercise that attempts to optimize business profits by accommodating customer-service activities
and incurring expenses to acquire new business. The expenses of appointing new customers are
also included in budget.

The Budgeting Process

In many organizations, sales are the key variable for formulating the budget of the other
departments. Thus, raw materials and production are purchased and planned in accordance with
the sale estimates, leading to the purchasing budget. Finance is arranged in accordance with the
requirements of production and other department. Human resources are deployed to realize the
overall planning requirements. The starting point becomes the sales budget. It generates other
budgets like the inventory budget, purchase budget, production budget and so on. The sales
budget becomes a major input in the financial plan.

Planning can be top-down and bottom up. In a top-down plan, the plan flows from the top, and is
broken down into smaller units. In bottom-up plan, the departments and units set their own goals,
which are aggregated at the top. In sales budgeting, some organizations adopt a top-down
approach in which the goals are set by the immediate higher level. Some organizations follow a
bottom-up approach where each level in sales right from the salesman puts forward sales and
profit objectives. The bottom –up style is more participatory.

Each budget has quotas or standards, against which management has to measure performance.
Evaluation and control are vital parts of the management process. As the opening scenario
suggests, management needs feedback on the effectiveness of its plan and the quality of its
execution to operate more effectively; otherwise it is easy to lose sight of the firm‘s objectives.
In order to achieve goals and objectives, sales managers plan by outlining the essential costs to
be incurred. The budget acts as an instrument of coordination. Selling is one of the functions of
marketing and needs support from the elements of marketing mix. Budgets help in integrating all
functions, like sales, finance, production and purchase. A comparison between budgeted and
actual cost results in the analysis of factors causing variations and enables the sales manger to
spot problem areas or plan better for expected outcomes.

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 3.5 What Is A Quota?

A quota refers to an expected performance objective routinely assigned to sales units, such as
individuals, regions, or districts. It is individual sales target figure assigned to each sales unit such a
sales person, dealer, distributor, region, or territory, as a required minimum for a specified period
(month, quarter, and year). Sales quotas may be expressed either in dollar figures (monetary terms)
or in number of goods or services sold (volume terms).

Sales quota is a minimum sales volume goal established by the seller. Sales quota may be
expressed in terms of dollars or units sold. Quotas may also be set for sales activity (number of
calls per day), sales costs and profitability in addition to sales volume. A sales quota may be
required of a salaried or commissioned salesperson or may be a goal set for a brand, a product
line, or a company division. Sales quotas are used to ensure that company sales goals are met
even though they may exceed an individual salesperson's personal goals or abilities. Sales quotas
also ensure that the volume sold will cover the fixed costs of producing the product or service.
Sales quotas should be high enough to encourage excellence but not so high as to be
unachievable, thereby discouraging the sales force. Failure to meet sales quotas is an immediate
call for action on the part of the seller. If a salesperson fails to meet quota, the salesperson may
be given a smaller or less desirable prospect territory or may be terminated. A salesperson may
receive a bonus for exceeding the sales quota.

It is also 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 Quota is a sales assignment, goal or target set for a salesperson in a given
accounting period; commonly used types of sales quotas are dollar volume quotas, unit volume
quotas, gross margin quotas, net profit quotas and activity quotas. Sales quotas are a way of life for
the sales force. All activities of the sales force revolve around the fulfillment of sales quotas. Sales
quotas are targets assigned to sales personnel. They signify the performance expected from them by
the organization. Sales quotas help in directing, evaluating and controlling the sales force. They
form an indispensable tool for sales managers to carry out sales management activities. Sales quotas
are prepared on the basis of sales forecasts and budgets. Sales quotas serve various purposes in

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organizations. They provide targets for sales personnel to achieve act as standards to measure sales
force performance and help motivate the sales force. Compensation plans are invariably linked to
quotas. The commission and bonuses given to sales persons are based on their meeting quotas set
for them. The four categories of sales quotas widely used are -- sales volume quotas, expense
quotas, activity quotas and profit quotas. A sales quota should be fair, challenging yet attainable,
rewarding, easy to understand, flexible and must satisfy management objectives.

It must also help in the coordination of sales force activities. Setting motivating and easy to
understand quotas is essential to obtain the cooperation of the sales force. Various methods are used
to set sales quotas, among which, quotas based on sales forecasts and market potential are the most
common. Skilful administration by sales managers is required for effective implementation of
quotas. Convincing salespeople about the fairness and accuracy of quotas helps the sales
management to successfully implement quotas.

Sales quotas have certain limitations such as being time consuming, difficulty in comprehending if
complicated statistical calculations have been used and focusing on attaining sales volumes at the
cost of ignoring important non-selling activities. Quotas may reduce risk-taking among sales
personnel and may influence them to adopt unethical selling practices. With changes in the
competitive environment and variations in customer expectations, many companies have started
developing compensation plans that are increasingly based on non-traditional aspects, thereby
reducing dependency on quotas.

3.6 why is Quota important

 To provide performance targets

To provide standards
 To provide control
 To provide change of direction
 Quotas are motivational

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 3.7 Types of Quotas and Methods of Setting Sales Quotas
3.7.1 Types of quotas
A. Sales Volume Quotas
1. Sales Volume Quotas: a performance objective that includes dollar or product unit objectives
for a specific period.
2. Breakdown total sales volume:
a. To do this, ask these questions: To whom are we going to sell? Where are they located
geographically? Which products will be sold? Which products will sell the best? During what
time period will the sales occur?
b. While answering these five questions, salespeople will establish sales volume quotas for the
following: Product lines; Individual established and new products; Geographic areas based on
how the sales organization is designed, which would include sales regions, sales districts, and
individual sales territories.
B. Profit Quotas: The two types of profit quotas
 Gross Margin Quota: a quota determined by subtracting cost of goods sold from sales volume.
 Net Profit Quota: a quota determined by subtracting costs of goods sold and salespeople's
direct selling expenses from sales volume.
C. Expense Quotas: a target aimed at controlling costs of sales units.
D. Activity Quotas: objectives set for job-related duties useful toward reaching salespeople's
performance targets.
E. Customer Satisfaction: a customer's feelings about any differences between what is expected
and actual experiences with a purchase. Customer Satisfaction Index – an index usually
compiled of all customer satisfaction data rated into one number or percentage.
F. Quota Combinations: Combines many in one
Methods for Setting Sales Quotas
 Quotas based on forecasts and potentials
 Quotas based on forecasts only
 Quotas based on past experience
 Quotas based on executive judgments
 Quotas salespeople set

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 CHAPTER FOUR

PLANNING FOR AND RECRUITING SUCCESSFUL SALESPEOPLE

Chapter objectives
At the end of this unit, you should be able to:
 Know the Definition The recruitment process
 Discuss Job Analysis
 Discuss Manpower Planning
 Define Job Descriptions
 Discuss Job Specifications
 Discuss Sources of Sales Recruits
 Discuss Problems in Screening Applicants
 Selecting Applicants

Introduction

In attempting to recruit and select a new sales representative, sales managers find themselves in
an unaccustomed role. Instead of being a seller they for once take on the role of buyer. It is
crucial that this transition is carried out effectively because the future success of the sales force
depends upon the infusion of high caliber personnel. There are a number of facts that emphasize
the importance of effective sales force selection.

4.1 The recruitment process

There are a number of stages in the recruitment and selection process
1. Preparation of the job description and personnel specification.
2. Identification of sources of recruitment and methods of communication.
3. Designing an effective application form and preparing a shortlist.
4. Interviewing.
5. Supplementary selection aids – psychological tests, role playing.
An understanding of each stage and the correct procedures to be followed will maximize the
chances of selecting the right applicant.

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The production of an accurate job description should prove of little difficulty for the sales
manager. They have intimate knowledge of what is required, having been a salesperson and out
on the road with salespeople during training and evaluation exercises. Generally a job
description will cover the following factors: title of the job, duties and responsibilities – the tasks
which will be expected of new recruits, e.g. selling, after-sales service, information feedback,
and range of products/markets/type of customer with which they will be associated, to whom
they will report, technical requirements, e.g. the degree to which the technical aspects of the
products they are selling need to be understood, location and geographical area to be covered and
degree of autonomy – the degree to which salespeople will be able to control their own work
programs.

Once generated, the job description will act as the blueprint for the personnel specification which
outlines the type of applicant the company is seeking. The technical requirements of the job, for
example, and the nature of the customers which the salespeople will meet, will be factors which
influence the level of education and possibly the age of the required recruit. The construction of
the personnel specification is more difficult than the job description for the sales manager. Some
of the questions posed lead to highly subjective responses. Must the recruit have selling
experience? Should such experience be within the markets that the company serves? Is it
essential that the salesperson holds certain technical qualifications? If the answer to all of these
questions is yes, then the number of possible applicants who qualify is reduced.

The danger is that applicants of high potential in selling may be excluded. Graduates at
universities often complain that jobs they are confident they are capable of doing well are denied

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them because of the ‗two years‘ experience in selling‘ clause in the advertisements. The
implications of this are that the job specification should be drawn up bearing in mind the type of
person who would be excluded from applying if conditions are laid down with regard to such
factors as previous experience. Is it really necessary or just more convenient since less training
may then be required? Another aspect of the personnel specification is the determination of
qualities looked for in the new salesperson. This is a much more nebulous concept than the level
of technical qualifications, age or previous experience. The qualities themselves may depend on
the nature of the job, the personal prejudices of the sales manager (a good rule of thumb is that
many managers favor people like themselves).

Mayer and Greenberg claim that when an applicant has a large measure of both these qualities
they will be successful at selling anything. Their research led them to believe that sales ability is
fundamental, not the product being sold: Many sales executives feel that the type of selling in
their industry (and even in their particular company) is somehow completely special and unique.
This is true to an extent. There is no question that a data-processing equipment salesperson needs
somewhat different training and background than does an automobile salesperson. Differences in
requirements are obvious, and whether or not the applicant meets the special qualifications for a
particular job can easily be seen in the applicant‘s biography or readily measured.

Certainly, the evidence which they have provided, which groups salespeople into four categories
(highly recommended, recommended, not recommended, virtually no chance of success)
according to the degree to which they possess empathy and ego drive, correlated well with sales
success in three industries – cars, mutual funds and insurance. Their measures of empathy and
ego drive were derived from the use of a psychological test.

In summary, a personnel specification may contain all or some of the following factors:

 Physical requirements: e.g. speech, appearance.

 Attainments: e.g. standard of education and qualifications, experience and successes.
 Aptitudes and qualities: e.g. ability to communicate, self-motivation.
 Disposition: e.g. maturity, sense of responsibility.
 Interests: e.g. degree to which interests are social, active, inactive.

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 Personal circumstances: e.g. married, single, etc.
The factors chosen to define the personnel specification will be used as criteria of selection in the
interview itself.

The Importance of Selection

1. There is wide variability in the effectiveness of salespeople. In the Institute of Marketing

commissioned study into sales force practice, the following question was asked of sales
managers: ‗If you were to put your most successful salesperson into the territory of one
of your average salespeople, and made no other changes, what increases in sales would
you expect after, say, two years?‘ The most commonly expected increase was 16–20
percent and one-fifth of all sales managers said they would expect an increase of 30 percent
or more. It must be emphasized that the comparison was between the top and average
salesperson, not top and worst salesperson. Clearly, the quality of the sales representatives
which sales managers recruit can have a substantial effect on sales turnover.
2. Salespeople are very costly. If a company decides to employ extra sales personnel, the cost
will be much higher than just basic salary (and commission). Most companies provide a car if
travel is required and travel expenses will also be paid. The special skills necessary to make a
sale, rather than to receive an order, imply that training will be required. No company will
want to incur all of these costs in order to employ a poor performer.
3. Other important determinants of success, such as training and motivation, are heavily
dependent on the intrinsic qualities of the recruit. Although sales effectiveness can be
improved by training, it is limited by innate ability. Like other activities where skill is
required, such as cricket, football and athletics, ultimate achievement in selling is highly
associated with personal characteristics. Similarly, motivational techniques may stimulate
salespeople to achieve higher sales but they can do only so much. A lot will be dependent on
the inborn motivation of the salesperson to complete a difficult sale or visit another prospect
instead of returning home.

Sales managers are clearly faced with a difficult and yet vitally important task. However, many
of them believe that the outcome of the selection process is far from satisfactory. Recruitment
and selection is a particularly difficult task when operating in overseas markets

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4.2 Job Analysis

For a human resource department to be proactive, it needs information about various external
challenges facing the organization (e.g., changes in technology, government regulations) and
factors internal to the firm. Where there is no human resource department, all employee-related
matters are handled by individual managers who already should know the characteristics,
standards, and human abilities required for each job and who probably do not feel the need for
any formal record of this knowledge. After a human resource department is created, however,
knowledge about jobs and their requirements must be collected through job analysis. This is
done by specialists called job analysts. This knowledge is vital to the effective functioning of a
HR department.
Job analysis is a systematic study of a job to discover its specifications, skill requirements, for
wage-setting, recruitment, training, or job-simplification purposes. Jobs are at the core of every
organization‘s productivity. If they are not well designed and done right, productivity suffers,
profits fall, and the organization is less able to meet the demands of society, customers,
employees, and other stakeholders. Improvements in productivity, quality, and cost often begin
with the jobs employees do. For a human resource department to be effective, its members must
have a clear understanding of the jobs found throughout organizations. Without this information
base, the human resource department would be less able to redesign jobs, recruit new employees,
train present employees, determine appropriate compensation, and perform many other human
resource functions. A job consists of a group of related activities and duties. A job may be held
by a single employee or several persons. The collection of tasks and responsibilities performed
by an individual employee is called a position.
Major Human Resource Management Activities that Rely on Job Analysis Information
1) Efforts to improve employee productivity levels necessitate careful study of jobs.
2) Elimination of unnecessary job requirements that can cause discrimination in employment.
3) Matching of job applicants to job requirements.
4) Planning of future human resource requirements.
5) Determination of employee training needs.
6) Fair and equitable compensation of employees.
7) Efforts to improve quality of work life.
8) Identification of realistic and challenging performance standards.

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9) Redesign of jobs to improve performance and/or employee morale.
10) Fair and accurate appraisal of employee performance.
Steps in Job Analysis Process
Job analysis has three phases and these are preparation, collection of job information and use of
job information for improving organizational effectiveness.
A. Preparation for Job Analysis:
Three key activities are performed in this phase:
1. Familiarization with the Organization and Its Jobs: Before studying jobs, it is important
to have an awareness of an organization‘s objectives, strategies, structure, inputs (people,
materials, and procedures), and desired outcomes. Job analysts may also study industry and
government reports about the jobs to be analyzed. In all instances, the intent is to collect
relevant and accurate information about jobs and factors determining job success.
2. Determination of Uses of Job Analysis Information: job analysis plays a critical role for
many HR functions. While the most common uses of job analysis are in human resource
selection, and training and designing performance appraisal and compensation systems job
analysis may also be done to eliminate discrimination against specific employee groups or
job redesign. In some cases, job analysis also aids the accomplishment of other objectives
such as identifying ―non-traditional career‖ paths for employees.
3. Identification of Jobs to be analyzed: While almost all job positions could benefit from an
in-depth analysis, resource and time constraints often preclude organizations from this.
Likely targets of job analysis are jobs that are critical to the success of an organization; jobs
that are difficult to learn or perform (since this determines the extent of training); jobs where
the firm continuously hires new employees (since identification of clear job requirements
assumes great importance).
B. Collection of Job Analysis Information
This phase contains three interrelated activities: determining the source of job data, data
collection instrument design, and choosing the method of data collection.
1. Determination of the Source of Job Data: Although the most direct source of information
about a job is the job incumbent, various other sources—both human and non-human—may
be used for this purpose. If job analysis has been done before, previous records may be used.
Moreover, existing job descriptions, process specifications, and reports relating to individual

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 and work group performance may also help in establishing the nature of the various jobs.
Other sources such as equipment design blueprints, maintenance manuals and records, safety
manuals, and videos and films from suppliers of machinery also provide valid insights into the
manner in which jobs are performed. Several company records including organizational charts
and reporting relationships often provide clues on the job outcomes, responsibilities, and
interdependencies among jobs.
2. Data Collection Instrument Design: To study jobs, analysts most often develop
questionnaires that are sometimes called checklists or job analysis schedules. These
questionnaires seek to collect job information uniformly. They uncover the duties,
responsibilities, human abilities, and performance standards of the jobs investigated.
3. Choice of Data Collection Method: There is no one best way to collect job analysis
information. Analysts must evaluate the trade-offs between time, cost, and accuracy
associated with each method.8 Once they decide which trade-offs are most important, they use
interviews, questionnaires, employee logbooks, observations, or some combination of these
techniques.
C. Use of Job Analysis Information
The information collected about various jobs is put into such usable forms as job descriptions,
job specifications, and job standards. Together, these applications of job analysis information
provide a minimum human resource information system and data necessary for formulating
various HR strategies
4.3 Manpower Planning

Manpower planning is determination of right number and right skills of human force to suit
present and future needs. Manpower planning is ―strategy for the requisition, utilization,
improvement and preservation of an enterprise‘s human resource. It relates to establishing job
specifications or the quantitative requirements of jobs determining the number of personnel
required and developing sources of manpower.‖ Manpower planning is a process determining
requirements of right number and right kind of human force at right place and right time.
Objectives of manpower planning are to ensure optimum use of human resources currently
employed. To assess future skills requirement, to provide control measures to ensure that
necessary resources are available as and when required, to determine requirement level, to

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anticipate redundancies and avoid unnecessary dismissals and assess training and development
needs.
Each organization needs manpower planning. An organizational unit is started to accomplish
certain goals. Which requires human resources with necessary qualification? These are provided
through effective manpower planning. Comprehensive manpower planning helps to optimize
effectiveness of human resources. In an organization, employees who have grown old or who
resign, retire, die or become incapacitated because of mental or physical ailment have to be
replaced and new employees have to be recruited. This can be done through manpower planning.
It is also needed for identifying surplus or shortage manpower areas and there by balancing
manpower. In short manpower planning provides right size and structure of human resources
which provides the basic infrastructure for smooth functioning of an organization. It minimizes
the cost of employment and nullifies the effects of disruptions in developing and utilizing the
human resources. Manpower planning process includes three steps. These are anticipating
manpower needs, preparing job analysis and job description and selecting adequate sources of
recruitment.
4.4 Job Descriptions

A job description is a written statement that explains the duties, working conditions, and other
aspects of a specified job. Job description is a recognized list of functions, tasks, accountabilities,
working conditions, and competencies for a particular occupation or job. The contents of a
typical job description within a firm, is all the job descriptions follow the same style, although
between organizations, form and content may vary. One approach is to write a narrative
description that covers the job in a few paragraphs. Another typical style breaks the description
down into several subparts. The key parts of a job description are: job identity, job summary, job
duties and working conditions. Most job descriptions also identify the author, the work
supervisor, and the date on which it was prepared.

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 4.5 Job Specifications

Job specification is a written statement that explains what a job demand of job holders and the
human skills and factors required. The difference between a job description and a job
specification is one of perspective. A job description defines what the job does; it is a profile of
the job. A job specification describes what the job demands of employees who do it and the
human factors those are required. It is a profile of the human characteristics needed by the job.
These requirements include experience, training, education, physical demands, and mental
demands. Since the job description and job specification both focus on the job, they are often
combined into one document. The combination is simply called a job description. Job
specifications contain a job identification section if they are a separate document. The
subheadings and purpose are the same as those found in the job identification section of the job
description. A job specification should include specific tools, actions, experiences, education,
and training (i.e., the individual requirements of the job).

4.6 Sources of Sales Recruits

Identification Of Sources Of Recruitment And Methods Of Communication

There are six main sources of recruitment:

 From inside(company‘s own staff)
 Recruitment agencies
 Educational establishments
 Competitors
 Other industries
 Unemployed.
1. Company‘s own staff: The advantage of this source is that the candidate will know the
company and its products. The company will also know the candidate much more intimately than
an outsider. A certain amount of risk is thereby reduced in that first-hand experience of the
candidate‘s personal characteristics is available. However, there is no guarantee that they have
selling ability.

2. Recruitment agencies: Recruitment agencies will provide lists of potential recruits for a fee.
In order to be entered on such a list, reputable agencies screen applicants for suitability for sales
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positions. It is in the long-term interests of the agencies to provide only strong candidates. The
question remains, however, as to the likelihood of top salespeople needing to use agencies to find
a suitable job.

3. Educational establishments: It is possible to recruit straight from higher education personnel

who have as part of their degree worked in industry and commerce. Most business degree
students in Britain have to undergo one year‘s industrial training. Some of these students may
have worked in selling; others may have worked in marketing. The advantage of recruiting from
universities is that the candidate is likely to be intelligent and may possess the required technical
qualifications. It should be borne in mind that the applicant may not see their long-term future in
selling, however. Rather, they may see a sales representative‘s position as a preliminary step to
marketing management.
4. Competitors: The advantage of this source is that the salesperson knows the market and its
customers. The ability of the salesperson may be known to the recruiting company, thus reducing
risk.
5. Other industries and unemployed: Both these categories provide applicants with sales
experience. Obviously careful screening will need to take place in order to assess sales ability.
6. Communication: Although some sales positions are filled as a result of personal contact, the
bulk of recruitment uses advertisements as the major communication tool.

4.7 Selecting Applicants

Selection of candidates begins where their recruitment ends. I.e. only after adequate number of
applicants is secured through different sources of recruitment. Selection is a process of choosing
a few among those who have been attracted. In selection, the organization is moving towards
actual placement on job. Selection process is of one or many go, no-go, gauges. Candidates are
screened by the application of these tools. Qualified applicants go on the next step, while the
unqualified applicants are eliminated. Selection process is a series of steps, for securing relevant
information about an applicant. At each step we learn more about the applicant. The purpose of
selection process is to determine whether an applicant meets the qualification for specific job and
to choose an applicant who is the most likely to perform well in that job.
Different expert have given different selection process. Some of them indicated these processes:
initial or preliminary interview, application blank or blanks, check of references, psychological
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tests, and employment interview, approval by the supervisor and induction or orientation. After
you‘ve advertised your vacancy and received the applications the next stage is the selection
process. When deciding on the successful candidate you should take into account three things:
Data collection, candidate assessment and comparison. The key document here is your person
specification. When you assess candidates‘ suitability always compare the candidates against the
essential criteria and desirable criteria of the person specification. Avoid simply comparing the
candidates against each other: this is likely highly subjective! Data collection information can be
gathered about candidates via: application forms and/or Curricula Vitae and covering letters -
interview performance, references, essays (or extended questions within application forms),
some larger organizations may wish to use other more advanced techniques (psychometric
testing, assessment centers), any mitigating circumstances.
Your aim is to recruit the person or people who best fit your person specification. As above,
you should ensure that you only collect relevant information.
The first stage of the selection process – short listing (or deciding who to invite for interview) –
generally takes place using information provided by either (i) an application form or (ii) curricula
vitae and covering letters. Short listing should take place as soon as possible after the closing
date. If at all possible it is useful to have at least two people involved in this process. It also gives
the first real indication of the success (or not) of the recruitment and advertising stages of the
process. If the application form has been well-designed and based around your person
specification and job description, it should be relatively easy to filter out those candidates who
do not meet the essential criteria. If you still have a large number of potentially suitable
candidates after considering the essential requirements, you may shortlist further by producing a
list of candidates who appear to possess a number of the desirable requirements as well.
A good rule of thumb is to interview between 4 and 6 candidates for a job. The next stage, after
the short-listing, is the interview stage. Interviews are useful for: verifying information,
exploring any omissions, checking assumptions, providing the candidate with information.
Interviews are often poor predictors of job performance. Many organizations tend to hire people
who perform well at interview rather than on their application and their performance at
interview. This is to an extent understandable but it may mean we pick people who are good
at interviews rather than people who are best for the job. As well as this as outlined in the
section on unconscious bias below – we often hire people who are similar to us rather than

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people who are objectively going to do the job well. It is possible to improve the efficacy of
interviews by preparing thoroughly and ensuring that you are evaluating the interviewees against
the person specification and job description.
When assessing candidates it is vital to evaluate each candidate against the relevant criteria
detailed in the person specification and reach an objective judgment in each case. Your skills in
defining those criteria in specific and measurable terms will be extremely helpful. It is important
to remember that you are comparing the candidate assessment with the person specification and
looking for the closest ‗match‘. The candidate who most closely matches the ideal person
specification should be offered the vacancy. You are aiming to select the right person for the job
and the right job for the person.

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 CHAPTER FIVE
CHOICES IN SALES FORCE ORGANIZATION
Chapter objectives
At the end of this unit, you should be able to:
Discuss Principles of Organization
 Discuss Types of Sales Organization
 Discuss Manpower Planning
 Discuss techniques of determining the Kind of Sales Personnel
 Discuss Choice of Basic Selling Style
 Discuss techniques of Determining the Size of the Sales Force

Introduction

Sales organization is a structured framework, specifying the formal authority and responsibility
among persons working in the organization. It consists of group of individuals working to
achieve selling objectives to increase sales, maximizing profits, expanding market share etc. It
establishes coordination among various selling activities necessary for the achievement of selling
objectives. Sales organization is not a separate unit. It is affected by other functional areas
suchas production, finance, personnel etc.

Sales organization organizes group of persons in the form of a suitable structure, depending upon
the requirements of the enterprise. Various forms of sales organization structure can be line
organization, line and staff organization functional sales organization, committee form of sales
organization.

Definition:
According to H.R. Toosdal, A sales organization 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.

According to Still and Cundiff, A sales organization is group of individual striving jointly to
reach certain goals and bearing formal as well as informal relations to each other.

According to American Marketing Association, Sales organization is the planning, directing

and coordinating the activities of sales force for increasing organizational efficiency.

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 5.1 Principles of sales organization

Principle of Unity of Objectives: Success of sales organization is measured by the success of its
objectives. So the objectives of the sales organization should be clearly defined so that every part
of sales organization tries to achieve them. The principle of unity of objective means that even if
the various units of sales organization have different aims, they are somehow or the other linked
with the main objective of sales organization.

Principle of Specialization: According to this principle, the sales organization should be

established in such a manner that work is divided among individuals according to their
knowledge, experience, taste. Such a division of work makes every person a specialist in his
field.

Principle of coordination: All the departments established under sales organization are inter-
dependent. If there is some hindrance in the functioning of one department, the sales
organization may be affected.

Principle of Parity of Authority and Responsibility: According to this principle, whatever

responsibility is given to an individual, he should be given an equal amount of authority to
discharge his responsibility.

Principle of exception: According to this, superior should retain the authority to take decisions
regarding important activities alone, and the authority to take decisions on routine matter should
be delegated to subordinates.

5.2 Types of Sales Organization

Organization is an entity designed to identify and group the work to be performed, defining and
delegating the authorities and responsibilities and establishing relationships to enable the people
within the organization to work with efficiency and effectiveness towards the attainment of the
general and specific goals. There are four very prominent types. These are functional, product,
consumer and area type.

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A. Sales Organization – Function Based

This type of organization is divided on the basis of its functions and a functional manager heads
each department. In this case, all the functional managers report to the marketing executive or
the chief sales manager.

Marketing Executive or Chief

Sales manager

Personnel Marketing Advertising Production Sales

Manager R&D Manager Manager Promotion
Manager Manager
Sample of Organizational structure is given below:

Merits
 Specialization at different levels.
 Flexibility of increasing and decreasing of departments as per needs.
 Quick decision making.
 Easy co-ordination between sub functions.
 Economical
Demerits

 Products do not get due attention.

 Delay because of sub division of departments.
 Problem of co-ordination due to increased responsibility of general manager.
 Conflicts between departments.
 Effectiveness of organization is badly affected due to malfunctioning of departments.

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B. Sales Organization Structure – Product Based

Here, classification is made according to the product line specializations. Each product or a
group of products are entrusted to a special sales force compromising of assistant sales manager,
who are supposed to report to the marketing manager.

Marketing Manager

Sales manager Sales manager Sales manager

product Group product Group product Group

chemical cosmetics

Assistant Manager Assistant Manager

Product A Product B
MERITS:
 Each product gets due attention.
 Merits of specialization.
 Smooth un-interfered co-ordination.
 Easy assignment of responsibility.
 Possibility of comparative efficiency.

DEMERITS:
 Problem of co-ordination between product department.
 Increased selling cost.
 High cost of operations.
 Self-contained unit.
 No brake on freedom of employees.

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SUITABILITY:
Product departmental organization is suitable where

 Too many products are there.

 Where products are highly priced.
 Where products are of technical nature.

C. Sales Organization Structure –Territory /Geography Based

This type of sales organization is classified on the basis of geographical location or sales territory
and different managers are appointed for each zone or territory. The chief sales manager, who
supervises and co-ordinates all the zonal sales managers head such type of organization.
Example of geographic sales organization structure is given below:

Chief Sales manager

Eastern Regional Northern Regional Western Regional

Sales manager Sales manager Sales manager

District Sales manager District Sales manager District Sales manager

Individual Salespeople Individual Salespeople Individual Salespeople

or sales territory or sales territory or sales territory

MERITS:
 Better service to customers,
 New and modified products can be provided.
 Transport cost can be reduced.
 Zonal competition can be combated.
 Zonal sales performance can be measured for betterment.

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DEMERITS:
 It is a costly proposition.
 Problem of co-ordination of different markets.
 Greater conflicts for resource allocation and facilities.

SUITABILITY:
Zonal structure is suitable where:

 Market territory is large and substantive.

 Each market is different.
 Products can be differentiated on quality zonal wise.
 Total sales much higher

D. Sales Organization Structure - Customer Based

It is also called market based organization structure Under each type of organization structure,
classification is made on the basis of market or customer.

Sales manager

Manager - Manager - Manager -

Wholesalers Retailers Consumers
MERITS:
 Each category of consumer gets due attention.
 Maximum service to the consumers.
 Better sales planning and policies keeping each category at focus.
 Specialized salesmen to meet the requirements of costumers.
 Company image building.

DEMERITS:
 Higher establishment expenses.
 Problems of co-ordination control of sales activities.
 Duplication of efforts and investments.

SUITABILITY:

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Consumer specialization type of organization is suitable where

 Too many customers are there requiring a special treatment.

 When company has all types of customer work caring for.

5.3 Choice of Basic Selling Style

Trade Selling means the trade salesperson develops and maintains long-term relations with a
stable group of customers. This is low-key selling, with little or no pressure, and the job is dull
and routine. This selling style is applied primarily to products that have well-established markets.
All promotional strategies/forms are more vital to promote this type of selling approach. One
important responsibility of the trade salesperson is to help customers build up their volume
through providing promotional assistance.

Missionary Selling: - The missionary salesperson‘s main job objective is to increase the
company‘s sales volume by assisting customers with their selling efforts. The missionary sales
person is concerned only with securing orders incidentally, through primary public relations and
through customers of the customers (i.e., indirect customers). Direct customers persuade indirect
customers and missionary salespersons persuade direct customers.

Technical Selling:- The technical salesperson deals primarily with the company‘s established
accounts, and his main objective is to increase their volume of purchase by providing technical
advice and assistance. The technical salesperson devotes considerable time to acquaint industrial
users with technical product characteristics and applications and to helping they design
installations or processes that incorporate the company‘s products. In this selling style, the ability
to identify, analyze, and solve customer‘s problems is important. Technical salespeople often
specialize, either by products or markets.

New-business Selling:- In this mode of selling the salesperson‘s main job is to find and obtain
new customer‘s, i.e., to convert prospects into customers. The salesperson should be universally
creative and ingenious and possess a high degree of resourcefulness.

Hence lots of changes took place in professional selling since 1990‘s and the change is still
continuing. This might be because of changing markets, diversified products, R&D,
Economic/Purchasing abilities, communication and transportation developments.

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 5.4 Determining the Size of the Sales Force

There are three methods to determine the size of sales force in a territory.
1. Sales potential method
The sales potential method is based on the assumption that performance of the set of activities
contained in the job description (means duties and responsibilities of a particular job) represents
one sales personnel unit.

2. Incremental method
This approach is best approach than the other remaining approaches. This approach based on the
net profit.

If net profits increases the incremental method will be implemented and then the sales personnel
will be happy, they will get more benefits from the organization.

3. Work load method

In this method all sales persons should shoulder equal work loads.

Management first estimates the total work load involved in covering the company‘s entire
market and then divides by work load and finally an individual sales person should be able to
handle.
The workload approach allows the number of salespeople needed to be calculated, given that the
company knows the number of calls per year it wishes its salespeople to make on different
classes of customer. Talley showed how the number of salespeople could be calculated by
following a series of steps:

Customers are grouped into categories according to the value of goods bought and potentialfor
the future.

The call frequency (number of calls on an account per year) is assessed for each category of
customer.

The total required workload per year is calculated by multiplying the call frequency and
number of customers in each category and then summing for all categories.

The average number of calls per week per salesperson is estimated.

The number of working weeks per year is calculated.

The average number of calls a salesperson can make per year is calculated by multiplying (4)
and (5).

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 The number of salespeople required is determined by dividing the total annual calls requiredby
the average number of calls one salesperson can make per year.

Here is an example of such a calculation. The formula is:

Number of salespeople = Number of customers * Call
frequency Average weekly call rate *

Step (1), (2) and (3) can be summarized as in the following table

Customer Groups Number Call Frequencies Per Year Total

of

Firms
A(over $1,000,000 per year) 200 X12 2,400
B( $500,000-$1m per year) 1,000 X9 9,000
C($150,000-$499,000per year) 3,000 X6 18,000
D (less than $ 150,000) 6,000 X3 18,000
Total annual workload 47,400

Step (4) gives: average number of calls per

week per person =30 Step (5) gives: number of
weeks= 52
Less: holidays = 4

Illness=1
Confere
nce/
meetings
=3
Training
=1
number of working weeks = 52-(4+1+3+1)=43

step (6) gives: average number of calls per salesperson per

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 year= 43X30=1,290 step (7) gives: sales force size =
47,400/1,290= salespeople.

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 CHAPTER SIX
TRAINING THE SALES TEAM
Chapter objectives
At the end of this unit, you should be able to:
 Define what is Sales Training?
 Discuss importance of Sales Training
 Discuss methods of Sales Training

Introduction

As we know that the effective sales organization is the antipathy of any competitor.
However, it must be emphasized that the Sales-Force can be effective only when the other
ingredients of the Marketing-Mix: product, price, place and promotion are equally sound
and intact. To expect sales- people to become more productive; it is hardly fair. Each
ingredient of this Mix has to be emphasized equally so that its productivity may be
improved.
Thus, the Sales-Force is the infantry that has to visit customers, and/or channels of
distribution to impart information and knowledge; actually obtain orders from specific
customers, and ensure that existing customers are happy and satisfied with the company
and its service provided to them apart from, of course, looking for new prospects.
Building a sales training program requires five major decisions: aim, content, method, execution
and evaluation. The aim of training is to identify the experience and needs of salespersons for
training. The content consists of product data, sales techniques and market. The method of
training varies according to the situation and needs of an organization. Execution of training
includes how and where the training will take place. Evaluation of training finally judges the
effect of a training program on the organization and salesperson. Training varies with the
salesperson‘s career cycle. Salespersons have varied backgrounds, experience levels, learning
abilities, etc., and therefore have their own particular training needs.

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 6.1. What is Sales Training?

 Training salespersons in any organization is an important and ongoing activity. Training

makes salespersons more skilled so that they can perform better in an ever-chaining
environment.
 Training can be defined as a process of learning that is specifically directed to the acquiring
and developing of specific attitudes and skills for the successful carrying out of specific
objectives and tasks.
 Basically, it is the process of enhancing the skill and knowledge of an employee for doing a
particular job. In salesmanship, training is highly essential for improving the performance of
salesman. As a matter of fact, a newly selected salesman, how efficient he may be, needs
some formal training. Even the existing sales force needs training from time to time in order
to acquaint them with the new products and the new selling techniques.
 The purpose of sales training is to achieve improved job performance. Training substitutes
for or supplements experience, so sales personnel given training reach high job performance
levels earlier. If sales training helps new sales personnel to perform their jobs satisfactorily,
the rate of sales personnel turnover declines, recruitment and selection costs fall, and overall
efficiency of the personal selling operation climb up.
 Considerable opportunity exists for improving sales force effectiveness through training.
 The overall efficiency of a company‘s personal selling operation is influenced by the state
of relations with customers and prospects.
 The sales force plays a crucial role in molding and maintaining these relations. Experienced
sales personnel maintain better continuing relations with established accounts and make
better impressions on prospects. Sales training contributes through accelerating the process
of learning through experience.
Types of training programs
There are several types of sales training programs.
 The most comprehensive and longest is the induction training program for newly
recruited sales personnel.
 More intensive and shorter programs on specialized topics, as well as periodic refresher
courses – collectively known as continuing sales training – are presented for
experienced sales personnel.

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  In addition, many companies offer sales training programs for sales personnel of their
distributors and dealers. Some sales training programs are designed to develop
individuals as sales trainers or as junior level sales executives like district or branch
sales managers. Each type of program serves a different purpose, and its content
reflects that purpose.

ACMEE MODEL
Building a sales training program requires five major decisions. Some sales training specialists
refer to these decisions as the A-C-M-E-E decisions – Aim, Content, Methods, Execution, and
Evaluation. The specific training aims must be defined, content decided, training methods
selected, arrangements made for execution, and procedures set up to evaluate the results.

The aims, contents and methods steps are the why, what, and how decisions, while the
execution step is the who, where and when decisions. The evaluation step is the appraisal of
results, that is, the extent to which the ‗why-s‘ were accomplished. Evaluation requires
comparison with the program aims.
WHO?

WHEN?

WHY? WHAT? HOW WHEN?

AIM CONTENT METHOD(S) EXECUTION EVALUATION

FEEDBACK: Recycle, Redesign, Modify

Defining training Aims

General aims are translated into specific aims phrased in operational terms. Specific aim
definition begins with a review of general aims and the means currently employed to attain
them. The process cannot be completed until sales management perceives the training needs
from which specific training aims derive directly.

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Identifying Initial Training Needs

Determining the need for, and specific aims of, an initial sales training program requires
analysis of three main factors: job specifications, trainee’s background and experience, and
sales related marketing policies.

Job specifications: The qualifications needed to perform the job are detailed in the job
specifications. The set of job specifications needs to be scrutinized to ascertain the points
on which new personnel are most likely to need training.
Trainee‘s background and experience: Each individual enters an initial sales training
program with a unique educational background and experience record. The gap between
the qualifications in the job specifications and those a trainee already has represents the
nature and amount of needed training. In some organizations, where training mechanisms
are highly flexible, information about trainees‘ qualifications makes possible some
tailoring of programs to individuals, increasing both trainee satisfaction and program
efficiency.
Sales-related marketing policies: Differences in products and markets mean differences
in selling practices and policies. To determine initial sales training needs, sales related
marketing policies must be analyzed. Differences in product, price, promotion, and
physical distribution all have implications for initial sales training. Selling a line of
machine tools requires emphasis on product information, whereas selling non-technical
products demands emphasis on sales techniques. If advertising is relatively little, sales
training should prepare sales personnel to handle considerable promotional work, but if
advertising is used extensively, new sales personnel need to learn how to coordinate their
activities with advertising.
Identifying Continuing Training Needs

Determining the specific aims for a continuing sales training program requires identification of
specific training needs of experienced sales personnel. Basic changes in products and markets
give rise to needs for training, as do changes in sales-related marketing policies, procedures,
and organization. Sales management must know a great deal about how sales personnel
perform to identify training needs and define specific aims.

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Deciding Training Content

The content of a sales training program derives from the specific aims that management
formulates after analyzing its training needs. Initial sales training programs provide instruction
covering all important aspects of performance of the sales-person‘s job; continuing programs
concentrate on specific aspects only. Every initial sales training program should devote some
time to each of four main areas: product, sales methods and technique, market and
competition, company, and channel of distribution,
 Product: New salespersons must know enough about the products, their uses, and
applications to serve customers‘ information needs. Companies with technical products
need to devote more time in product training. For standardized products sold routinely,
new sales personnel require minimal product training. Product knowledge is basic to a
salesperson‘s self-confidence and enthusiastic job performance. Understanding product
uses and applications is also very important. Salespersons need to know the features of
the products and also how to convert these features into benefits for solving the
customer‘s problems. Some training on competitors‘ products is also desirable. The
salesperson should have perfect knowledge about the products of the company,
manufacturing details, raw materials used, features, prices and the uses. Knowledge of
the products is crucial for the sales force since it enables their enthusiasm and self-
confidence.
 Sales methods and technique: The salesman should be given training with regard to
different selling methods and techniques. New salesmen need basic instruction in how to
sell. The scientific selling process needs to be explained and different steps such as
prospecting, approach for seeking an appointment, closing techniques, objection
handling etc... Practiced through role playing and other training methods. The salesman
should have full knowledge of sales, credit, pricing, and its personnel policies.
 Markets and competition: The salesman should know the size or the market, the
demand for the product, the competitors, and potential areas where the product can be
sold better. The new salesperson should know who the customers are, their locations,
the particular products in which they are interested, their buying habits and motives, and
their financial conditions. The salesperson needs to know not only who buys what but,
more important why and how they buy.

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  Company: The training program should include coverage of sales-related marketing
policies and the reasoning behind them. The salesman should be provided with all
possible knowledge about the company, its history, objectives, selling policies, area of
operations, the important commodities produced by the firm and the sales volume.

 Channels of distribution: The training program should include knowledge of the

general channels of distribution and the importance of each channel.
Selecting Training Methods

It is important to select those training methods that most effectively convey the desired
content. The program content often limits the training method to be adopted. If the content is a
new policy on vacations and holidays, the training methods like role playing and
demonstration are ruled out and lecture method supplemented with visual aids may be
adopted.
Sales Training
Methods

Individual Training Group Programs

Methods

On-the-job Training a. Lecture

Programmed Learning b. Personal Conference
c. Demonstration
d. Role-Playing
e. Case Discussion
f. Gaming
g. Correspondence Course

There are a variety of training methods to choose from:

Individual training methods: - These are on-the job training and programmed learning methods
 On-the-job Training: Also called the coach-and-pupil method or field-training, this
method combines telling, showing, practicing, and evaluating. The trainer begins with
describing particular selling situations, explaining various techniques and approaches
that might be used effectively. Next, accompanied by the pupil, the coach makes actual
sales calls, each one being followed by discussion and appraisal. Involves training sales

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 force on their job for which they are appointed. They are given the opportunities of
performing the role of professional salesmen under supervision and control of senior and
experienced salesmen. It is often called apparent ship.
 Programmed Learning: This method breaks down subject matter into numbered
instructional units called frames, which are incorporated into a book. Each frame
contains an explanation of a specific point, plus a question or problem for the trainee to
use in testing his understanding. Trainees check answers by referring to another
designated frame. If the answer is correct, the trainee is directed to new material; if it is
incorrect, additional explanation is provided and the trainee is rested before going on to
new material.
Group training methods: these are lecture, personal conference, demonstration, role-
playing, case discussion, gaming, and correspondence courses.
 The Lecture: The most ancient instructional method, in which trainees mainly watch
and listen. Although some versions of lecturing permit questions, the lecture method
features passive, rather than active, trainee participation. A lecture can be effective if the
lecturer is able and enthusiastic and uses examples, demonstrations and visual aids.
Lecturing may be the only practical way to handle instruction when the training group is
too large to permit constructive audience participation. This method is useful in giving
information and providing a frame of reference to aid the learning process.

The lecture should be supported by the use of visual aids, for example, professionally
produced PowerPoint. Trainees should be encouraged to participate so that the
communication is not just one way. Discussion stimulates interest and allows
misunderstandings to be identified and dealt with.
 The Personal Conference: In a personal conference, the trainer – often a sales
executive or supervisor – and the trainee jointly analyze problems such as effective use
of selling time, route planning, and handling unusual selling problems. The personal
conference is an unstructured and informal method and may be held in offices,
restaurants, outside the prospects home (kerbstone conference), and elsewhere.
 Demonstrations: Effective sales trainers use demonstrations to the maximum extent
because they enliven an otherwise dull lecture.
 Role Playing: This method has trainees acting out parts in contrived problem situations.
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 The role-playing session begins with the trainer describing the situation and the different
personalities involved. The trainer provides needed props, and then designates trainees
to play the salesperson, prospect and other characters.
Each plays his or her assigned role, and afterward, they, together with other group
members and the trainer, appraise each player‘s effectiveness and suggest how the
performance of each might have been improved.

In another version, a training group is given information on, for example, a buyer‘s
objection to a particular product and then is asked to extemporize a solution. This gives
individual trainees a chance to apply what they have learnt.

This learning method moves the trainees into the stage of being consciously able to
perform a skill. It allows the trainees to learn by their own successes and failures in a
buyer–seller situation. Feedback is provided by other group members, the sales trainer
and by audio-visual means. Seeing oneself perform is an enlightening and rewarding
experience and can demonstrate to the trainee the points raised by other members of the
group. Without this dimension some trainees may refuse to accept a fault, e.g. losing the
buyer‘s interest, simply because in the heat of the selling discussion they genuinely do
not notice it. Playback allows the trainee to see the situation through the eyes of a third
person and problems are more easily recognized and accepted.
 Case Discussion: This method, also called a sales seminar, begins with the trainer
making a brief oral presentation on an everyday problem. General give-and-take
discussion follows. Group members gain an understanding of many problems that
otherwise is acquired only through long personal experience. Case studies are
particularly appropriate for developing analytical skills. Trainees are asked to analyze
situations, identify problems and opportunities and make recommendations for dealing
with them. They can be used, for example, in setting call objectives. A history of a
buyer–seller relationship is given and the trainee is asked to develop a set of sensible
objectives for their next visit.
 Gaming: Also known as simulation, this method somewhat resembles role-playing, uses
highly structured contrived situations, based on reality, in which players assume
decision-making roles through successive rounds of play. A unique feature is that

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 players receive information feedback.
 Correspondence Course: This method is most appropriate where personnel are
scattered over large geographical area, and assemble only periodically. This method
involves providing materials (handouts) that the salesperson read and understand. It is
appropriate if the sales force are scattered and widely dispersed. After the completion of
the material, they will be asked to sit for test.
 E-learning: The heavy time constraints place on modern salespeople mean that taking
days off work to attend a traditional sales training course may not be feasible.
Technological advances mean that an alternative method of disseminating information is
via the internet. Using technology to package information is an inexpensive and
effective alternative to traditional programs. This approach means that training can take
place over long distances and at a time which fits in with salespeople‘s work patterns.
 Field Training: Involves the demonstration of actual sales work. Salesmen undergoing
the training move along with the trainee/ experienced salesmen who actually approach
the prospects with sales propositions. The trainee closely watches the sales efforts being
made by the trainer on the spot .After the conclusion of the sales talk, the trainer further
explains the various aspects of the selling. After some experience, the trainee is asked to
handle a prospect on his own and the whole job of selling while the trainer observes the
whole process.
 Sales manuals: Letting the salespeople to learn something especially about the
company, by reading sales manual of the company which contains information, about
the history, policies, product specifications, prices, advertising, sales promotions
activities, etc of the company.
Execution Arrangements
Execution of sales training program is concerned with four questions – Who, When, and Where.
Who?
Who will be the trainees: Identifying the trainees is more complex for continuing sales training
programs than initial trainings. In most companies the general practice is to select trainees based
on the following four criteria – Reward for good performance, Punishment for poor performance,
Convenience of trainees and trainers, and Seniority.
Who will be the trainer: If the sales training program is considered as a line function, training

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responsibilities are assigned to top most sales executives. If the training program is considered as
a staff function, training is done by the personnel director and the sales department has an
advisory role.
When?
Newly recruited sales personnel should receive formal group training before starting to sell.
Continuing sales training programs may be scheduled at a regular interval or as and when need
for training arises.
Where?
Some sales training programs are held at the branch offices, while some are held only at the head
office.
Evaluate Results

The evaluation step focuses on measuring program effectiveness. A sales training program
represents investment of time, money, and effort. Sales management expects returns
commensurate with the investments. The starting point is to compare the program‘s aim with
the results – such as improved selling performance. But, the core of the measurement difficulty
is in determining the training results.

6.2 Importance of sales training

The need for sales training arises mainly due to the following reasons:
 To improve sales performance: Training help the sales force to improve its
performance considerably.
 To influence prospects in a better way: Training equips the salesmen with the latest
techniques so that he/she can provide satisfactory service to the customers.
 Provides expert Knowledge: Training helps the sales man to gain essential knowledge
about products, people, and himself. Trained sales men can face customers with
confidence and certainty.
 Reduce wastages: Trained sales men usually don‗t commits mistakes. They take every
possible precaution to avoid wastage of products and efforts.
 Reduce control and supervision: Trained salesmen require lesser managerial control
and supervision as compared to the untrained ones. Since the trained salesmen are in a
position to know what is expected of them, they will function accordingly.

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  Develops high morale: Training creates a feeling among the sales force that they are
part of a sales organization. It provides job satisfaction, develops unity, a sense of
cooperation among fellow salesmen, and above all a sense of loyalty to the organization.
 Low turnover of sales force: Proper training makes the salesman well prepared for the
field work as a sufficient confidence is developed by the salesman to be successful in
their job. This results in reduced number of salesmen leaving their jobs.

Objectives of Training

The objectives of training differ from organization –to-organization depending on the

purpose for which it is designed. Normally, a successful training program has the following
objectives:
 To teach the principles and art of salesmanship.
 To make the salesmen acquainted with the policies, procedures, rules, and the firm
programs of the organization.
 To teach the sales force all the facts relating to the technical know-how and quality of
goods, the manufacturing process, the history of the company etc.
 To acquaint the staff with various rules and policies of the government which have a
direct influence on the marketing of goods.
 To ensure better demonstrations and sales presentations, and thereby reducing customer
complaints.
 To enhance the sales staff to gain enough knowledge and technique so that they don‗t
remain inferior to the sales man of competing organizations.
 To reduce selling costs by improving the efficiency of sales force.
 To keep a reserve force of salesman to keep the place of those who retire or resign.
In order to achieve this sales manager needs to do the following:

 Analyze each salesperson‘s performance;

 Identify strengths and weaknesses;
 Gain agreement with the salesperson that a weakness exists;
 Teach the salesperson how to overcome the weaknesses;
 Monitor progress to check that an improvement has been realized.

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 Evaluation of Training program

Evaluation of training programs involves the comparing of the training programs aim with the
results and measuring its impact on the salesperson. There is no direct method of measuring the
impact of training but certain methods are available for ascertaining whether the results are
positive or not. These are:

 Market share percentage: judged by the increase/decrease in the market share.

 Written Tests: taking a test of the sales people who were trained.
 Observers who work with sales personnel: the performance of sales people is judged
by the trainer, who observers the actual selling situations.
A widely adopted framework for evaluating the effectiveness of sales training is the four-stage
training model proposed by Kirkpatrick.
 Participants‘ reactions to the training course. Reactions are measures of how the
sales trainees feel about various aspects of a sales training course. They are, therefore,
similar to Traditional measures of customer satisfaction.
It is assumed that when salespeople dislike a training course, little effort will be put into
learning and using the material. Conversely, if sales trainees enjoy the training they will
learn more and be more motivated to use the material.

Typically, reaction measures focus on value adding aspects of the training such as
satisfaction with the instruction, satisfaction with the course content, and general course
satisfaction.

Research by Leach and Liu suggests that there is a positive link between reaction
measures and knowledge retention, i.e. the more trainees are satisfied with a sales
training course, the more they retain selling knowledge from it.
 Acquisition and retention of knowledge and attitude change. Acquisition and
retention of knowledge can be assessed by pen and paper tests when the training
objectives are the provision of information (e.g. product and competitor information).
When training objectives involve the teaching of selling skills, pen and paper tests will
be supplemented with evaluated role plays. The study by Leach and Liu indicates that
trainees whose level of knowledge acquisition was higher were more likely to transfer

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 learned material to the marketplace.
 Changes in work behavior. Behavior change evaluations measure the extent to which
salespeople modify their job-related behavior due to sales training. This is often referred
to as ‗transfer of learning‘ and is crucial to the success of a sales training course.
Learning transfer evaluations often involve direct observations of the sales trainee in the
workplace by sales managers. The Leach and Liu study suggests that assessment of the
degree of learning transfer to the job is an important aspect of evaluation since it is
linked to organizational outcomes, i.e. the more trainees apply what they have learnt
from the sales training course, the better their achievement of desired organizational
outcomes such as improved selling effectiveness, enhanced customer relations and
higher levels of organizational commitment.
 Organizational outcomes. These evaluations measure the extent to which a sales
training course has contributed to the achievement of the objectives set out by the
company. Six organizational sales training objectives are often used: increased sales
volume; improved customer relations; increased salesperson commitment leading to
lower levels of staff turnover; decreased selling costs; improved control of the sales
force; and better time management.
Limitations of salesmen training
Despite of its numerous advantages, training suffers from certain limitations. These are:
 Training always involves expenditures.
 Sometimes salesmen may leave the job after acquiring the necessary training. In such
cases, the expenditure incurred for their training goes waste.
 Organization of training may interfere with the routine work of the company. To provide
this type of situation, training is performed to be imparted on a rotation basis.
NB: Despite all limitations, sales force training program is inevitable for each and every
organization.
Skill Development

There are four classic stages to learning a skill.

Unconsciously unable: - The first stage defines the situation before a trainee decides to enter a
career in selling. They are unable to carry out the skills and have not even thought about them.
Consciously unable: - By reading or being told about the skills involved, the trainee reaches

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 the second stage of being consciously unable. They know what to do but cannot successfully
perform any of the skills.
Consciously able: - at the third stage (consciously able) the trainee not only knows what to do
but is reasonably proficient at putting the skills into practice individually. They are like a
learner driver who can engage gear, release the clutch, look in the mirror, gently press the
accelerator and release the handbrake as a series of separate operations, but not in a co-ordinate
manner that successfully moves the car from a standing start. The trainee may be able to make a
presentation successfully, handle objections and close a sale, but may be hopelessly adrift when
they need to handle objections, continue making the presentation and all the while look for
signs to close the sale.

Unconsciously able:- A successful training program takes the trainee through this difficult
barrier to the fourth stage (unconsciously able) when they can perform all the skills at once and
have the ability to think a stage in advance so that they have control of the selling situation. A car
driver reaches this stage when able to co-ordinate the skills necessary to start, move and stop a
car without thinking; the timing of gear changes and braking, for example, become automatic,
without conscious thought. Similarly, the salesperson can open the interview, move through the
stages of need identification, presentation and handling objections in a natural manner, and can
alter the approach as situations demand, before choosing the right moment and most appropriate
technique to close the sale.

When salespeople become unconsciously able they are likely to be competent although, like a
driver, football player or cricketer, there will always be room for further improvement and
refinement of their skills.

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 Training Sales Managers

To succeed as a sales manager requires the following:

 Developing close relationships with customers and an in-depth understanding of
customers‘ businesses;
 Partnering salespeople to achieve sales, profitability and customer satisfaction goals;
 Co-coordinating hybrid sales forces of telemarketers and field salespeople;
 Keeping up to date with the latest technologies impacting the sales function;
 Learning marketing skills to identify potential business opportunities and recommend
strategies;
 Working with other functional areas to achieve overall corporate goals through customer
satisfaction;
 Continually seeking ways to exceed customer expectations and create added value in
buyer–seller relationships;
 Creating a flexible, learning and adapting environment for the sales team;
 Developing teaching, analytical, motivational, organizational, communication &
planning skills

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xxxviii
 CHAPTER SEVEN

COMPENSATING (REMUNERATING) SALESPEOPLE

Chapter objectives
At the end of this unit, you should be able to:
 Discuss Need for Sound Remuneration Plan
 Discuss Functions of Compensation(Remuneration plan)
 Discuss Importance of Compensation
 Identify Factors Affecting Remuneration Plan
 Identify Methods of Compensation

Introduction

Compensation is a systematic approach to providing monetary value to employees in exchange

for work performed. Compensation may achieve several purposes assisting in recruitment, job
performance, and job satisfaction. Reward management is concerned with the formulation and
implementation of strategies and policies, the purposes of which are to reward people fairly,
equitably and consistently in accordance with their value to the organization and thus help the
organization to achieve its strategic goals. It deals with the design, implementation and
maintenance of reward systems (reward processes, practices and procedures) that aim to meet the
needs of both the organization and its stakeholders.

Compensation mean all forms of financial return, tangible services & benefits that employees
receive as part of their employment relationship. Direct financial compensation can be wages,
salaries, commissions, bonuses and indirect financial compensations can be insurance plans, life,
health, dental, disability, social assistance benefits, retirement plans, social security, vacations,
holidays, and sick leave. Non-financial benefits are the job environment which is interesting,
challenging, need more responsibility; and the opportunity for recognition, advancement, feeling
of achievement, job environment policies, supervision, co-workers, status symbols, working
conditions, flextime, compressed work week, job sharing, telecommuting, flexible benefits
programs.

7.1 Need for Sound Remuneration Plan

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Sales managers should consider carefully the type of compensation plan they wish to use. This is
because there are a number of objectives which can be achieved through a compensation scheme.
First, compensation can be used to motivate a sales force by linking achievement to monetary
reward. Second, it can be used to attract and hold successful salespeople by providing a good
standard of living for them, by rewarding outstanding performance and providing regularity of
income. Third, it is possible to design compensation schemes, which allow selling costs to
fluctuate in line with changes in sales revenue. Thus, in poor years lower sales are offset to some
extent by lower commission payments, and in good years increased sales costs are financed by
higher sales revenue. Fourth, compensation plans can be formulated to direct the attention of
sales personnel to specific company sales objectives. Higher commission can be paid on product
lines the company particularly wants to move. Special commission can be paid to salespeople
who generate new active accounts if this is believed to be important to the company. Thus,
compensation plans can be used to control activities.

Principles of Sales force Compensation

 Provide a living wage
 Compatible with other motivational plans existing/ proposed.
 Equity and fairness.
 Easy to understand and implement.
 Rewards are directly related to performance.
 Meets the overall objectives of the organization.

The Aims of Reward/Compensation Management

 Reward people according to what the organization values and wants to pay for
 Reward people for the value they create
 Reward the right things to convey the right message( in terms of behaviors and outcomes)
 Develop a performance culture; Motivate people and obtain their commitment and
engagement
 Help to attract and retain the high quality people the organization needs
 Create total reward processes recognizing importance of both financial & non-financial
rewards
 Develop a positive employment relationship and psychological contract

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 Align reward practices with both business goals and employee values
 Operate fairly( people feel they are treated justly)
 Apply equitably( people are rewarded appropriately in relation to others within the
organization, relativities between jobs are measured as objectively as possible and equal pay
is provided for work of equal value;
 Function consistently – decisions on pay do not vary arbitrarily and without due cause
between different people or at different times;
 Operate transparently – people understand how reward processes operate and how they are
affected by them.

7.2 Functions of compensation (remuneration) plan

A good scheme of remuneration can help to fill the following major functions:
1. Attracting sufficient and desirable salespeople
2. Rewarding sales employees for productivity
3. Retaining desirable salespeople
4. Correcting sales costs with results
5. Controlling selling activities
7.3 Importance of Compensation

 It has positive impact on the efficiency and results produced by employees and encourage the
employees to perform better and achieve the standards.
 It enhances the process of job evaluation. It will also help in setting up an ideal job
evaluation and the set standards would be more realistic and achievable.
 It brings peace and good relationship o between employer and employees.
 It creates healthy competition among employees and encourages them to work hard and
efficiently.
 It provides platform for happy and satisfied workforce and minimizes the labor turnover that
guarantees the organization stability and sustainability.
 It provides growth and advancement opportunities to the deserving employees.
 It helps the organization to retain instead of switching of best and talented workers to
competitors.

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 It gives the organization hope to think of expansion and growth due to support of skillful,
talented and happy workforce.
 It is hallmark of organization‘s success and prosperity. The success and stability of
organization is measured with pay-package it provides to its employees.
 It raises the morale, efficiency and cooperation among the workers and provides satisfaction
to the workers.
7.4 Factors Affecting Remuneration Plan

Mainly there are two environments that affect the remuneration plan. These are the internal
factors (exist within the organization and influence the pay structure of the company) and the
external factors (exist out of the organization but do affect the employee compensation in one/
the other way).
A. Internal Factors
1. Ability to Pay: The prosperous or big companies can pay higher compensation as compared
to the competing firms whereas the smaller companies can afford to maintain their pay scale
up to the level of competing firm or sometimes even below the industry standards.
2. Business Strategy: The organization‘s strategy also influences the employee compensation.
In case the company wants the skilled workers, so as to outshine the competitor, will offer
more pay as compared to the others. Whereas, if the company wants to go smooth and is
managing with the available workers, will give relatively less pay or equivalent to what
others are paying.
3. Job Evaluation and Performance Appraisal: The job evaluation helps to have a
satisfactory differential pays for the different jobs. The performance appraisal helps an
employee to earn extra on the basis of his performance.
4. Employee: The employee or a worker himself influences the compensation in one of the
following ways.
 Performance: The better performance fetches more pay to the employee, and thus with the
increased compensation, they get motivated and perform their job more efficiently.
 Experience: As the employee devotes his years in the organization, expects to get an
increased pay for his experience.
 Potential: The potential is worthless if it gets unnoticed. Therefore, companies do pay
extra to the employees having better potential as compared to others.

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B. External Factors
1. Labor Market: The demand for and supply of labor also influences the employee
compensation. The low wage is given, in case; the demand is less than the supply of labor.
On the other hand, high pay is fixed, in case; the demand is more than the supply of labor.
2. Going Rate: The compensation is decided on the basis of the rate that is prevailing in the
industry, i.e. the amount the other firms are paying for the same kind of work.
3. Productivity: The compensation increases with the increase in the production. Thus, to earn
more, the workers need to work on their efficiencies that can be improved by way of factors
which are beyond their control. The introduction of new technology, new methods, better
management techniques are some of the factors that may result in the better employee
performance, thereby resulting in the enhanced productivity.
4. Cost of Living: The cost of living index also influences the employee compensation, in a
way, that with the increase or fall in the general price level and the consumer price index, the
wage or salary is to be varied accordingly.
5. Labor Unions: The powerful labor unions influence the compensation plan of the company.
The labor unions are generally formed in the case, where the demand is more, and the labor
supplies is less or are involved in the dangerous work and, therefore, demands more money
for endangering their lives. The non-unionized companies or factories enjoy more freedom
with respect to the fixation of the compensation plan.
6. Labor laws: There are several laws passed by the government to safeguard the workers from
the exploitation of employers. Thus, there are several internal and external factors that decide
the amount of compensation to be given to the workers for the amount of work done by them.

There are several factors which affect the remuneration plan of an organization. These factors
determine the nature and amount of remuneration. Some of the important factors are as follows:
1. Nature of the sales job
If the job is time consuming and needs hard work, the remuneration should be high and
handsome. On the other hand, if the job is simple and needs little effort, the payment could be
moderate.
2. Nature of the product

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The remuneration plan depends on the nature of products. If the product is a consumer product, it
needs little effort on the part of the salesperson. Therefore, they are usually paid less as
compared to those who sell specialists or technical goods.
3. Class of the salesperson some kinds of salespersons like travelling salesperson; creative
salesperson, etc are highly paid because their work is more painful and hazardous. On the other
hand, counter salesperson which perform routine type of activities is paid relatively less.
4. Financial capacity of the firm
In firms, which have limited financial capacity, the remuneration plan is planned in such a
manner so that it does not become a burden for the firm. They can follow a remuneration plan
entirely based on commission basis. In case the firm is financially sound, it can adopt any
remuneration policy.
5. Channel of Distribution:-The larger the channel, the easier the job of the sales person. In
such cases the middlemen take a lot of burden from the salespersons and the sales person gets a
moderate remuneration. In case, the channel is short, the salespersons are expected to get
handsome remuneration.
7.5 Methods of compensation/remuneration

There are various methods of remuneration for sales persons. The following are the schemes of
remuneration:

1. Straight Salary Method:- This method is the most common and simple perhaps the oldest
method of remunerating sales persons. Under this method, the salesperson is paid a certain
amount as salary like other employees. The salary is paid on the basis of time not on the basis of
sales. The amount of remuneration payable to a salesperson remains same regardless of his/her
sales volume. There are usually three elements in a straight salary method of remuneration. They
are: - salary, increment, and allowances. The basic salary goes on increasing with annual
increments. The appointment letter specifies the amount of increment and the minimum salary he
is likely to draw. To the salary and increments, the dearness allowance (D.A.) and variable
dearness allowance (V.D.A) is added. The D.A and V.D.A represent the payment as per the cost
of living index. There are also allowances like travelling, house rent, daily allowances for
travelling salesmen etc.

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This plan of remuneration offers the following advantages:

1. This is the simplest of all methods remuneration. It is therefore, easy to calculate and simple to
understand.
2. This method of remuneration ensures stability. It means the changes in sales have no effect
over salary.
3. This method of remuneration provides a sense of security and measure of confidence to the
sales people. This motivates the sales force for effective selling. 4. Better control over the sales
force can be exercised under this method of remuneration. As the remuneration of salesperson is
fixed, the sales manager finds it easier to control the sales force.
5. Under this scheme of remuneration the sales person does not hastily increase the sales volume
by selling on credit. As a result, bad debts are reduced to a minimum.
6. This plan of remuneration keeps the sales force content. Cooperation among the salesperson is
strengthened under this method.
7. Any readjustment in sales territories or management policies can be made smoothly when this
method of remuneration is in place. The sales force never opposes such adjustments.
8. Under this scheme of remuneration, the salesperson does not have to adopt high pressure
selling tactics to increase sales as the remuneration is based on time spent rather than sales
volume.

As against the above advantage the straight salary method of remuneration suffers from the
following limitations. 1. This method of remuneration does not provide incentive for a
hardworking and efficient salesperson feel disappointed under this scheme.

2., This method does not distinguish efficient salesperson from inefficient salesperson.

3. Fixing the right amount of salary poses a problem under method or remuneration. There
remains no general formula to test the ability of the salesperson.

4. Hard working and experienced salesperson do not stick to their jobs. The reason is that the
firm pays through straight salary only.

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5. The company has to pay salary irrespective to the sales volume under this plan of
remuneration. Even in case where sales volume falls due to the negligence or inefficient of
salesperson the company has to pay the salary.

2. Straight Commission Method: - Under such method of remuneration, the remuneration is

paid on the basis of the amount of sales made. This method of remuneration is effort oriented and
based on volume of sales made. The percentage of commission varies from concern to concern
and from person to person. The income of a salesperson fluctuates directly with the volume of
sales made. The commission can also be higher for certain territories and customers. Usually the
basis of commission is: i. Commission on all the order received from a territory. ii. Commission
on orders from customer‗s first contacted. iii. Commission on new business introduced by
salesperson.

Advantages of this plan of remuneration based on commission are :-

 This scheme encourages the salespersons who are efficient and hard working.
 The sales manager needs not to remind the salesperson to improve sales performance.
The salesperson themselves are motivated to work hard.
 Hard working and efficient salesperson are automatically attracted towards the firm. As a
result, the firm can maintain an efficient and talented sales force.
 As the scheme of remuneration is directly connected with sales volume, it never poses a
burden for the firm. In other words, during slack seasons or recession period, the firm has
to pay fewer amounts as remuneration.
 Sincere and efficient salespeople are not required to depend up on the favor of the sales
manager to earn their remuneration. Under this method the salesperson can earn higher
commission by their own effort and talent.

Disadvantages of the straight commission method of remunerations are:

 Under this scheme of remuneration, there is no certainty and security of income.

 Since more sales mean more commission the salesperson may try his level best to
increase sales. Such desperate attempts to increase sales may leads to more credit sales

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 and selling to unworthy customers. This leads to accumulation of more and more bad
debts.
 In this method, the problems of controlling the sales force arise. The relation between
superior and subordinate become nominal.
 Under this scheme of remuneration, the salesperson‗s fortune is directly linked with the
firm‗s sales volume and financial soundness. The salesperson can maintain a good
standard of living during a good time. But during depression, he may not be able to
maintain the minimum, standard of living, as there is no minimum monthly salary.

3. Salary and Commission Method: - Under this scheme of remuneration, the sales force is
entitled to a fixed salary and commission. This plan of remuneration combines the merits of
straight salary method and straight commission method. This combination plan also tries to
eradicate the disadvantages of both methods. The salary element gives the salesperson the
necessary security and comfort. The commission elements meant to reward hardworking and
efficient salesperson that put extra efforts to increase the sales volume. Thus, this salary plus
commission method is found to be good both for competent and newly recruited salesperson.
Even for employees it is an ideal scheme of remuneration. This method, therefore, is one of
the most popular methods nowadays and adopted by many firms. The advantage of this
method lies in the fact that it encompasses advantages of two straight methods namely salary
and straight commission. The scheme of remuneration also distinguishes efficient
salesperson from in efficient salespersons. This method is comparatively simple and easy to
understand. This method also provides some amount of security for the salesperson so that
they feel secure. Even during periods of depression and slack seasons, salespersons are
assured of a regular income. The sales manager can exercise full control over the sales force.

4. Salary, commission, and bonus method: - sometimes the sales persons are paid a straight
salary. This salary is paid for certain specific duties performed by the salespersons.

In case the salespersons put extra efforts or sell beyond a predetermined limit, he/she is paid
commission and/or bonus. This commission or bonus meant for the results over and above
certain satisfactory level of efforts. The main advantage of this method is that the salespersons
have security about their income and incentives for better results. As extra efforts are rewarded,

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the sales force always tries to increase sales volume beyond the limit. This method of
remuneration is also gaining popularity day by day. In addition to the above schemes of
remuneration, the sales manager can also follow various other schemes to stimulate the action of
the sales force.

5. Fringe Benefits: defined those benefits which are supplied by an employer to or for the
benefits of an employee, and which are not in the form of wages, salaries, and time rated
payments.
Therefore, fringe benefits are very essential precondition to maintain high morale of sales
persons.

Importance of Fringe Benefits

• To create and improve sound industrial relation.
• To boost up employee morale.
• To provide quality work environment and work life.
• To provide health measures to the employees against accidents.

Some examples are given below:

• Provide Company cars, specified parking lots, furnishing housing etc.
• Paid holidays
• Sick leave
• Maternity leave for women workers
• Life insurance, Medical reimbursement and profit sharing etc.

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 CHAPTER EIGHT

EVALUATION AND CONTROL OF SALESPEOPLE

Chapter objectives
At the end of this unit, you should be able to:
 Define Performance Appraisals – what are they?
 Discuss Performance Appraisal Processes and Procedures
 Discuss Rules for Performance Appraisals

8.1 Performance Appraisals

Performance Appraisals is the assessment of individual‘s sales force performance in a

systematic way. It is a developmental tool used for all round development of the sales force and
the organization. The performance is measured against such factors as job knowledge, quality
and quantity of output, initiative, leadership abilities, supervision, dependability, co-operation,
judgment, versatility and health. Assessment should be confined to past as well as potential
performance also.
Performance Appraisals and Job Analysis Relationship

Job Analysis Performance Standards Performance Appraisals

 Describe the work and  Translate job requirements  Describe the job relevant
personnel requirement of into levels of acceptable or strengths and weaknesses of
a particular job. unacceptable performance each individual sales force.

Objectives of Performance Appraisals

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 Use of Performance Appraisals

1. Promotions
2. Confirmations
3. Training and Development
4. Compensation reviews
5. Competency building
6. Improve communication
7. Evaluation of HR Programs
8. Feedback & Grievances

8.2 Performance Appraisal Processes and Procedures

Stages in the sales force performance appraisal process include:

(1) establish sales goals and objectives; (2) develop the sales plan; (3) set sales force
performance standards; (4) allocate resources and sales force efforts; (5) devise a plan for sales
force performance improvement; (6) conduct the sales force performance evaluation process; and
(7) provide feedback on sales force performance appraisals.

Outcome-based measures can be separated into sales efforts, sales results, and profitability
indices. Sales efforts include such measures as number of sales calls made, selling expenses as a
percentage of sales volume, and number of service calls. Sales results include measures such as
number of orders obtained, dollar sales volume, number of new accounts, and collections of
accounts receivable. Profitability indices include net profit contribution, and performance as
measured by financial/economic indicators, such as return on investment, return on sales, return
on assets, and return on assets managed.

Behavior-based outcomes include sales-related activities such as customer relations, territory

management, report preparation and timely submission, product knowledge, and personal
characteristics. Successful sales organizations usually employ a mixture of quantitative and
qualitative performance standards. Competence assessment, which tries to determine the
characteristics needed to do a job rather than the specific tasks of the job, has been successfully
used to select high-achieving salespeople. Professional development measures for assessing sales

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force performance include professional selling skills, professional knowledge, and personal
characteristics.

Establish different types of sales goals and objectives, and develop the sales plan.

After establishing long-run sales goals, the sales manager can focus on the shorter-run, more
quantifiable targets, called sales objectives that should be aligned to the company's goals and
objectives. For example, these goals may be to become the most service-oriented sales force in
the industry or to increase profitability on sales by 10 percent. If these sales goals and objectives
are not communicated to salespeople, they can become little more than "wish lists" without the
organizational commitment needed for achievement.

In essence, the sales plan provides the detailed "road map" showing how to achieve sales goals
and objectives. It includes four major parts: (1) situation analysis, (2) opportunities and
problems, (3) action programs, and (4) performance evaluation systems.

Set sales force performance standards.

Performance standards are planned achievement levels the sales organization expects to reach at
progressive intervals throughout the year. Ideally, they should be agreements between
subordinates and superiors as to what level of performance is to be acceptable in some future
period, and they should be formalized based on the detailed job description for the sales
subordinate. In setting performance standards for the sales force, managers need to consider
efforts expended as well as results obtained. Business-to-business sales may require several
months of intense sales efforts before the prospective buyer makes a final decision. Thus, where
there's a time lag between effort and tangible results, sales managers must use qualitative, as well
as quantitative, measures in setting sales performance standards.

Describe the procedure for marketing costs and profitability analyses.

Sales analysis, whether by territory, sales rep, product line, or customer, involves five major
steps: (1) specify the purpose of the analysis, (2) identify functional cost centers, (3) convert
natural expenses into functional costs, (4) allocate functional costs to segments, and (5)
determine the profit contribution of segments.

Allocate resources and efforts through sales quotas.

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There are four types of sales quotas: sales volume, financial, activity, and combination. The
rationale to use a specific type of sales quota is largely based on the quantitative and qualitative
sales goals a salesperson is expected to achieve in a given time frame. Three variants of volumes
quotas are dollar-based sales quotas, unit volume quotas, and point quotas. Two categories of
financial quotas are expense quotas and profit quotas. Activity quotas are measured by factors
such as the number of prospects called on, number of demonstrations made, number of displays
set up, and number of new accounts established. Combination quotas are used when management
wants to control the performance of both the selling and non-selling activities of the sales force.
These quotas generally use points as a common measuring tool to overcome the difficulty of
evaluating the different units used across quotas.

List the major steps in the sales force performance evaluation monitoring system (PEMS).

An effective performance evaluation monitoring system (PEMS) has three stages: performance
planning, performance appraisal, and performance review. Specific steps in the performance
measurement and evaluation process include (a) establish sales goals and objectives, (b) develop
the sales plan, (c) set performance standards, (d) allocate resources and sales force efforts in
implementing the sales plan, and (e) evaluate sales force performance and implement corrective
actions, if needed.

Provide feedback and evaluation, and improve sales force performance.

Four widely used evaluation techniques are descriptive statements, graphic rating scales,
behaviorally anchored rating scales (BARS), and management by objectives (MBO).
Descriptive statements about a salesperson may be short responses to a series of specific criteria
such as job knowledge, territorial management, customer relations, personal qualities, or sales
results. Two commonly employed devices in graphic rating scales are "semantic differential" and
Likert-type scales. The semantic differential uses bipolar adjective extremes to anchor several
scale segments. Likert-type scales provide descriptive anchors under each segment of the scale.
BARS, which concentrates on measuring behaviors key to performance that the individual
salesperson can control, includes four basic steps: (a) identify critical incidents, (b) refine critical
incidents into performance dimensions, (c) rate the effectiveness of the described behaviors, and
(d) select a set of incidents as behavioral anchors for the performance dimension. MBO involves
mutual goal setting by the sales manager and the sales representative, who jointly agree on the

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salesperson's specific goals or performance targets for the coming period. Traditional
performance evaluation systems have limitations including the halo effect, central tendency,
varying evaluation standards, psychological resistance to negative evaluations, recent
performance bias, no outcome focus, inadequate sampling of job activities, political concerns,
fear of reprisal, interpersonal bias, questionable personality traits, and the influence of special
organizational use. Prompt evaluation feedback should be provided to salespeople, so they can
take measures to enhance their performance by improving selling skills and ultimately their sales
performance through sales training programs.

Methods for Performance Appraisals

Every sales manager and sales supervisor appraises the performance of the salesmen under his
charge. It is unfortunate that the importance of organized appraisal is not recognized by many
sales executives; some believe in accurate appraisal as it is not possible because of the nature of
sales job and good many variables influence his performance; still, there are others who dismiss
the idea on the count that such an appraisal is purely subjective and superficial and unsupported
by facts and colored by personal whims and fancies of the appraiser.

However, in spite of these problems of judging the salesman‘s performance, reliable methods of
evaluation can be developed to provide sound appraisal of salesman‘s work. The principal
methods of evaluating such performance can be of two types namely, qualitative and
quantitative.

The qualitative methods are:

 Personal observation by sales executives.

 Merit rating.
 Customer opinion of salesmen.

On the other hand, the quantitative methods are:

 Analysis of sales records and reports.

 Comparison of salesman‘s performance with quota.
 Ratio analysis.
 Profit and loss statement.

Qualitative methods:

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Personal observation by the sales executives:

Personal observation of sales performance of sales-force by sales supervisors, branch and district
sales managers, sales manager and other, sales executive staff is used in appraising the
salesmen‘s effectiveness.

This method involves casual, informal impressions by the sales executives in their day-to-day
contacts with the salesmen in the office and the field. As it appears superficial, many sales
managers feel that there should be extensive and continuous appraisal.

Appraisal begins with sales supervisors who work closely in the field with small group of
salesmen. Here, the sales supervisor appraises sales performance of each one with a view to
detect the possible selling weaknesses to bring about refinement in the due course.

Branch sales managers do undertake appraisal work with a view to recognize the good
performance on the basis of which they can decide on employee up-gradation and transfer.

Regional or divisional sales managers appraise the salesmen to make long-range plans,
strengthen marketing organization and boost operations. Sales staff at headquarters appraises
sales-force to determine the effectiveness of recruitment, selection, training and control of
salesmen.

Merit rating:
Another reliable method of measuring the sales aptitudes and performance is merit rating. Rating
are made of each salesman by his superior who completes a rating form containing series of traits
and accomplishments on the basis of which a salesman is rated.

A numerical scale ranging from ‗high‘ to ‗low‘ is used by the rates in rating each characteristic
of a salesman. These characteristics are determined by the nature of selling task.

However, the most common traits are industry, dependability, loyalty, cooperativeness, initiative,
judgment, knowledge of product company sales task. Therefore, separate forms are used for
salesmen engaged in different types of sales jobs.

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Merit-ratings are fruitfully employed by sales managers to record the progress of salesmen as a
guide in determining promotions, demotions, transfers, counsels, compensation, and recruitment,
selection, training and to boost the morale of sales-force by considering their performance.

Customer opinion of salesmen:

Sales managers and supervisors get regular comments on salesmen under their charge through
their personal contacts with consumers and dealers. The relationship of a salesman with
consumers, dealers, architects, contractors, purchasing agents and the like has deeper bearing on
his sales performance.

Usually, those salesmen who work well with others, command respect and friendship of
customers and is credited with superior performance. Customer opinion of salesman is usually a
reflection of the personality and personal service of the individual.

The salesman, who instructs the buyers in the operation of the product, makes prompt
adjustments, helps customers in getting good delivery and service is well treated by the
customers.

Similarly, a salesman who gives dealer sales assistance, merchandising and management advice
has the favorable opinion. A good customer and dealer opinion is a mark of his success and a bad
opinion is a sure sign of poor performance.

Quantitative methods:

Analysis of sales records and reports:

Controlling the individual salesman‘s performance by sales managers and sales supervisors
begins with the sales call report. Information from the call report is summarized on a salesman‘s
weekly and monthly sales record files in the sales office.

These summary records give condensed account of his sales, commission, travel expenses,
number of calls, loss of working day, new accounts opened, performance in relation to quota, of
products sold and other facts about his activities.

With these salient facts of a salesman‘s performance in the summary records a sales manager or
the supervisor can make a weekly and monthly analysis of a salesman‘s progress and take

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prompt corrective action. Any deviation from a normal performance can be quickly noted and
called to attention of the salesman concerned.

The deviation can be analyzed and plans be made for personal supervision to bring the
salesman‘s performance back to normalcy. It also shows outstanding performance of some
salesmen so that recognition can be given to those who deserve it.

Such analysis is not only needed for control but for future planning of operations and designing
the programs. A caution is to be exercised here in that salesman‘s effectiveness should not be
based entirely on the analysis of the sales reports and records because, there are many other
factors which influence sales- performance which are not revealed by sales reports and records
alone.

Comparison of salesmen‘s performance with quotas:

One of the most common methods of appraising the salesmen is comparing present and past
salesmen‘s performance with quotas or standards of accomplishment established for sales
volume, profit, expenses and the activities. Sales quotas are set by management after due
consultation with the salesman, for each salesman‘s territory for a specific period. Each salesman
is judged on the basis of his performance in relation to his quota.

Though separate quotas may be established for sales volume, sales expenses, gross-profit and
activities, the most popular is sales volume quota expressed in terms of so many units or rupees
for a specific period.

Such a figure spelled out is arrived on the basis of a detailed analysis of market potential, past
sales performance estimates by salesmen and dealers, new products or product of product
improvements, advertising, competition, the ability of salesman, judgment of sales executive and
the prevailing economic conditions.

Such a sales quota can be for all the products in a line or for individual product or group of
products, for an area say, branch or district or a region, for a specific period ranging from a
month to a year or for individual customer or a group of customers and for a call or sale.

On the basis of comparison, the sales executives appraise the effectiveness of each salesman and
take necessary action.

Ratio analysis:

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Certain ratios are much helpful in measuring sales performance in analyzing sales reports and
records that the sales office has. Take the example of sales expenses ratio. This ratio establishes
the relationship between the sales expenses and the sales volume.

If annual sales are say Rs. 2,00,000 and sales expenses are Rs. 5,000, then the expenses ratio will
be 40 per cent (Rs. 5, 00 /Rs. 2.00,000) x 100 .

Taking the specific conditions prevailing in each sales territory such norms can be fixed and the
actual can be compared with these norms and deviations can be analyzed for taking necessary
corrective action. This being an expenses ratio, it is dangerous for a salesman to exceed this ratio
or percentage. Similarly, sales performance can be appraised on the basis of sales profit ratio.

This ratio speaks of the rate of profitability in terms of profits. Say, a firm has an estimated sales
of Rs. 1,00,000 and a profit of Rs. 15,000, then the sales profit ratio will be 15 percent (Rs. 15,
00 /Rs. 1.00,000) x 100 .If this 1, 00,000 figure is accepted as norm for sales-man‘s performance,
every salesman should reach this and cross it as income ratio.

Such ratios can be: stores displays to total retail accounts served, a ratio of direct mail programs
to the total accounts or a ratio of time spent in stores to total selling time, in case of missionary
salesmen.

In case of new business, this ratio can be of new accounts to total accounts. Through ratio
analysis is not fully used in appraising sales effectiveness, it can be a valuable guide if one uses
it in cross-verification way.

Profit and loss statement analysis:

It is a recognized fact that ability to sell at a profit is a clear indication of excellence of sales
performance. A salesman‘s profit performance is measured by profit and loss statements for his
sales territory.

Progressive and cost conscious companies prepare income statement for each salesman‘s
territory giving the details of net sales, cost of goods sold, gross profit, operating expenses and
the net profit.

Depending on the individual company procedures, either gross profit or net profit and other
related expenses are analyzed and salesman‘s effectiveness is determined in the back-ground of

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standards so set. This profit and loss statement method of evaluating salesman‘s performance has
its own limitations.

Neither gross profit nor net profit gives a totally accurate picture of salesman‘s performance. It is
quite possible that the two salesmen selling the same articles may give different profits; this may
be due to the differences in territory size, demand pattern, nature of products sold, nature of
accounts dealt with, market potential, caliber of outlets, economic conditions and so on.
Therefore, one is to be careful while using this as a yardstick to measure the efficiency of the
sales-force at the command of the company.

8.3 Rules for Performance Appraisals

Seven Rules for Performance Appraisals
Have a positional agreement for the employee: Instead of a job description, have a positional
agreement for the employee's job position that includes their responsibilities and how their
performance will be measured.

The performance appraisal can then be designed to match up with the responsibilities and the key
measurements in the positional agreement. The employee will have a good expectation of what is
required for the job and it will be easier for the manager to make judgments on their
performance.

Have a vision for the employee's development: A leader does two things well. They enroll and
inspire others to follow them. You as the leader need to have an inspiring vision and understand
how the employee will potentially contribute to that vision.

Understand for yourself what a high level of performance for the position would be and set the
standards.

Have formal performance evaluation every six months: In his book, First Break All the
Rules, Marcus Buckingham lists 12 questions that that the most talented and best performing
employees need from the workplace. One of the 12 questions in the list is "In the last six months,
has someone reviewed my progress?" Another point is that "How much do I get paid?" was not
even on the list.

To summarize, it is more important for the best employees to have their performance reviewed at
least every six months over how much they get compensated.

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Have employees develop their own goals for each six month period: Most of the time
performance appraisals are much too subjective to the opinions of the supervisor. An employee
will not understand how their performance is perceived unless they receive constant feedback.

However, if the employee is allowed the opportunity to set their own goals, they will know
exactly where they stand on their evaluation and they will also take more ownership of their
performance.

Match evaluation criteria to culture and values of company: What is the main reason that
employees often get terminated? Often it is not because the employee cannot do the
responsibilities of the job, but it is rather their behavior or attitude that creates problems.

A strong definition of the culture of the company combined with a performance appraisal that
requires employees to set goals in improving the culture of the company will go a long way in
building a superior employee base.

Have employee evaluate themselves against their own goals: At the end of the six months the
employee now has the opportunity to evaluate themselves against their own goals. The key is
that these are their own goals. The employee will commit more to their own goal because of the
added incentive of maintaining their integrity.

Coach, and not dictate the employee to better performance: After the performance appraisal
is completed and evaluated at the end of the six month period, the manager also will provide
feedback to the employee on their perception of how well they met their goals.

This conversation is an excellent time for the manager to coach the employee and ask, what
support do you need from me to meet your goal? Instead of a manager feeling like they are
delivering bad news in a performance review session, he or she can feel that they are now
encouraging their employees to improve themselves.

One of the most valued assets in your company is the sales people that work for you. The
performance appraisal is an excellent way to attract and keep your top employees for a long time.

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 CHAPTER- 9
PROFESSIONAL BUSINESS SELLING PROCESS
Chapter objectives

At the end of this unit, you should be able to:

 Discuss Prospecting ,Pre-approaching, Approaching ,Sales Presentation, Handling
Objections, Closing the sales , and Follow up and relationship building

Introduction

All selling process contains the same basic steps, though the detail of each step and time required
to complete it will vary according to the product that is being sold. For example: a door to door
sales representative may go through all the steps from prospecting to closing of sale in a matter
of ten to fifteen minutes in contrast, the selling process for computer or electronic typewriter may
take several visits, even years, for getting an order.

9.1 Prospecting

The selling process begins with prospecting or finding qualified potential customers. Except in
retail selling, it is unlikely that customers will come to the sales person. In order to sell the
product, the sales person must seek out potential customers, prospecting involves two major
activities:-

(a) Identifying potential customers also known as prospects; and

(b) Qualifying them in order to determine if they are valid prospects.
(a) Identifying prospects

The identification of potential customers is not an easy job, especially for a new sales person.
Rejection rate is quite high and immediate payoffs are usually minimal. In some consumer goods
businesses, identification of prospects usually came from friends and acquaintances, other sales
people, former customers, present customers etc. Few of the best sources and techniques for
finding prospects are discussed below.

Present customers: The best source of prospects is usually the sales person‘s existing satisfied
customers. It is much easier to sell additional goods and services to existing customers than to
attract new customers. Indian companies are using this method of selling successfully. For
example person or an organization who has purchased a portable typewriter from an office

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automation product company and is pleased with it is usually more receptive to purchase a
bigger typewriter and similar product from the same company than someone else. This is the
main reason; present customers should get first priority by the company when new products and
services are introduced.

Endless chain: This is also an effective prospecting tactics. In this method companies use
satisfied customers as source of referrals. Sales representatives ask current customers for names
of friends or business associates who might need similar products or services. Then, as the sales
person contacts and sells to these prospects, more referrals are solicited. In this way the process
continues further.

Centre of Influence: Another effective prospecting technique based on referrals is the center of
influence approach. A center of influence is people with information about other people or
influence over them that can help a sales person identify good prospects. Some frequently used
centers of influences are housewives, bankers, and local politicians etc.

Spotters: Some companies use spotters as a source for prospecting potential customers. Spotters
are usually ‗sales trainees‘ who help sales person identifying prospects, thus saving time and
qualifying sales lead.

Cold call: Cold call is also known as unsolicited sales calls. This prospecting technique involves
knocking on doors. The sales person makes contact with potential customers, introduces him or
herself, and asks if there is a use for the product or service. This technique is utilized by the sales
person when they have time available between scheduled appointments.

Directories: A wide variety of directories are full of prospect. The classified telephone directory
is the most obvious one. A sales person may also find that membership directories of trade
associations, professional societies, and civic and social organizations are good sources for
prospects.

Mailing lists: In India, specialized companies compile lists of individuals and organizations for
direct mail advertisers. These lists may also be used to identify sales prospects. The major
advantages of mailing list are that they are often more current and more selective than
directories.

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Trade shows and exhibitions: A cost effective way to make personal contacts and locate
prospective buyer is to participate in tradeshows and exhibitions. Now a days more and more
companies are increasing their participation in these shows and exhibitions to company‘s booth
by mailing invitations or promising a gift. Advance announcements sent to trade publications
may also help to attract prospects. In view of the rising costs of personal selling trade shows have
become an increasingly important source of prospecting. India International Trade Fair organized
by Trade Fair Authority of India every year provides a good example of usage of trade shows for
prospecting.

(b) Qualifying prospects: Once the sales person has identified potential customers, he or she
must qualify them to determine, if they are valid prospects. Unless this is done, time and energy
is wasted in trying to sell to people who cannot or will not purchase the product or service.

There are several factors to consider while qualifying a prospect.

One approach to qualifying often called MAN (Money, Authority and Need) approach is given
below:

Money: Does the prospect have the money or resources to purchase a product or service? Ability
to pay is very critical factor in qualifying a prospect. The sales people must be familiar with
financial resources of a prospect.

Authority: Does the prospect have the authority to make commitment? This is a particular
concern when dealing with corporation, government agencies or other large organizations. Even
while selling to a married couple; it may be difficult to identify who actually makes the purchase
decision. A sales person must identify the key decision maker early to economies on selling time
more effectively.

Need: Does the prospect need the product or service? If a sales person cannot establish that the
customer will benefit from purchasing a product or service, there is no reason to waste a sales
call. The prospect either will refuse the offer or will end up dissatisfied with the purchase. Before
proceeding further the sales person should first appraise whether money, authority and need exist
with the prospect.

9.2 Pre-approach

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Once a salesperson has identified a qualified prospect, preparation for the sale begins with the
Pre-approach. The pre approach stage involves obtaining further information on the prospect and
deciding on the best method of approach.

Activities in this stage include finding information on who the prospect is, how the prospect
prefers to be approached, and what the prospect is looking for in a product or service. For
example, a stockbroker will need information on a prospect's discretionary income, investment
objectives, and preference for discussing brokerage services over the telephone or in person. For
industrial products the pre approach involves identifying the buying role of a prospect (for
example, influencer or decision maker), important buying criteria, and the prospect's receptivity
to a formal or informal presentation.

Identifying the best time to contact a prospect is also important. For example, Northwestern
Mutual Life Insurance Company suggests the best times to call on people in different
occupations: dentists before 9:30 A. M., lawyers between 11:00 A.m. and 2:00 P.m., and college
professors between 7:00 and 8:00 P.M. [ Marks Ronald B, 1988].

9.3 Approach

The approach stage involves the initial meeting between the salesperson and prospect, where the
objectives are to gain the prospect's attention, stimulate interest, and build the foundation for the
sales presentation itself and the basis for a working relationship. The first impression is critical at
this stage, and it is common for salespeople to begin the conversation with a reference to
common acquaintances, a referral, or even the product or service itself. Which tactic is taken will
depend on the information obtained in the prospecting and pre-approach stages.

The approach stage is very important in international settings. In many societies outside the
United States, considerable time is devoted to nonbusiness talk designed to establish a rapport
between buyers and sellers. For instance, it is common that two or three meetings occur, before
business matters are discussed in the Middle East and Asia.

There are three common approach methods.

Premium approach: Presenting your potential client with a gift at the beginning of your
interaction

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Question approach: Asking a question to get the prospect interested

Product approach: Giving the prospect a sample or a free trial to review and evaluate your
service

9.4 Sales Presentation

After establishing rapport with the prospects through calls, the sales person proceeds to the
formal sales presentation. The objective of the presentation is to explain how the product meets
the special needs of the consumer. The job of the sales person is to inform the prospect about the
characteristics, capabilities and availability of goods and services that are for sale. In order to
ensure that the presentation is understood by the prospect, the sales person should be clear in
his/her communication.

Presentation should also be interesting enough to keep the attention of the prospect focused on
the proposal.

Sales presentations are classified into the different categories:

Fully automated, Semi-automated, Memorized, Organized, and Unstructured.
 Fully automated: The fully automated presentation is the most highly structured
approach, based on film or slide presentations. The sales person simply answers questions
or clear up doubts. e.g. selling life insurance to the rural or semi-urban prospects.
 Semi-automated: In this approach, the sales person reads from brochures or literatures,
adding comments to the prepared materials when necessary. A common example is
selling of pharmaceutical products by medical representatives.
 Memorized: In memorized presentation, company message is presented, with few
changes initiated by the sales person.
 Organized presentation: The most popular and often the most effective sales
presentation method is the organized presentation. With this method the sales person has
complete flexibility in oral communication but follows a company prepared outline or
checklist. The organized approach best exemplifies the selling process in which
customers are moved through four stages to a purchase decision; i.e. attention, interest,
desire and action (AIDA).

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  Unstructured presentations: (Also referred to as problem solving). In this approach, the
buyer and seller together explore the problems that are the real sources of the company‘s
needs. Although unstructured presentations are often effective and widely used, they have
a number of limitations. Such presentations tend to be not too well-focused. As a result,
points are often missed and time is wasted. Further, sales person do not usually anticipate
objections but may have to face surprise complaint from the prospects. Because it is
difficult to teach sales person how to use the unstructured method, the problem solving
presentation seems best suited to experienced, sales person who are selling to established
customers.

Sales presentation comprises of two distinct activities, approach and demonstration.

a) Approach

When the sales person has the name of the prospect and adequate pre-approach information, the
next step is the actual approach. It frequently makes or breaks the entire presentation. If the
approach fails, the sales person often does not get a chance to give a presentation or
demonstration. It gets the prospect attention, it immediately inspires interest in hearing more
about the proposition, and it makes easy transition into the demonstration phase.

Four basic approaches are in common use:

1. The introductory approach, the sales person introduces himself to the prospect and states what
company he represents.

2. The product consists of handling the product to prospect with little conversation. It can be
most effective when the product is unique and creates interest on sight.

3. The sales person starts the sale in a consumer-benefit approach by informing the prospect of
what the firm can provide in benefits. In other words, directs the prospects attention toward the
benefits the firm has to deliver.

4. Lastly, referral approach successful in getting an audience with prospect who is difficult to see
directly. It consists of obtaining the permission of a past or present customer to use his or her
name as a reference in meeting a new prospect.

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(b) Demonstration

The demonstration is the core of the selling process. The sales person actually transmits the
information and attempts to persuade the prospect through product demonstration to make a
customer.

Two factors should be taken into consideration in preparing an effective product demonstration:

i) The demonstration should be carefully rehearsed to reduce the possibility of even a minor
malfunction.

ii) The demonstration should be designed to give customers ‗hand on‘ experience with the
product wherever possible. For example an industrial sales representative might arrange a
demonstration before the purchaser‘s technical personnel.

9.5 Handling objections

All sales person confront sales resistance i.e. actions or statements by a prospects that postpone,
hinder or prevent the completion of the sale. Normally sales resistance takes the form of an
objection which can be classified as stated or hidden. Prospects may state their objections to a
proposition openly and give the sales person a chance to answer them.

This is an ideal situation because everything is out in the open and the sales person does not need
to read the prospect‘s mind. Unfortunately, in many instances prospects hide their real reasons
for not buying. Beside having hidden objections, their stated objection may be phony. Unless one
can determine the real barrier to the sale one shall not be able to overcome it. There are two
major techniques for discovering hidden objections. One is to keep the prospect talking by
asking probing questions. The other is to use insights gained through experience in selling the
product, combined with knowledge of the prospects situation, to perceive the hidden objection.
Often objection to price and product are also faced by sales person either in a form of
unaffordable or too high price. Product objections can be answered best when sales people have
extensive product knowledge of both their own products and competitors. Many times prospects
may be misinformed or may not understand some of the technical aspects of the proposition. In
this case, the sales person should provide additional information. Even the prospects objections
can be met simply and effectively by altering the product to suit the customer.

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 9.6 Closing

After having answered and overcome objections, it is the stage for sales person to ask for the
order from the prospects. The entire effort is wasted unless the sales person can get the prospect
to agree to buy the product.

Sales person should select among these technique one that fits the specific prospect and selling
situation. Now we would discuss few effective closing techniques. In action close technique the
sales person take an action that will complete the sale e.g. in case of high priced products like
Motorcar, photocopier or industrial product the sales person may negotiate with the financial
institution for financial assistance for the prospects.

The gift close technique provides the prospect with an added incentive for taking immediate
buying action. In one more yes close techniques, the sales persons restates the benefits of the
products in a series of questions that will result in positive responses by the prospects.

The process may result in an order. The direct close is clear and simple technique, many sales
persons feel that this is the best approach for closing, especially if there are strong positive
buying motives, the sales person will summarize the major points that were made during
presentation to the prospects prior to asking for the sale.

Experienced sales people always try to close early. If they are not successful, they continue the
presentation and then try a different closing technique. Good sales person know that if they have
successfully completed all of the earlier steps, then the prospect is worth an extra effort at
closing. In most cases this simply means switching to a different type of close. Closing is the
most important aspect of the sales process.

Unless the sales person can close the sale, the other steps in the sales process are meaningless.

9.7 Follow-up and relationship building

The selling process is not completed by merely making the sale, as generally assumed by many
sales people. After sales activities is important part of the whole selling process. Effective sales-
follow-up reduces the buyer‘s doubt about the product or services and improves the chance that
the person will buy again in the future. In addition to post-sale activities, sales person are also
required to maintain good customer relations.

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Now-a-days many companies are evolving specific policies and practices to ensure that
customer‘s needs are not neglected. No matter how efficient a company is, there are always some
customer complaints.

The complaint should be taken seriously and handled with concern. The customer must know
that the company cares about maintaining good customer relations. Reasonably frequent contacts
with the present customers are, an expected part of the sales person‘s job. For important
customers, personal visit are appropriate. Letters, notes, phone calls, greetings are also good
ways to keep in touch with customers. Many good business houses also offer customer
newsletter.

Successful sales person never stop serving customers. In addition to handling complaints, they
keep customer informed about the latest products or services, fulfill reasonable request, and
provide other forms of assistance. The sales people should also appreciate the customer by
thanking customers for their business. Small gifts can be given after the sale and at appropriate
times during the year. Sales person should try to make self-analysis for evaluating their own
selling performance and methods. A Sales person should analyses every call to determine what
factors influenced its eventual outcome. Self-analysis is a very useful tool in improving overall
sales effectiveness.

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 PART II:- MARKETING CHANNELS AND LOGISTICS MANAGEMNT

COURSE CODE:- Mktm4051

EXIT EXAM MODULE

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 CHAPTER ONE:- LOGISTICS AND CHANNEL MANAGEMENT

Chapter objectives

At the end of this unit, you should be able to:

 Know the Definition of logistic and channel management

 Discuss the role & Objectives of Logistics
 Discuss Logistic systems, costs and components
 Discuss the output of logistic system
 Identify Four key area of interfaces between logistics & Channel management

1.1 Definitions of logistics

The term logistics does not mean the same thing to all persons, even to those who are actively
engaged in the field. A sampling of the membership roster of the National Council of Physical
Distribution Management shows the field represented by job titles such as transportation,
distribution, physical distribution, supply and distribution, materials management, operations and
logistics. For our purpose we use logistics, business and physical distribution interchangeably.

Logistics or Business Logistics can be defined as the study and management of goods and
services flows and the associated information that sets these into motion.

Thus, the mission of the logistician is to get the right goods or services to the right place at the
right time and in the desired condition at the lowest possible cost.

The other definition of business logistics deal with all move-store activities that facilitate product
flow from one point of raw-material acquisition to the point of final consumption, as well as the
information flows that set the product in motion for the purpose of providing adequate levels of
customer service at a reasonable cost.

Logistics can also be defined as a single logic to guide the process of planning, allocating and
controlling financial and human resources committed to physical distribution, manufacturing
support and purchasing operations.

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In the other definition market logistics involves planning, implementing and controlling the
physical flows of materials and final goods from points of origin to points of use to meet
customer requirements at a profit.

Like logistics the concept channel can also be defined in different ways. Sometimes it is
thought of as the route taken by a product as it moves from the producer to the consumer or other
ultimate user. Some define it as the path taken by the title to goods as it moves through various
agencies. Still others describe the marketing channel in terms of a loose coalition of business
firms that have banded together for purposes of trade.

According to Kotler marketing channels are sets of interdependent organizations involved in the
process of making a product or service available for use or consumption.

From the viewpoint of managerial decision-making in producing and manufacturing firms

marketing channel may be defined as the external contractual organization that management
operates to achieve its distribution objectives. Four terms in this definition should be especially
noted:

External - means that the marketing channel exists outside the firm. Management of the
marketing channel therefore involves the use of inter-organizational management (managing
more than one firm) rather than intra-organizational management (managing one firm).

Contractual organization - refers to those firms or parties who are involved in negotiatory
functions as a product or service moves from producer to its ultimate user. Negotiatory functions
consist of buying, selling, and transferring title to products or services.

Operates - meant to suggest involvement by management in the affairs of the channel. This
involvement may range from the initial development of channel structure all the way to day-to-
day management of the channel.

Distribution Objectives - means that management has certain distribution goals in mind. The
marketing channel exists as a means for reaching these. The structure and management of the
marketing channel are thus in part a function of a firm's distribution objectives.

1.2. The Role & and importance of Logistics

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Role - Even the most carefully designed and managed marketing channel must rely on logistics
to actually make products available to customers. The creation of time and place utilities
essential for customer satisfaction is heavily dependent upon logistics. The essence of the role of
logistics in the marketing channel lies on the movement of the right amount of the right products
to the right place at the right time.

Logistics also play an important role on the global scale. Efficient logistics systems throughout
the world economy are a basis for trade and a high standard of living for all of us.

An efficient logistics system allows a geographical region to exploit its inherent advantage by
specializing its productive efforts in those products in which it has an advantage and by
exporting these products to other regions.

Objectives - In terms of logistical system design and administration, each firm must
simultaneously achieve at least six different operational objectives. These operational
objectives, which are the primary determinants of logistical performance, include rapid response,
minimum variance, minimum inventory, movement consolidation, quality and life cycle support.

A) Rapid response -- is concerned with a firm's ability to satisfy customer service requirements
in timely manner. Information technology has increased the capability to postpone logistical
operations to the latest possible time and then accomplish rapid delivery of required inventory.

B) Minimum variance -- variance is any unexpected event that disrupts system performance.
Variance may result from any aspect of logistical operations. Delays in expected time of
customer order receipt, an unexpected disruption in manufacturing, goods arriving damaged at a
customer's location, or delivery to an incorrect location--all result in a time disruption in
operations that must be resolved. Potential reduction of variance related to both internal and
external operations.

C) Minimum inventory -- the objective of minimum inventory involves asset commitment and
relative turn velocity. Total commitment is the financial value of inventory deployed throughout
the logistical system. Turn velocity involves the rate of inventory usage over time. High turn
rates, coupled with inventory availability, mean that assets devoted to inventory are being

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effectively utilized. The objective is to reduce inventory deployment to the lowest level
consistent with customer service goals to achieve the lowest overall total logistics cost.

D) Movement consolidation -- one of the most significant logistical costs is transportation.

Transportation cost is directly related to the type of product, size of shipment, and distance.
Many logistical systems the feature premium service depend on high-speed, small-shipment
transportation. Premium transportation is typically high-cost. To reduce transportation cost, it is
desirable to achieve movement consolidation.

E) Quality -- a fifth logistical objective is to seek continuous quality improvement. Total

Quality Management (TQM) has become a major commitment throughout all facets of industry.
If a product becomes defective or if service promises are not kept, little, if any, value is added by
the logistics. Logistical costs, once expended, cannot be reversed.

In fact, when quality fails, the logistical performance typically needs to be reversed and then
repeated. Logistics itself must perform to demanding quality standards. Logistics is a prime
part of developing and maintaining continuous TQM improvement.

F) Life-cycle support -- few items are sold without some guarantee that the product will
perform as advertised over a specified period. In some situations, the normal value-added
inventory flow toward customers must be reversed. Product recall is a critical competency
resulting from increasingly rigid quality standards, product expiration dating, and responsibility
for hazardous consequences.

1.3. Logistics Systems, Costs, & Components

Prior to World War II logistics was equated mainly with transportation. Hence the field was
narrowly defined in terms of the activities involved in shipping and receiving products and was
given relatively little management attention. But during World War II developments in military
logistics required to move vast amounts of supplies to the European and Pacific war theaters
demonstrated the importance of logistics in winning the war.

Of particular note was the emergence of the systems concept for dealing with logistical
problems; that is, more note was taken of the various factors involved in the logistical process
and the interrelationships among them. Rather than being thought of as separate and distinct

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from one another, such factors as transportation, materials handling, inventory control,
warehousing, and packaging of goods were seen as interrelated components of a system. Thus
decisions or actions affecting one component could have implications for other components of
the logistical system.

This concept of logistics as a system has served as the foundation of modern logistics
management. In essence, those in charge of managing logistics seek to find the optimum
combination of basic logistics components (transportation, materials handling, order processing,
inventory control, warehousing, and packaging) to meet customer service demands.

In a commercial or profit-making context, which, of course, involves most business situations,

the logistics manager also attempts to achieve the desired level of customer service at the lowest
cost by applying the concept of the total cost approach.

The use of the systems concept and the total cost approach to manage logistics is seen in the
following

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 Figure. View of Logistics Management Based on the Systems Concept and the Total Cost
Approach: The Basic Components of Logistics Systems

Transportation

Systems Concept

Material Handling Total Cost Approach

Order Processing
Management view
Management attempt to
logistics as a system of
minimize the cost of using
interrelated components
the components taken as a
whole
Inventory Control

Warehousing

Packaging

Transportation: - is the most fundamental and obviously necessary component of any logistics
system, for clearly, in virtually all cases, products must be physically moved from one location to

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another if a transaction is to be completed. Transportation is also often the component
accounting for the highest percentage of the total cost of logistics.

From a logistics management standpoint, the overriding issue facing the firm is choosing the
optimum mode of transportation to meet customer service demand. This can be a very complex
and technical task because there are so many considerations. A few of these are:

 What are the different rates available?

 What specific transportation services are offered?
 How reliable are various common carriers?
 What modes of transportation are competitors using?
Materials handling: - encompasses the range of activities and equipment involved in the
placement and movement of products in storage areas. Issues that must be addressed when
designing materials handling system include:

How to minimize the distances products are moved within the warehouse during the course
of:
o Receiving,
o Storage, and
o Shipping;
What kinds of mechanical equipment (such as conveyor belts, cranes, and forklifts) should be
used; and
How to make the best use of labor involved in receiving, handling, and shipping products.
Order Processing: - is the task of filling customer orders may at first appear to be a minor part
of logistics and a rather routine activity that does not require a great deal of thought to do well.
In fact, order processing is often a key component of logistics, and developing an efficient order
processing system can be far from routine.
The importance of order processing in logistics lies in its relationships with order cycle time,
which the time is between when an order is placed and when the customer receives it.
Inventory Control: - refers to the firms attempt to hold the lowest level of inventory that will
still enable it to meet customer demand. This is a never-ending battle that all firms face. It is a
critically important one as well.

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Inventory carrying costs including the costs of financing; insurance; storage and lost, demand,
and stolen goods on average can amount to approximately 25 percent of the value of the
inventory per year.
Unfortunately, there is a conflict between these two objectives. Average inventory carrying
costs rise in direct proportion to the size of the order. Thus, a trade-off must be made between
these two objectives. Average inventory carrying costs rise in direct proportion to the level of
the inventory, while average ordering costs decrease in rough proportion to the size of the order.
Here, the logistics manager needs constantly to aspire to achieve the lowest total cost by
balancing inventory carrying and ordering costs.

Warehousing: - the warehousing or storage component of a logistics system is concerned with

the holding of products until they are ready to be sold. Warehousing can actually be one of the
more complex components of a logistics system because quite often, when considering options
for warehousing, the firm faces several key decisions, each of which can be difficult and
complex to deal with. The most basic of these decisions are:
1) The location of warehouse facilities
2) The number of warehousing
3) The size of the units
4) The design of the units including layout and internal systems, and
5) The question of ownership
Successful decisions in each of the areas requires careful planning and analysis and may require
input from experts in such fields as locations analysis, real estate, operations research, and
industrial engineering, in addition to logistics management. Warehousing can be an important of
a logistics system because it is so closely linked to the ability of firms to provide high levels of
customer service.
Packaging: - Packaging and the costs associated with the packaging of products are relevant as a
component of the logistics system because packaging can affect the other components of the
system, and vice versa.
Materials handling and order processing procedures and cots can also be affected by packaging
because well-designed packaging can help to increase efficiencies in these components of the
logistics system.

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Effective packaging can also help control inventory carrying costs as well by reducing product
damage. Further, warehouse space and thus costs can be saved if packaging is designed to be
space efficient.
Packaging design is a highly specialized area within the field of industrial design. The point to
be made here is that packaging is far more than a promotional device for fostering product
differentiation and attracting consumer attention.
Packaging has an important logistics dimension that can make a significant difference in the
effectiveness and efficiency of the logistics system. Indeed, a product in distinctive and
attractive packaging will have even more appeal if it is also easy to handle, stacks up with no
problem, and takes minimum space on the channel members‘ shelves.
1.4 The Output of the Logistics System: Customer Service

Although good customer service is the end result of virtually all of the efforts of the firm,
logistics is a very important part of this effort. This is particularly true for the types of services
that are a direct function of the logistics system.
Over the years, logistics researchers and practitioners have given a great deal of thought to the
kinds of services that can be provided by a logistics system. A number of attempts have been
made to define and enumerate these services and to measure performance in terms of what
logistics experts refer to as service standards. Heskett, Galskowsky, and Ivie, for example, stress
the following nine categories of logistics service standards:

1) Time from order receipt to order shipment

2) Order size and assortment constraints
3) Percentage of items out of stock
4) Percentage of orders filled accurately
5) Percentage of orders filled within a given number of days from receipt of the order
6) Percentage of customer orders that arrive in good condition
7) Order cycle time (time from order placement to order delivery)
8) Ease and flexibility of order placement
These logistics service standards are usually quantified in some fashion and then the
manufacturer‘s actual performance is measured against these standards.

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The second service standard in the list might be set in terms of some minimum quantity of
products, and certain restrictions might be placed on mixing the various products unless specified
minimum quantities of each are ordered.

The third standard percentage of items out of stock, or stock outs is almost always set in terms of
percent of items ordered during a given period that cannot be filled from inventory. The other
six service standards in the list can be quantified and used in a similar fashion.

1.5 Four Key Areas of Interface between Logistics and Channel Management

Logistics management is subsidiary to the broader area of channel management. In other words,
channel management is a broader more comprehensive element of distribution strategy than is
logistics management. Channel management is involved with the administration of all of the
major channel flows (product, negotiation, ownership, information, and promotion), whereas
logistics is concerned mainly with the product flow.

But logistics management and channel management are very closely linked and interdependent
because a well-designed and administered marketing channel cannot exist without an efficient
flow of products to the channel members and final target markets, in the right quantities and at
the right times and places. In short, channel management and logistics management go together
hand in hand to provide effective and efficient distribution.

But such meshing of channel management and logistics management requires good coordination.
This especially applies to four major areas of interface between channel management and
logistics management.

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 Interfaces between Logistics and Channel Management, Viewed Sequentially

Interface I
Defining what kinds of logistics service standards the channel members want

Interface 2
Making sure the proposed logistics program designed by the manufacturer meets channel
members’ service standards

Interface 3
Selling the channel members on the logistics program

Interface 4
Monitoring the results (in terms of fostering channel member cooperation) once it has been instituted

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1.5.1. Defining Logistics Service Standards

In general, the higher the service standards the manufacturer offers, the higher the costs will be.
While well-designed logistics systems and modern technology can keep these costs under
control, it is usually not possible to escape the trade-off of higher costs for higher service
standards completely.

A manufacturer must cover the costs either indirectly in the price it charges for products, or by
passing them along to channel members in the form of service charges. Thus the key issue
facing the channel manager with respect to defining logistics service standards is to determine
precisely the types and levels of logistics service desired by the channel members.

In sum, the development of logistics service standards should not be based solely on the views of
the manufacturer; channel members' views should also be incorporated. If this is done, the set of
logistics service standards developed by the channel members actually want rather than what the
manufacturer may think they want. Since channel members in one way or another way for the
logistics services offered by manufacturers, they should at least have some say in what they are
getting for their money.

1.5.2. Evaluating Logistics Program

A logistics program may be offered to channel members as a separate entity or may be included
as a major component of the manufacturer's overall approach for supporting channel member
needs. If the latter is the case, the logistics program may. For example, be the keystone feature
of a channel "partnership" or strategic alliance, or it may play an important role in a
comprehensive distribution programming agreement.

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1.5.3. Selling the Channel Members on the Logistics Program

Regardless of how good a manufacturer perceives its logistics program to be, it still must
convince channel members of its value. Stewart made this point succinctly in the decisive
discussion of this topic:

A word of caution! Changes in (physical) distribution must be palatable

(pleasant) to the company's customers (channel members). Changes which
provide cost benefits only to the manufacturer without corresponding benefits to
customers may be more difficult to implement than those that offer incentives to
customers to change.

Stewart went on to suggest several types of appeals, which, if emphasized by the manufacturer in
attempting to sell the logistics program, may help the manufacturer to be more convincing.
Three of these follow:

A. Emphasize the deduction in out-of-stock occurrences that the new logistics program
will make possible. By minimizing out-of-stock occurrences through an improved
logistics program, sales lost by the channel members will be reduce.
B. Emphasize the reduction in channel member inventories that the new logistics
program will allow. A well-designed and responsive logistics program can mean
shortened channel member order cycles, which in turn can mean lower inventories
carried by the channel members.
C. Emphasize the added manufacturer support for the channel members fostered by the new
logistics program (strengthening the manufacturer-channel member relationship). A
carefully designed logistics program aimed at improving service to channel members can
serve as one of the most tangible signs of the manufacturer's concern and commitment to
the channel members' success. In presenting a proposed logistics program to the channel
members, the manufacturer should emphasize that the program was conceived to help
them (the channel members) to be more successful.

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1.5.4. Monitoring the Logistics System

Clearly, then, logistics systems, once put in place, cannot be simply left alone with the
expectation that they will continue to work well and meet channel member needs indefinitely.
Rather, logistics systems must be continuously monitored, both in terms of how successfully
they are performing for the manufacturer and, just as importantly, how well they are meeting
changing channel member needs.

Thus, as part of an overall attempt to learn about the needs and problems of channel members,
the channel manager should continually monitor the channel members' reactions to logistics
programs. The principal objectives of such monitoring are to appraise channel members'
responses to the program and to find out whether modifications are needed.

The most effective way of monitoring channel member reactions is to conduct a survey of a
sample of channel members. If the number of channel members is small, it may be feasible to
include all of them.

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 CHAPTER TWO:- TRANSPORTATION MANAGEMENT

Chapter objectives

At the end of this unit, you should be able to:

 Discuss Basic transport Economics & pricing

 Discuss Transport Decision Making

Introduction

Transportation represents the most important single elements in logistical costs for most firms.
Freight movement typically absorbs two-thirds of the logistics expense. For this reason, the
logistician should have a good understanding of transportation matters.

The five basic transportation modes are Rail, Highway, Water, Pipeline, and Air. The relative
importance of each mode can be measured in terms of:

 System mileage,
 Traffic volume,
 Traffic revenue, and
 The nature of traffic composition.
Generally, an enterprise has three alternative ways to obtain transportation capacity.

9) Private--a private fleet of equipment may be purchased or leased.

10) Contract--specific contracts may be arranged with transport specialists to provide
movement service.
11) Common carriage--an enterprise may engage the services of any legally authorized
transport company that offers point-to – point transfer at specified charges.
From the logistical system viewpoint, three factors are of primary importance in establishment of
the transport service capability:

a. Cost
b. Speed, and
c. Consistency
The cost of transport accrues from the actual payment for movement between two points, plus
the expenses related to owning in-transit inventory. Logistical systems should be designed to

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minimize the transport cost in relation to the total system cost. However, this does not mean that
the most inexpensive method of transportation is always desirable.

Speed of transportation service is the time required to complete a movement between two
locations. Speed and cost are related in two ways:

 Transport specialists capable of providing faster service will charge higher rates.
 The faster the service, the shorter the time interval during which materials and products
are captured in transit.
Consistency of transportation service refers to the variance in time for a number of movements
between the same locations. In essence, how dependable is a given method of transportation
with respect to time? In many ways, consistency of service is the most important characteristic of
transportation.

2.1 Basic Transport Economics & Pricing

Transport economics and pricing are concerned with the factors and characteristics that
determine transport costs and rates. To develop an effective logistics strategy and to successfully
negotiate transport agreements, it is necessary to understand the economics of the industry. A
discussion of transportation economics and pricing required coverage of three topics:

 The factors that influence transport economics

 The cost structures that influence expense allocation.
 The rate structures that form the foundation for actual customer charges.
2.1.1 Economic Factors

Transport economics is influenced by seven factors. The specific factors are distance, volume,
density, stowability, handling, liability, and markets. In general, the above sequence reflects the
relative importance of each factor.

Distance: - is a major influence on transportation cost since it directly contributes to variable

cost, such as labor, fuel, and maintenance. The following figure shows the general relationship
and illustrates two important points.

1. The cost curve does not begin at the origin because there are fixed costs associated
with shipment pickup and delivery regardless of distance.

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 2. The cost curve increases at a decreasing rate as a function of distance.
This characteristic is known as the tapering principle, which results from the fact that longer
movements tend to have a higher percentage of intercity rather than urban miles.

Generalized relationship between distance and transportation

Volume: - like many other logistics activities, transportation scale economies exist for most
movements. This relationship, illustrated in the following figure, indicates that transport cost per
unit of weight decreases as load volume increases. This occurs because the fixed costs of pickup
and delivery as well as administrative costs can be spread over additional volume. The
relationship is limited to the maximum size of the vehicle (such as a trailer). Once the vehicle is
full, the relationship repeats for the second vehicle. The management implication is that small
loads should be consolidated into larger loads to take advantage of scale economies.

Generalized relationship between weigh and transportation cost/pound.

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 Price per pound

Density: - the third economic factor is product density, which incorporates weight and space
considerations. These are important since transportation cost is usually quoted in terms of
dollars per unit of weight, such as amount per ton or amount per hundredweight (cwt). In terms
of weight and space, an individual vehicle is constrained more be space than by weight. Once a
vehicle is full, it is not possible to increase the amount carried even if the products is light. Since
actual vehicle labor and fuel expenses are not dramatically influenced by weight, higher density
products allow relatively fixed transport costs to be spread across additional weight. As a result,
these products are assessed lower transport costs per unit weight.

In general, logistics managers attempt to increase product density so that more can be loaded in a
trailer to better utilize capacity. Increased packaging density allows more units of product to be
loaded into the fixed cube of the vehicle. At a certain point, not additional benefits can be
achieved through increased density liquids such as beer or soda ‗weighs out‖ a highway trailer
when it is about half full. As such, the weight limitation is reached before the volume restriction
is met. Nevertheless, efforts to increase product density will generally result in decreased
transportation cost.

Generalized relationship between density and transportation cost/pound.

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Stowability: - refers to product dimension and how they affect vehicle (railcar, trailer, or
container) space utilization. Odd sizes and shapes, as well as excessive weight or length, do not
stow well and typically waste space. Although density and stowability are similar, it is possible
to have products with the same density that stow very differently. Items with standard
rectangular shapes are much easier to stow than odd-shaped items. Stowability is also influenced
by the shipment size; sometimes large numbers of items can be ―nested‖ that might otherwise be
difficult to stow in small quantities.

Handling: - Special handling equipment may be required for loading or unloading trucks,
railcars, or ships. Furthermore, the manner in which products are physically grouped together
(e.g., taped, boxed, or palletized) for transport and storage also affects handling cost.

Liability: -—includes six product characteristics that primarily affect risk of damage and the
resulting incidence of claims. Specific product considerations are susceptibility to damage,
property damage to freight, perishability, and susceptibility to theft, susceptibility to spontaneous
combustion or explosion, and value per pound. Carriers must either have insurance to protect
against possible claims or accept responsibility for any damage. Shippers can reduce risk, and
ultimately the transportation cost, by improved protective packaging or by reducing
susceptibility to loss or damage.

Market Factors: -Finally, market factors, such as lane volume and balance, influence
transportation cost. A transport lane refers to movements between origin and destination points.
Balance is also influenced by seasonality such as the movement of fruits and vegetables to
coincide with the growing season. Demand directionality and seasonality result in transport rates

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that change with direction and season. Logistics system design must take this factor into account
and add back-haul movement where possible.

2.1.2 Cost Structures

The second dimension of transport economics and pricing concerns the criteria used to allocate
cost components. Cost allocation is primarily the carriers concern, but since cost structure
influences negotiating ability, the shipper‘s perspective is important as well. Transportation
costs are classified into a combination of categories.

Variable Costs: -—are those costs that change in a predictable, direct manner in relation to
some level of activity during a time period. Variable costs can be avoided only by not operating
the vehicle. Aside from exceptional circumstances, transport rates must at least cover variable
costs. The variable category includes direct carrier costs associated with movement of each load.
These expenses are generally measured as a cost per mile or per unit of weight. Typical cost
components in this category include labor, fuel, and maintenance.

Fixed Costs: -are those costs that do not change in the short run and must be covered even if the
company is closed down (e.g., during a holiday or a strike). The fixed category includes carrier
costs not directly influenced by shipment volume. For transportation firms, fixed components
include terminals, right-of-way, information systems, and vehicles. In the short term, expenses
associated with fixed assets must be covered by contributions above variable cost on a per
shipment basis. In the long term, the fixed cost burden can be reduced somewhat by the sale of
fixed assets; however, it is often very difficult to sell rights-of-way or technologies.

Joint Costs: -are expenses unavoidably created by the decision to provide a particular service.
For example, when a carrier elects a haul a truckload from point A to point B, Either the joint
cost must be covered by the original shipper from A to B, or a back-haul shipper must be found.
Joint costs have significant impact on transportation charges because carrier quotations must
include implied joint costs based on considerations regarding an appropriate back-haul shipper
and/or back-haul charges against the original shipper.

Common Costs: -this category includes carrier costs that are incurred on behalf of all shippers
or a segment of shippers. Common costs, such as terminal or management expenses, are

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characterized as overhead. These are often allocated to a shipper according to a level of activity
like the number of shipments handled (e.g., delivery appointments). However, allocating
overhead in this manner may incorrectly assign costs.

2.1.3 Pricing Strategies

When setting rates to charge shippers, carriers can adopt one or a combination of two strategies.
Although it is possible to employ a single strategy, the combination approach considers trade-
offs between the cost of service incurred by the carrier and the value of service to the shipper.

Cost-of-Service Strategy: - is a ―buildup‖ approach where the carrier establishes a rate based on
the cost of providing the service plus a profit margin. For example, if the cost of providing a
transportation service is Br. 200 and the profit markup is 10 percent, the carrier would charge the
shipper Br. 220. The cost-of-service approach, which represents the base or minimum
transportation charge, is a pricing approach for low-value goods or in highly competitive
situations.

Value-of-Service Strategy: - is an alternative strategy that charges a rate based on perceived

shipper value rather than the cost of actually providing the service. For example, a shipper
perceives transporting 1,000 Birr of electronic equipment as more critical or valuable than 1,000
Br. of coal since the equipment is worth substantially more than the coal. As such, a shipper is
probably willing to pay more to transport it. Carriers tend to utilize value-of-service pricing for
high-value goods or when limited competition exists.

Combination Strategy: -—establishes the transport price at some intermediate level between
the cost-of-service minimum and value-of-service maximum. In standard practice, most
transportation firms use such a middle value. Logistics managers must understand the range of
prices and alternative strategies so that they can negotiate appropriately.

Net Rate Pricing: - it is a simplified pricing format. Carriers can replace individual discount
sheets and class tariffs with a single price sheet and thus make the customers interpretation of the
rate-making process much simpler.

Established discounts and accessorial charges are built into the net rates. In other words, the net
rate represents a final price. The goal is to drastically reduce carriers‘ administrative costs and

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directly respond to customer demand to simplify the rate making process. Carriers thus hope to
win over new shippers and solidify current shipper accounts by taking much of the calculation out
of finding a price. Shippers welcome pricing simplification because it promotes billing accuracy
and provides a clear understanding of how to generate savings in transportation.

 Rating
This section presents the actual pricing mechanics used by carriers and it applies specifically to
common carriers, although contract carriers utilize similar concepts.

Class Rates: - in transportation terminology, the price in Birr and cents per hundredweight to
move a specific product between two locations is referred to as the rate. The rate is listed on
pricing sheets or computer files known as tariffs. The term class rate evolved from the fact that
all products transported by common carriers are classified for pricing purposes. All products
legally transported in interregional commerce can be shipped via class rates.

Determination of common carrier class rates is a two-step process:

 The classification or grouping of the product being transported.

 The determination of the precise rate (i.e., price) based on the classification of the
product and the origin-destination points of the shipment. Typically, this procedure is
referred to as rate administration.
 Classification: - all products transported together are typically grouped into uniform
classifications. The classification takes into consideration the characteristics of a product or
commodity that will influence the cost of handling or transport. Product with similar density,
stowability, handling, liability, and value characteristics are grouped together into a class,
thereby reducing the wide range of possible ratings to a manageable size. The particular
class that a given product or commodity receives is its rating. The rating is the product's
classification placement, which is used to determine the freight rate. It is important to
understand that the classification does not define the price charged for movement of a
product. It refers to products transportation characteristics in comparison to other
commodities.

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 Products are also assigned different ratings on the basis of packaging. Glass may have a
different rating when shipped loose, in crates, or in boxes than when shipped in wrapped
protective packing.

 Rate Administration: -—once a classification rating is obtained for a product, the specific
rate must be determined. The rate per hundredweight is usually based on the shipment origin
and destination, although the actual price charged for a particular shipment is normally
subject to a minimum charge and may also be subject to surcharges or ancillary assessments.
Historically, the origin and destination rates were maintained in notebooks that had to be
updated and revised regularly.
In addition to the variable shipment charges on either per hundredweight or a per mile basis,
two additional charges are common for transportation:

D. Minimum charges and

E. Surcharges.
The minimum charge represents the amount a shipper must pay to make a shipment regardless of
weight.

Commodity Rates: -when a large quantity of a product moves between two locations on a
regular basis, it is common practice for carriers to publish a commodity rate. Commodity rates
are special or specific rates published without regard to classification.

Exception Rates: - exception rates, or exceptions to the classification, are special rates
published to provide shippers lower rates than the prevailing class rate. The original purpose of
the exception rate was to provide a special rate for a specific area, origin-destination, or
commodity when either competitive or high volume movements justified it.

An aggregate tender rate: - is utilized when a shipper agrees to provide multiple shipments to a
carrier in exchange for a discount or exception from the prevailing class rate. The primary
objective is to reduce carrier cost by permitting multiple shipment pickups during one stop at a
shipper‘s facility or to reduce the rate for the shipper because of the carrier‘s decreased
management and marketing expenses.

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A limited service rate is utilized when a shipper agrees to perform services typically performed
by the carrier, such as trailer loading, in exchange for a discount. A common example is a
shipper load and count rate, where the shipper takes responsibility for loading and counting the
cases. Another example of limited service is a released value rate, which limits carrier liability
in case of loss or damage. Normally, the carrier is responsible for full product value if loss or
damage occurs in transit.

2.2 Transport Decision Making

Transportation decision making requires the availability of information and the assignment of
knowledgeable, trained individuals to process the information in order to serve the enterprises
functional and strategic transportation needs. Information is provided through a variety of
transport documents. Utilization and analysis of the information are the responsibility of various
members of the traffic department.

 Transport Documentation
Several documents are required to perform each transport movement. The three primary
types are bills of lading, freight bills, and shipping manifests.

Bill of Lading: -is the basic document utilized in purchasing transport services. It serves as
a receipt and documents commodities and quantities shipped. For this reason, accurate
description and count are essential. In case of loss, damage, or delay, the bill of lading is the
basis for damage claims. According to Charles Taff, the bill of lading has the following three
purposes:

 It serves as a receipt for goods, subject to the classifications and tariffs that were in
effect on the date that the bill of lading was issued.
 It serves as a contract of carriage and identifies the contracting parties and prescribes
the terms and conditions of the agreement.
 It serves as documentary evidence of title.
Freight Bill: -represents a carriers method of charging for transportation services
performed. It is developed using information contained in the bill of lading. The freight
bill may be either prepaid or collect. A prepaid bill means that transport cost must be
paid prior to performance, whereas a collect shipment shifts payment responsibility to
the consignee.
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 Shipping Manifest: - lists individual stops or consignees when multiple shipments are
placed on a single vehicle. Each shipment requires a bill of lading. The manifest lists the
stop, bill of lading, weight, and case count for each shipment. The objective of the manifest
is to provide a single document that defines the contents of the total load without requiring a
review of individual bills of lading. For single-stop shipments, the manifest is the same as
the bill of lading.

2.2.1 Modes of transportation and their performance characteristics

1. Rail Network,

2. Motor Carriers

3. Water Transport,

4. Pipeline

5. Air Transport

Road Transport Advantages:

 It is a relatively cheaper mode of transport as compared to other modes.

 It is a flexible mode of transport as loading and unloading is possible at any destination.
It provides door to door service.

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  It helps to carry goods from one place to another, in places which are not connected by
other means of transport like hilly areas.
Limitation 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.
Air

 Air freighting is commonly used by companies who work with short lead times, or
advanced service levels.
 Air transportation is best suited for small, high - value items or time sensitive emergency
shipment that have to travel a long distance.
 Air carries normally move shipments that have high value but light weight.
Advantages of air transportation

 It is the fastest mode of transport

 It is very useful in transporting goods to the area, which are not accessible by any other
means.
 Reduce lead time.
 Improved service levels.
Disadvantages:

 It is relatively more expensive mode of transport.

 It is not suitable for transporting heavy and bulky goods.
 It is not suitable for short distance travel.
Rail

 Rail Transport uses freight trains for the delivery of merchandise. Freight trains are
usually powered by diesel, electricity and steam.
 Rail is suited for bulk shipment of products like fertilizer, cement, food grains and coal
etc. From the production plant to the warehouses.
Advantages of Rail transportation:

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  it is relatively faster than road transport.
 it is suitable for carrying heavy goods in large quantities over long distances.
 cost effective.

Limitations of Rail transportation:

 it is relatively expensive for carrying goods 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.

Water

 Water transport uses ships and large commercial vessels that carry billions of tons of
cargo.
 Water transport is used primarily for the movement of large bulk commodity shipment
and it is the cheapest mode for carrying such load.
 Water transport is particularly effective for significantly large quantities of goods that are
not perishable in nature and for cities or states that have water access.
Advantages of Water transportation:

 It is a relatively economical mode of transport for bulky and heavy goods.

 The cost of maintaining and constructing routes is very low most of them are naturally
made.
 It promotes international trade.
Disadvantages of Water transportation:

 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.

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Pipeline

 Pipeline is used primarily for the transport of crude petroleum, refined petroleum
products and natural gas.
 It includes a significant initial fixed cost in setting up the pipeline nd related
infrastructure.
 Pipelines are not flexible and this scope is limited with respect to commodities.
 Unable to transport a variety of materials.
Intermodal Transportation

 Intermodal Transportation is use of more than one mode of transport for the movement of
shipment from origin to its destination.
 Intermodal Operation is used two or more mode of transport to take the advantage of
inherent economies of each and thus provide the integrated service at lower cost. For
example: truck/ water / rail.

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 CHAPTER THREE: - TRAFFIC MANAGEMENT
Chapter objectives

At the end of this unit, you should be able to:

 Define and discuss Carrier Selection
 Discuss Privately Controlled Transportation

Introduction

Traffic management is typically the transportation-operating arm of the logistics function. It has
the major responsibility for seeing that the transportation operations are carried out efficiently
and effectively on a daily basis. Given the background on transportation provided in the
previous chapter, this chapter concentrates on the typical decisions and concerns facing the
traffic manager.

3.1 Carrier Selection

Perhaps the first major problem confronting the traffic manager is the selection of the carrier to
move the company‘s goods. The choices usually are between for-hire services and privately
owned vehicles. The for-hire services, especially those of common carriers, must be evaluated
on the basis of costs for the service balanced against delivery performance. There are typically
multiple services offered within the multiple modes. That is, a trucking company may offer
common-carrier and contract carrier service. Choice is not a simple matter of selecting the
minimum cost carrier or one that is the cheapest given certain performance requirements. The
traffic manager must look at the indirect effects of the choice. That is, the cheapest mode is
frequently the slowest mode with the largest shipping-size requirement. Use of such a transport
mode results, in high level of inventory at both ends of the shipment. The best choice is to
balance the inventory costs against the transportation costs to find the minimum total cost.

When selecting between for-hire and private carriage, additional considerations come into play.
The reasons for taking on the investment administrative burden of private transportation
ownership would include:

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  Lower costs of transportation
 Better transit times
 Better control over loss and damage.
In general, private (or leased) transportation becomes an attractive alternative when an adequate
volume of freight is to be moved on a regular basis so that at least 80% of the vehicle‘s capacity
(in the case of trucking) is utilized on a regular basis.

Of course, carriers may be selected based on a number of factors not directly related to their cost
and performance. These include:

 Goodwill
 Credit
 Reciprocity and
 Long-term relationship with the shipper
For –Hire Carrier Management

The management of the transportation function is different depending on whether the carriers
used are some form of for-hire or privately controlled types. Rate negotiation, documentation,
freight-bill auditing, and shipment consolidation are just a few of the concerns when the method
of transportation is for-hire. Dispatching, load balancing, and routing and scheduling are some
of the concerns when a privately controlled fleet must be managed. Often the traffic manager
must manage a mixture of both. Consider for-hire carrier management first.

Rate Negotiation: -negotiating favorable rates with carriers is an activity that is likely to
consume a major portion of the traffic manager‘s time. Published rates by common and contract
carriers should never be considered as firm. Many of them are average rates derived from
average conditions. There are at least four typical circumstances under which lower rates might
be negotiated with for-hire carriers.

Competition: -when there are significant rate differences between competing transport modes or
competing services within the same mode, the traffic manager may use the threat of switching
carriers to gain a more favorable rate. The carrier may be willing to take a lower margin in order
to retain the business.

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Similar Products: -where there is a difference in rates between essentially similar products
moving between the same points even by the same carrier, the traffic manager may argue that his
or her product deserves the same rate. The products should be similar as to weight, cube,
fragility, and risk. Comparing similar products is also a useful way of setting a rate where one
doesn‘t otherwise exist.

Increased Volume: -when the traffic manager can argue that a lower rate will result in increased
volume for the carrier because the company is in a better competitive position, the rate reduction
may be granted if the total profits for the carrier will be higher than at the previous rate.

Large Volume: -one of the convincing arguments for rate reduction is that the company can
offer the carrier a substantial volume in trade for a lower-than-average rate. The rate reduction is
usually argued on the basis of a high volume flowing between specific points. The carrier may
grant the rate reduction if it can be demonstrated that all costs can be covered and it does not
create a problem with other customers that may want the same low rate but do not have the high
movement volume to justify it.

DOMESTIC DOCUMENTATION

Three documents play a key role in the movement of domestic freight. These are:

 The bill of lading,

 The freight bill, and
 The freight claim form.
These documents facilitate the movement of freight, as well as establish liability for it. Bill of
lading and freight bill were discussed in the previous chapter; here we see the freight claim form.

Freight claims: -generally, two types of claims are made on for-hire carriers. The first arises
from the carriers legal responsibilities as a common carrier, and the second occurs because of
overcharges.

Loss, damage, and delay claims: -a common carrier is responsible for moving freight with
―reasonable dispatch‖ and without loss or damage. The bill of lading specially defines the limits
of carrier responsibility.

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Overcharges: a claim against a carrier for overcharges results from some form of misbilling. A
number of reasons for misbilling have been cited:

 application of incorrect classification,

 failure to use the correct rates,
 use of incorrect distance factors or basing points,
 simple arithmetic errors,
 carrier misrouting of joint-line shipments,
 duplicate collection of freight charges,
 errors in determining item weights, and
 Differences in interpretations of rules and tariffs.
Normal bill auditing may detect these errors before payment is made, and a corrected freight bill
may be issued. Otherwise, up to 3 years is allowed for overcharge claims on inter-region
shipments.

The reparation claim results from a type of overcharge. Because common carriers are required
by law to charge reasonable rates, the published rate paid by the shipper may later be declared by
the regulatory agency or the court to be unreasonable.

INTERNATIONAL DOCUMENTATION

Importing and exporting goods requires many more documents than domestic shipments since
multiple carriers, languages, governments, and currencies are often involved. A listing of the
more popular documents and their purposes follows:

Exporting

Bill of lading: -receipt for the cargo and a contract for transportation between the shipper and the
carrier.

Dock receipt: -used to transfer accountability for cargo between domestic and international
carrier.

Delivery instructions: -provide specific instructions to the inland carrier regarding delivery of
the goods.

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Letter of credit: -financial document guaranteeing payment to the shipper for the cargo being
transported.

Consular invoice: -used to control and identify goods shipped to particular countries.

Commercial invoice: -—bill for the good from the seller to the buyer.

Certificate of origin: -used to assure the buying country precisely in which country the goods
were produced.

Insurance certificate: -A document issued by an insurance company/broker that is used to

verify the existence of insurance coverage under specific conditions granted to listed individuals.
Insurance certificate issued by an insurer to a shipper as evidence that a shipment of merchandise
is covered under a marine policy.

Transmittal letter: -a list of the particulars of the shipment and a record of the documents being
transmitted, together with instructions for disposition of the documents.

Importing

Arrival notice: -informs the party receiving the shipment of the estimated arrival time of the
shipment along with some details of the shipment.

Customs entries: a number of documents describe the merchandise and its origin and duties
that aid in expediting clearance of the goods through customs, with or without the immediate
payment of duties.

Carrier‘s certificate and release order: -certifies to customs the owner or consignee of the
cargo.

Delivery order: -issued by the consignee to the ocean carrier as authority to release the cargo to
the inland carrier.

Freight release: -evidence that the freight charges for the cargo have been paid.

Preparation of this paperwork is facilitated by the many foreign-trade specialists who can aid the
shipper and the receiver of goods moving internationally.

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 Auditing Freight Bills

For-hire carriers have a responsibility not to overcharge or undercharge shippers for their
services. The traffic manager is especially concerned that his company not be overcharged.
Errors in computing rates can occur due to incorrect rates, product descriptions, weights, and
routing.

Traffic departments may audit their own freight bills. They justify this effort based on the
projected rebates that can be found. Companies are now aided in this effort by elaborate rating
and routing computer programs. Alternately, companies may contract with an outside agency to
audit the bills. The outside firm will typically work on a percentage of the overcharges that are
found.

Tracing and Expediting

At times the traffic manager may have a need to know where a shipment is while in transit. A
common reason is that a shipment has not arrived by a promised delivery time and a customer is
anxious for delivery. Many common carriers now have extensive computer networks to locate
shipments anywhere within their transport systems. Tracing is usually part of the regular service
offered by common carriers to their customers.

Expediting is an action taken by a traffic department to move a shipment through the

transportation system more rapidly than normal. Carriers may either provide rush service on
shipments free of charge or offer expedited service for premium.
Small Shipments

The traffic manager is usually looking for ways that he or she can reduce the total transportation
bill for the company. Small shipments represent an area of opportunity. As small shipments are
consolidated into large shipments, substantial cost reductions can be achieved. The smaller the
shipment size, the greater the benefit from consolidation. However, there is typically a
disadvantage to consolidating shipments. That is, in order to build large quantities to ship at one
time, orders must be held. This may degrade customer service and cause some loss in revenue to
the company.

3.2 Privately controlled transportation

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A company typically acquires the means of transportation by outright equipment ownership or
through leasing. Not all modes are likely to be privately controlled. Few companies would
consider owning or leasing a pipeline or a railroad. Some companies do have their own ships or
aircraft that are used primarily for freight movement. Usually the firm that controls its own
transportation is controlling a fleet of trucks. Because of this, our attention will mainly be
directed at the problems associated with trucking operations.

One of the primary reasons for fleet ownership or leasing is to realize lower costs and better
delivery performance than is possible through the use of common carriers. Decision problems of
the traffic manager generally focus on fleet utilization. Improved utilization translates into fewer
trucks and lower fleet-operating costs.

Routing--is the problem of directing vehicles through a network of highways, rivers, or airways.
Movement is by the shortest distance, time, or combination of these. Although various route
combinations can be tested by manual methods, when the problem involves many possible routes
and/or the problem must be solved frequently, mathematical approaches that can be
computerized are attractive. One popular method is called the shortest-route method, and it lends
itself to either hand calculation or computer programming.

The routing problem may also involve multiple origin and destination points. It then must be
solved considering the supply-capacity restrictions of the origin points, the demand requirements
of the destination points, as well as the costs associated with the various routes.

Vehicle Scheduling--when a firm owns transport equipment, it frequently encounters the

problem of dispatching the equipment from a home-base point to a series of stop off points and
then returning to the home base. Such a problem is common to local-airline freight-delivery
operations, school-bus routing, and replenishment deliveries to supermarkets from a central
warehouse.

The planning problem involved is one of determining:

1. The number of vehicles needed,

2. Their sizes,
3. The stop off/pick up points on a given vehicle's route, and

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 4. The sequences of stop off/pick up points.
For the typical scheduling problem involving many points and many vehicles, the number of
ways in which the vehicles can be used is enormous. Because of this, principles that result in
good solutions can be very useful.

Practical designs can usually be achieved by applying the following rules:

 Begin with the points farthest from the depot.

 Find the next available point that is nearest to the center of the points in the cluster. Add
this point to the cluster (vehicle) if the vehicle capacity is not exceeded.
 Repeat step 2 until the vehicle capacity is reached.
 Sequence the stops in the form of a teardrop.
 Find the next farthest unassigned stop from the depot and repeat steps 2-4.
 Continue until all points are assigned.
Forming routes in this manner can give consistently good route designs.

Dispatching: - dispatching trucks to make pickups and deliveries might be considered the same
problem as vehicle scheduling. The primary difference is that in vehicle scheduling it is assumed
that the volume and the stops are known before the schedule is developed. In practice, this is not
always the case.

Route Sequencing--at times the traffic manager may be less concerned about the route design
than about minimizing the number of trucks needed to meet a schedule. This requires
sequencing routes in a manner that will minimize the idle time in the schedule and therefore the
number of trucks needed.

Load Balancing--a common concern when managing a private fleet is the balancing of the
forward hauls with back haul. A truck may be loaded to full capacity outbound from its depot to
make deliveries and return empty once deliveries are made. For better utilization of equipment,
traffic managers have become aware of using the back haul to move goods back to the depot,
usually from the company's own vendors.

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 CHAPTER FOUR:- MARKETING CHANNEL MANAGEMENT
Chapter objectives

At the end of this unit, you should be able to:

 Define and discuss Marketing Channel Concept
 Discuss Marketing Flows in Marketing Channel
 Discuss Analyzing Marketing Channel Structure
 Discuss Channel Management, Channel Relationship & Competitive Dynamics

4.1 Marketing Channel Concepts

Individual consumers and corporate/organizational buyers are aware that literally (kale bekal)
thousands of goods and services are available through a very large number of diverse channel
outlets. What they might not be as well aware of is the fact that the channel structure, or the set
of institutions, agencies, and establishments through which the product must move to get to
them, can be amazingly complex. Usually, combinations of institutions specializing in
manufacturing, wholesaling, retailing, and many other areas join forces in marketing channel
arrangements to make possible the delivery of goods to industrial users or customers and to final
consumers.

From the outset, it should be recognized that not only do marketing channels satisfy demand by
supplying goods and services at the right place, quantity, quality, and price: but they also
stimulate demand through the promotional activities of the units (e.g., retailers, manufacturers‘
representatives, sales offices, and wholesalers) constituting them. Therefore, the channel should
be viewed as an orchestrated network that creates value for end-users by generating form,
possession, time, and place utilities.

Channels of distribution evolve to serve customer needs. Furthermore, channel members‘ roles
and the context of their cooperation may vary from one context to another.

A major focus of marketing channel management is delivery. It is only through distribution that
public and private goods and services can be made available for use or consumption. Producers
of such goods and services are individually capable of generating only form or structural utility
for their products and services.

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As marketers continue to face hostile, unstable, and competitive environments, distribution will
play an increasingly important role. Companies are already moving into new distribution
channels that match up with market segments more precisely and effectively.

Growing Importance of Marketing Channels—as a strategic marketing tool, the field of

marketing channels had, for many years, taken something of a ―back seat‖ to the other three
strategic areas of the marketing mix: product, price, and promotion. Many firms marketing
channel strategy as somewhat of a ―leftover‖ after the more ―important‖ product, price, and
promotional strategies had been considered.

But in recent years this relative neglect of marketing channels has been changing—in many cases
to a keen interest in the area. Why has this happened? At least five developments underlie this
shift in emphasis:

 Greater difficulty of gaining a sustainable competitive advantage

 Growing power of distributors, especially retailers in marketing channels
 The need to reduce distribution costs
 The new stress on growth
 The increasing role of technology

4.2 Marketing Flows in Marketing Channel

Functions in Marketing Channels

Manufacturers, wholesalers, and retailers as well as other channel members exist in channel
arrangements to perform one or more of the following generic functions:

 Carrying of inventory
 Demand generation, or selling
 Physical distribution
 After sale service and
 Extending credit to customers.
In getting its goods to end-users, a manufacturer must either assume all these functions or shift
some or all of them to channel intermediaries.

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The foregoing discussion underscores three important principles in the structure of marketing
channels:

F. One can eliminate or substitute institutions in the channel arrangement.

G. The functions these institutions perform, however, cannot be eliminated.
H. When institutions are eliminated, their functions are shifted either forward or backward in
the channel and, therefore, are assumed by other members.
To the extent that the same function is performed at more than one level of the marketing
channel, the workload for the function is shared by members at all levels. For example,
manufacturers, wholesalers, and retailers may all carry inventory. This duplication and
redundancy in the channel may increase the distribution cost. However, the increase in cost is
justifiable to the extent that it may be necessary in order to provide goods to customers at the
right quantity, time, and place. If the increase in cost cannot be justified, then redundancy is
wasteful and inefficient

Flows in Marketing Channels

A flow is a set of functions performed in sequence by channel members. Therefore, the term
flow is descriptive of movement. There are eight universal flows or functions. Physical
possession, ownership, and promotion are typically forward flows from producer to consumer.
Each of these moves‖ down‖ the distribution channel—a manufacturer promotes its product to a
wholesaler, which in turn promotes it to a retailer, and so on. The negotiation, financing, and
risking flow move in both directions whereas ordering and payment are backward flows.

Negotiations are prevalent throughout the channel. Manufacturers, wholesalers, and retailers
negotiate product assortments, prices, and promotions. Some channel members, such as
manufacturer representatives and sales representatives, specialize in negotiations. They do not
carry title or take physical possession of the goods.

It is important to note that one member of the channel system holds any time inventories; a
financing operation is under way.

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Channel Member Specialization in Marketing Functions and Participation in channel
Flows—all of the flows or functions in the distribution channel are indispensable—at least one
institution or agency within the system must assume responsibility for each of them if the
channel is to operate at all. But it is not necessary that every institution participate in the
furtherance of all of the flows. Certain agencies specialize in one or more of the flows, as
indicated in the following figure.

CHANNEL INSTITUTIONS PARTICULAR TO SELECTED MARKETING FLOWS

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 The use of these and other intermediaries largely boils down to their superior efficiency in the
performance of basic marketing tasks and functions. Marketing intermediaries, through their
experience, specialization, contacts, and scale, offer other channel members more than they can
usually achieve on their own in terms of their superior efficiency in the performance of basic
marketing tasks and functions.

From a managerial perspective, participation by channel members in different flows is akin to

their being members of a number of different channels, such as an ownership or title channel,
and a promotions channel. The task of channel member coordination should be extended to
these different channels. Often, new product introduction by manufacturers fails as a result of
lack of synchronization of physical and promotional flows or channels. Although national
promotion may vigorously proceed on schedule, delays in transportation and lack of distribution
warehouse space may impede the availability of the product at retail outlets.

The key to coordination of the channel flows is information sharing among channel members.
Information exchange is inherent in each channel flow. Manufacturers, wholesalers, retailers,
banks, and other channel members deploy information and telecommunication systems
technology to ensure the exchange of information required to coordinate the channel and
enhance customer service.

4.3 Analyzing Marketing Channel Structures

Marketing channels evolve over time in response to forces of change, and this evolution process
is continuous. The basic economic rationale for the emergence of channel intermediaries and
institutional arrangements can be understood in terms of the need for exchange and exchange
efficiency, minimization of assortment discrepancies, and the facilitation of search procedures.
But such a rationale provides little information as to why channels are structured one way or
another to satisfy this need. More specifically, how can one account for the variations in channel
structure in terms of the number of levels and the extent of specialization of functions or flows?

i. Channels as a Network of Systems

Channels consist of interdependent institutions and agencies, in other words, that their members
are interdependent relative to task performance. A channel can be viewed as a system because of
this interdependency—it is a system of interrelated and interdependent components engaged in
producing an output. A distribution channel comprises two major sectors:
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  Commercial and
 End user
The commercial subsystem includes a set of vertically aligned marketing institutions and
agencies, such as manufacturers, wholesalers, and retailers. Each commercial channel member is
dependent on other institutions for achieving its goal(s). A producer is dependent on others in
getting its product to the end-user and, thereby, in gaining its objectives.

The marketing channel has boundaries, as all systems do. These include:

1 Geographic (market area),

2 Economic (the capability to handle a certain volume of goods or services), and
3 Human (the capability to interact)
Furthermore, a channel, like other systems, is part of a larger system that provides it with inputs
and imposes restrictions on its operation. A channel exists as part of an economy‘s distribution
structure that encompasses other channels. The economy‘s distribution structure is a subsystem
of the national environment, which is a subsystem of the international environments. Both the
national and international environments encompass physical, economic, social, cultural, and
political subsystems that influence the development of and impose constraints on the focal
channel system.

It is important here to recognize that marketing channels evolve and function in dynamic
environments. A channel structure is determined in part by the environment in which the
channel operates.

The survival and growth of certain channel members and the demise of others is best explained
by viewing the channel as an open system. Channel members must adapt to a changing
environment. As they alter their functions and adjust their organizations and programs to cope
with the changing environment, they impact the entire channel organization. Therefore, the
evolution of channel systems is an ongoing adaptation of organizations to economic,
technological, and sociopolitical forces both within the channel and in the external environment.

ii. Service Outputs as Determinants of Channel Structure

To explain the key elements that determine how channels are structured, Bucklin has developed
a rather elaborate theory, the rudiments of which are outlined briefly here. In essence, Bucklin

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argues that channel members perform various marketing functions to meet expressed demand for
service outputs. In order to remain viable in the long run, channel members must perform these
functions and participate in channel flows in a manner conducive to the reduction of consumers‘
search, waiting time, storage, and other costs. Other things being equal (especially price), end-
users will prefer to deal with a marketing channel that provides a higher level of service outputs.

Bucklin has specified four generic service outputs:

 Spatial convenience (or market decentralization),

 Lot size,
 Waiting or delivery time, and
 Product variety (or assortment depth and breadth).
Spatial Convenience—provided by market decentralization of wholesale and/or retail outlets
increases consumers‘ satisfaction by reducing transportation requirements and search costs.

Community shopping centers and neighborhood supermarkets, convenience stores, vending

machines, and gas stations are but a few examples of channel forms designed to satisfy
consumer‘s demand for spatial convenience.

Lot Size— the number of units to be purchased at each transaction is dependent on the
customers‘ buying power.

Waiting Time—the third service output identified by Bucklin, is defined as the time period that
the industrial or household consumer must wait between ordering and receiving goods.

Product Variety—the wider the breadth of assortment or the greater the product variety
available to the consumer, the higher the output of the marketing channel and the higher the
distribution cost, because greater assortment entails carrying more inventory.

The main goal underlying all of these service outputs is the delivery of service quality. Service
quality is defined as the gap between the consumers‘ expectations and perceptions; that is, the
quality of a service will be rated high when the service delivered exceeds the consumer‘s
expectations, and it will be rated poor when it does not meet them. High quality should be
designed into the channel service system in response to the customer or end-user‘s expectations
in designing each elements of the service.

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These service outputs are achieved through the performance of the marketing functions or flows.
The decisions on the amount of output to be delivered by channel members are directly
influenced by:
 The resource base,
 Capabilities of channel members to perform various marketing functions, and
 The kind of service outputs desired by the end-users.
The result of the interaction between channel member resources and end-user requirements is a
channel structure or arrangement that is capable of satisfying the needs of both channel members
and end-users. Under reasonably competitive conditions and low barriers to entry, the channel
structure that evolves over the long run should comprise a group of institutions so well adjusted
to the structure‘s task and environment that no other type of arrangement could create greater
returns (e.g., profits or other goals), or more end-user satisfaction per Birr of product cost. This
arrangement is called the normative structure.

The more service outputs required by end-users, the more likely it is that intermediaries will be
included in the channel structure. Thus, if end-users wish to purchase in small lots, then there
are likely to be numerous intermediaries performing sorting operations between mass producers
and the final users. If waiting time is to be reduced, then decentralization of outlets must follow,
and, therefore, more intermediaries will be included in the channel structure. The same type of
reasoning can be applied to all of the service outputs. As service outputs increase, however,
costs will undoubtedly increase, and these higher costs will tend to be reflected in higher prices
to end-users.

End-users are usually faced with a choice between channel structures that provide few service
outputs bet relatively low prices and structures in which both service outputs and prices are high.
The more the end-users participate in the marketing flows (in terms of search, physical
possession, financing, and the like), the more they should be compensated for their efforts.
Where channel service outputs are low, end-users are supposedly compensated for their
additional efforts through the lower relative prices provided by such channel structures.

Thus, when construction machinery manufacturers purchase brake parts in carload quantities
from firms and are willing to wait several months for delivery from distant plants, they can
expect to pay lower prices than if they were to order the same parts from a local warehouse

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distributor who is willing to ship in smaller quantities and to deliver the parts much more
quickly. The lower the level of service outputs provided, the greater the economy that can be
achieved by channel members, and vice versa.

The final structure that emerges is, therefore, a function of the desire of channel members to
achieve economies of scale relative to each of the marketing flows and the demand of consumers
for various service outputs. An optimal structure is one that minimizes the total costs of the
system (both commercial and end-user) by appropriately adjusting the level of the service
outputs. Within a channel, members can attempt to shift the degree of their participation in each
flow in order to provide the greatest possible service output at the lowest possible cost. But such
shifting calls for a tremendous amount of coordination and cooperation. This is one reason the
management of channel systems is so critical.

4.4 Channel Management, Channel Relationship & Competitive Dynamics

Economic battles involving producers versus producers or intermediaries versus intermediaries

will not, in long run, determine the ultimate victors in the marketplace. Rather, the relevant unit
of competition is an entire distribution system comprising a network of interrelated institutions
and agencies.
What do Hallmark, Bata Shoe, Caterpillar Tractor, Sony, and Compaq Computer all have in
common? What these companies all share are solid ties to distribution channels that distinguish
them from competitors and allow them to exploit their product lines and individual brand
advantages. By cleverly managing their chosen channels, these companies have successfully
differentiated themselves in their respective markets.

Now for the million-dollar question—how can a firm distinguish itself with distribution channel
that will set it apart from its rivals? The following are strategies that can furnish this kind of
competitive advantage.

THE EXCLUSIVITY ROUTE

Exclusivity provides the supplier with tighter ―image control,‖ that is, display, sale installation,
or repair. It also regulates the number and type of intermediaries, which is a key advantage in
managing the network. Exclusivity may put the channel in financial jeopardy if insufficient

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demand exists to sustain a typical dealer‘s cash flow. Moreover, if some end-users defect to new
or different channels to buy the same category of product, this route may also fail.

ENTER THE SECOND BRAND

Another classic differentiation strategy is for a supplier to develop unique second brands for
distribution channels with markedly different price positions in a market. Unfortunately, if the
second brand is not noticeably different from the primary brand, this strategy can backfire.
Obviously, people will buy the discount brand believing that they are getting the same thing for
less, thus biting into the primary brand sales.

LET‘S BE UNIQUE

Another way to differentiate is by using nontraditional channels. Although unique channels may
limit a brand‘s coverage, for niche marketers in a market they can represent a way to gain market
access and customer attention. Going through distribution channels where competitors are not
present can powerfully differentiate a company from rivals and will often avoid head-to-head
price wars.

CALL THE EXPERTS

A way to rise above adversaries in an industry is to create and nurture dealers, distributors, or
agents who are rated a cut above the rest in regard to customer-service quality. This nurturing
requires time, commitment, and follow-up. Developing these relationships within the
distribution channel allows for differentiation from competitors because the distribution partners
work together cooperatively to ultimately meet customer needs.

Channel Relationships: From Transactions to Partnerships and Strategic Alliances

In every marketing channel, the members that do business together have some kind of working
relationships.

The dichotomy is helpful in defining the range of relationship types in the channels according to
their nature (ad hoc or ongoing), and purpose (strategic or operational). Transactional
relationships occur when the customer and supplier focus on the timely exchange of basic
products for highly competitive prices. Partnering relationships, or partnerships, occur through
extensive social, economic, service, and technical ties over time. The intent in a strategic

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partnership is to lower total costs and/or increase value for the channel, thereby achieving mutual
benefit. Partnering relationships require communication, cooperation, trust, and commitment
among channel members.

Channel partnership is an in-depth collaboration between suppliers and their intermediaries or

between suppliers and their customers. Parties must agree on objectives, policies, and
procedures for ordering and physically distributing products. They must experiment with, and in
some cases, zealously adopt radically new ways of sharing responsibilities for order fulfillment,
inventory management, distribution, purchasing, and post-sales service.

Generally strategic alliances and partnerships require certain conditions in order to be effective:

 Recognition of the interdependence of channel members,

 Close cooperation between channel members,
 Careful specification of the roles and functions, that is, joint rights and responsibilities
each play in the marketing channel,
 Coordinated effort focused on a common goal(s), and
 Trust and communication between channel members.
Competitive Dynamics
Viewing channels as competitive units is significant for all companies, including those that
market their products through a number of different channels and those that develop assortments
of goods and services by purchasing from a variety of supplies. The way individual
manufacturers coordinate their activities with the various intermediaries with whom they deal,
and vice versa, will determine the viability of one type of channel alignment versus other channel
alignments made up of different institutions and agencies handling similar or substitutable
merchandise.

If, within a given marketing channel, an institution or agency does not see fit to coordinate
effectively and efficiently with other members of the same network, but rather pursues its own
goals in an independent, self-serving manner, it is possible to predict the eventual demise of the
channel alignment.

Myopic channel members are most concerned about the dealings that take place with those
channel members immediately adjacent to them, from whom they buy and to whom they sell. In
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this sense, such channel intermediaries are not, in fact, functioning as enlisted components of a
distribution system, but rather are acting individually as independent markets, with each one
choosing those products and suppliers that best help him serve the target groups for whom he
acts as a purchasing agent.

This notion of each channel intermediary acting as an independent market must be qualified and
analyzed with regard to total channel performance. Although an ―independent‖ orientation on
the part of any channel member may indeed be warranted at times, it is put into effect only at the
risk of sacrificing the levels of coordination necessary for overall channel effectiveness,
efficiency, growth, and long-run survival.

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 CHAPTER FIVE: - CHANNEL PARTICIPANTS
Chapter objectives

At the end of this unit, you should be able to:

 Know an overview of the channel participants

 Discuss Producer & Manufacturer
 Discuss Intermediaries
5.1 An Overview of the Channel Participants
The basic dichotomy between channel memberships is based on performance or nonperformance
of the negotiatory functions (buying, selling, and transferring title). Participants who engage in
these functions are linked together by the flows of negotiation or ownership and are therefore
members of the contractual organization (the marketing channel).
The three basic divisions of the marketing channel are depicted as;

 Producers and manufacturers,

 Intermediaries,
o Wholesale and
o Retail intermediaries
 Final users
o Consumer and
o Industrial users
In the context of the management perspective we are using, it is more appropriate to view final
users as target markets that are served by the commercial subsystem of the channel. The
commercial channel, then, by definition excludes final users.

Since facilitating agencies do not perform negotiatory functions, they are not members of the
channel. They do, however, participate in the operation of the channel by performing other
functions. Six of the more common types of facilitating agencies are:

 Transportation firms
 Storage firms
 Advertising agencies
 Financial firms

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  Insurance firms
 Marketing research firms.
5.2 Producers and Manufacturers
For our purpose producers and manufacturers consist of firms that are involved in extracting,
growing, or making products. This category includes forestry and fishing, mining, construction,
manufacturing, and some service industries.
The range of producing and manufacturing firms is enormous, both in terms of the diversity of
goods and services produced and the size of the firms. It includes firms that make everything
from straight pins to jet planes and that vary in size from a one-person operation to giant
multinational corporations with many thousands of employees and multibillion-Birr sales
volumes.
But even with all this diversity, a thread of commonality runs through producing and
manufacturing firms: All exist to offer products that satisfy the needs of markets. For the needs
of those markets to be satisfied, the products of producing and manufacturing firms must be
made available to those markets. Thus, producing and manufacturing firms must somehow see
that their products are distributed to their intended markets.
Most producing and manufacturing firms, both large and small, however, are not in a favorable
position to distribute their products directly to their final user markets. Quite often, they lack
the requisite expertise and the economies of scale (and/or scope) to perform all of the
distribution tasks necessary to distribute their products effectively and efficiently to their final
users.
5.3 Intermediaries
Intermediaries (or middlemen) are independent businesses that assist producers and
manufacturers and final users in the performance of negotiatory functions and other distribution
tasks. Intermediaries thus participate in the negotiation and/or ownership flows. They operate
basically at two levels:
 Wholesale and
 Retail.
5.3.1 Wholesale Intermediaries

Wholesalers consist of businesses that are engaged in selling goods for resale or business use to
retail, industrial, commercial, institutional, professional, or agricultural firms, as well as to other
wholesalers. Also included are firms acting as agents or brokers in either buying goods for or
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selling them to such customers.
Types and Kinds of Wholesalers—the most comprehensive and commonly used classification
of wholesalers is:
I. Merchant wholesalers
J. Agents, brokers, and commission merchants
K. Manufacturers‘ sales branches and offices
The following figure provides a schematic diagram of these three types of wholesalers.
Schematic Overview of the Three Major Types of Wholesalers

All
wholesale
firms

Independent Manufacturer
Middlemen owned

Merchant Agents, brokers, Manufacturers‘

Wholesalers and sales branches
Commission and offices
merchants

Merchant Wholesaler—are firms engaged primarily in buying, taking title to, usually storing,
and physically handling products in relatively large quantities and then reselling the products in
smaller quantities to retailers, to industrial, commercial, or institutional concerns, and to other
wholesalers.
They go under many different names, such as:
 Wholesalers,
 Jobber,
 Distributor,
 Industrial distributor,
 Supply house,

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  Assembler,
 Importer,
 Exporter, and others.
Agents, Brokers, and Commission Merchants—are also independent middlemen who do not,
for all or most of their business, take title to the goods in which they deal, but who are actively
involved in negotiatory functions of buying and selling while acting on behalf of their clients.
They are usually compensated in the form of commissions on sales or purchases.
Some of the more common types are known in their industries as:
 Manufacturers‘ agents,
 Commission merchants,
 Brokers,
 Selling agents, and
 Import and export agents.
Manufacturers‘ Sales Branches and Offices—are owned and operated by manufacturers but
are physically separated from manufacturing plants. They are used primarily for the purpose of
distributing the manufacturer‘s own products at wholesale. Some have warehousing facilities
where inventories are maintained, while others are merely sales offices. Some of them also
wholesale allied and supplementary products purchased from other manufacturers.
DISTRIBUTION TASKS PERFORMED BY MERCHANT WHOLESALERS
Merchant wholesalers serve manufacturers as well as retailers and other customers. They have
survived as intermediaries in the marketing channel because, as specialists in the performance of
distribution tasks, they can operate at higher levels of effectiveness and efficiency.

Modern, well-managed merchant wholesalers are especially well suited for performing the
following types of distribution tasks for manufacture

1. Providing for market coverage

2. Making sales contacts
3. Holding inventory
4. Processing orders
5. Gathering market information
6. Offering customer support

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Market Coverage—is provided by merchant wholesalers to manufacturers because the markets
for the products of most manufacturers consist of many customers spread over large
geographical areas. To have good market coverage so that their products are readily available to
customers when needed, manufacturers have relied increasingly on merchant wholesalers to
secure the necessary market coverage at reasonable cost.

Sales Contact—is a valuable service provided by merchant wholesalers. For manufacturers, the
cost of maintaining an outside sales force is quite high. If a manufacturer‘s product is sold to
many customers over a large geographical area, the cost of covering the territory with its sales
force can be prohibitive. By using wholesalers to reach all or a significant portion of their
customers, manufacturers may be able to reduce substantially the costs of outside sales contacts
because their sales force would be calling on a relatively small number of wholesalers rather than
the much larger number of customers.

Holding Inventory—is another crucial task performed by wholesalers for manufacturers.

Merchant wholesalers take title to, and usually stock, the products of the manufacturers whom
they represent. By doing so, they can reduce the manufacturers‘ financial burden and reduce
some of the manufacturers‘ risk associated with holding large inventories. Moreover, by
providing a ready outlet for manufacturers‘ products, wholesalers help manufacturers to better
plan their production schedules.

Order Processing—performed by wholesalers is very helpful to manufacturers because many

customers buy in small quantities. Yet manufacturers both large and small find it extremely
inefficient to attempt to fill large numbers of small orders from thousands of customers.
Wholesalers, on the other hand, are specifically geared to handle small orders from many
customers. By carrying the products of many manufacturers, wholesalers‘ order processing costs
can be absorbed by the sale of a broader array of products than that of the typical manufacturer.

Gathering Market Information—is another task of substantial benefit to manufacturers.

Wholesalers are usually quite close to their customers geographically and in many cases have
continuous contact through frequent sales calls on their customers. Hence, they are in a good
position to learn about customers‘ product and service requirements. Such information, if passed
on to manufacturers, can be valuable for product planning, pricing, and the development of

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competitive marketing strategy. Some wholesalers have even begun to use the Internet to
provide information to link suppliers and customers together.

Customer Support—is the final distribution task that wholesalers provide for manufacturers.
Products may need to be exchanged or returned, or a customer may require setup, adjustment,
repairs, or technical assistance. For manufacturers to provide such services directly to large
numbers of customers can be very costly. Instead, manufacturers can use wholesalers to assist
them in providing these services to customers. These extra support by wholesalers, often referred
to as value added services, plays a crucial role in making wholesalers vital members of the
marketing channel from the stand points of both the manufacturers who supply the and the
customers to whom they sell.

In addition to performing the six distribution tasks for manufacturers, merchant wholesalers are
equally well suited to perform the following distribution tasks for their customers:

 Assuring product availability

 Providing customer service
 Extending credit and financial assistance
 Offering assortment convenience
 Breaking bulk
 Helping customers with advice and technical support
Product Availability--providing for the ready availability of products, is probably the most
basic distribution task performed by wholesalers for customers. Because of the closeness of
wholesalers to their customers and/or their sensitivity to customers‘ needs, they can provide a
level of product availability that many manufacturers could not easily match.

Customer Service—customers often require services such as delivery, repairs, or warranty

work. By making these services available to their customers, wholesalers save their
customers effort and expense.

Credit and Financial Assistance—are provided by wholesalers in two ways. First, by

extending open account credit to customers on products sold, wholesalers allow customers to use
products in their business before having to pay for them. Second, by stocking and providing

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ready availability for many of the items needed by their customers, wholesalers significantly
reduce the financial inventory burden their customers would bear if they had to stock all the
products themselves.

Assortment Convenience—refers to the wholesaler‘s ability to bring together from a variety of

manufacturers an assortment of products, greatly simplifying customers‘ ordering tasks. Instead
of having to order separately from dozens or even hundreds of manufacturers, customers can turn
to one or a few general line or specialist wholesalers who can provide them with all or most of
the products they need.

Breaking Bulk—many customers do not use large quantities of products, or they may prefer to
order only a small quantity at a time. Many manufacturers find it uneconomical to fill small
orders and will establish minimum order requirements to discourage them. By buying large
quantities from manufacturers and breaking down these ―bulk‖ orders into smaller quantities,
wholesalers provide customers with the ability to buy only the quantity they need.

Advice and Technical Support--many products, even those that are not considered technical,
may still require a certain amount of technical advice and assistance for proper use, as well as
advice on how they should be sold. Wholesalers, especially through a well-trained outside sales
force, are able to provide this kind of technical and business assistance to customers

DISTRIBUTION TASKS PERFORMED BY AGENT WHOLESALERS

Agent wholesalers do not take title to the products they sell. Also, as a rule, they do not
perform as many distribution tasks as a typical merchant wholesaler. Manufacturers‘ agents
(also referred to as manufacturers‘ representatives or ―reps‖), for example, specialize mainly in
performing the market converge and sales contact distribution tasks for manufacturers. In effect,
the manufacturers‘ agents substitute for the manufacturer‘s outside sales force. Thus, they are
especially valuable to manufacturers who are not capable of fielding their own sales forces, or to
supplement the selling efforts of those manufacturers who do have their own sales forces but
who find it uneconomical to use them for certain product categories or territories.

Manufacturers‘ agents generally represent several manufacturers at the same time and operate in
a wide range of product and service categories such as house wares, hardware, chemicals, food-
processing equipment, electronics and electrical components, steel, and packaging. Services sold

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by manufacturers‘ agents include painting, planting services, machinery rebuilding, and a variety
of business service

Selling Agents—another type of agent wholesaler, usually perform more distribution tasks than
manufacturers‘ representatives. In fact, they may handle virtually the entire marketing and sales
effort for the manufacturers they represent. Thus, although selling agents usually do not
physically hold inventory or take title, they may perform many if not most of the other
distribution tasks, such as providing for market coverage, sales contact, order processing,
marketing information, product availability, and customer services.

Brokers—is usually defined as a go-between, or a party who brings buyers and sellers together
so that a transaction can be consummated. In the strictest definition sense, then, a broker would
only perform one distribution task—providing market information. Yet, in practice, some
brokers may perform many if not most of the distribution tasks, so that for all practical purposes
there is little to distinguish them from manufacturers‘ representatives or selling agents.

Commission Merchants of significance mainly in agricultural markets. They actually perform a

wide range of distribution tasks including physically holding inventory (though not taking title),
providing market coverage, sales contact, breaking bulk, credit, and order processing. These
distribution tasks are performed in the course of the commission merchant‘s acting on behalf of
his or her principal (producers or manufacturers).

5.3.2 Retail Intermediaries

Retailers consist of business firms engaged primarily in selling merchandise for personal or
household consumption and rendering services incidental to the sale of goods.

RETAILERS‘ GROWING POWER IN MARKETING CHANNELS—the power and influence

of retailers in marketing channels have been growing. This trend follows three major
developments:

 Increase in size and buying power

 Application of advanced technologies
 Use of modern marketing concepts and techniques

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Increase in size and buying power—since size translates into power, as retailers become larger;
their capacity to influence the actions of other channel members (wholesalers and manufacturers)
also becomes greater.

Giant retailers with their enormous buying power, large market shares, and sophisticated
managements have been referred to as power retailers and category killers, terms that convey the
dominant positions these retailers enjoy.

Application of advanced technologies—the many technological innovations of recent years have

not gone unnoticed by retailers. Indeed, retailers have become astute followers and (more
important) ardent users of many new technologies that have made them more sophisticated and
demanding channel members.

Use of modern marketing concepts and techniques—stressing customer orientation whereby the
firm that tries to adapt its offerings to more precisely meet the needs of customers, has been
around since the 1950s. But it was not until the 1990s that the marketing concept really caught
on in retailing. Retailers had traditionally been more supplier (vendor) driven than market
driven. As the 1990s unfolded, however, more and more retailers in many lines of trade
discovered the marketing concept and the power of modern marketing methods for surviving and
prospering in fiercely competitive retail markets.

DISTRIBUTION TASKS PERFORMED BY RETAILERS

The role of retailers in performing distribution task is summarized by Charles Y.Lazarus:

The role of the retailer in the distribution channel, regardless of his size or type, is to interpret the
demands of his customers and to find and stock the goods these customers want, when they want
them, and in the way they want them. This adds up to having the right assortments at the time
customers are ready to buy.

Elaborating on Lazarus‘s list, we may specify the distribution tasks for which retailers are
especially well suited, as follows:

 Expanding market coverage and increasing sales contact. Offering manpower and
physical facilities that enable producers/manufacturers and wholesalers to have many
points of contact with consumers close to their places of residence.

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  Promotion. Providing personal selling, advertising, and display to aid in selling
suppliers‘ products.
 Communication. Interpreting consumer demand and relaying this information back
through the channel.
 Bulk breaking. Dividing large quantities into consumer-sized lots, thereby providing
economies for suppliers (by accepting relatively large shipments) and convenience for
consumers.
 Storage. Offering storage, so that suppliers can have widely dispersed inventories of
their products at low cost and enabling consumers to have close access to the products of
producers/manufacturers and wholesalers.
 Risk bearing. Removing substantial risk from the producer/manufacturer (or wholesaler)
by ordering and accepting delivery in advance of the season.

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 CHAPTER SIX:- DEVELOPING CHANNEL DESIGHN
Chapter objectives

At the end of this unit, you should be able to:

 Know the Definition Channel Design
 Discuss the A paradigm of Channel Design
6.1 Channel Design
There is wide variation in the use of the term design as it applies to the marketing channel.
Some authors use the term as a noun to describe channel structure. Others use it to denote the
formation of a new channel from scratch, while still others use it more broadly to include
modifications to existing channels. Finally, design has also been used synonymously with the
term selection, with no distinction made between the two.

Such variations in usage can lead to confusion. Therefore, before proceeding further we will
define more precisely what we mean by design as it applies to the marketing channel:

Channel design refers to those decisions involving the development of new marketing
channels where none had existed before, or to the modification of existing channels.

The first key point to note in this definition is that channel design is presented as a decision faced
by the marketer. In this sense channel design is similar to the other decision areas of the
marketing mix, namely, product price, and promotion. In other words, when viewed from a
management perspective, the marketer must make decisions in each of these areas of the
marketing mix.

A second point is that channel design is used in the broader sense to include either setting up
channels from scratch or modifying existing channels. In fact, modification or redesign of
existing channels sometimes referred to in recent jargon, as reengineering the marketing channel,
is actually in practice a more common occurrence than setting up channels from scratch.

Third, when used in its verb form, the term design implies that the marketer is consciously and
actively allocating the distribution tasks in an attempt to develop an efficient channel structure.
The term is not used to refer to channel structures that have simply evolved. In short, design
means that management has taken an active role in the development of the channel.

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Fourth, the term selection, as we will be using it, refers to only one phase of channel design—the
selection of the actual channel members.

Finally, the term channel design also has a strategic connotation because channel design should
be used as an integral part of the firm‘s attempt to gain a differential advantage in the market.
The using channel design as a strategic tool for gaining a differential advantage should be
uppermost in the channel manager‘s thinking when designing marketing channels.

6.2 A Paradigm of the Channel Design

The channel design decision can be broken down into seven phases or steps.

3. Recognizing the need for a channel design decision

4. Setting and coordinating distribution objectives
5. Specifying the distribution tasks
6. Developing possible alternative channel structures
7. Evaluating the variables affecting channel structure
8. Choosing the ―best‖ channel structure
9. Selecting the channel members
Phase 1: Recognizing the Need for a channel Design Decision

Many situations can indicate the need for a channel design decision. Among them are the
following:

 Developing a new product or product line. If existing channels for other products are
not suitable for the new product or product line, a new channel may have to be set up or
the existing channels modified in some fashion.
 Aiming an existing product at a new target market. A common example of this
situation is a firm‘s introduction of a product in the consumer market after it as sold in
the industrial market.8
 Making a major change in some other component of the marketing mix. For
example, a new pricing policy emphasizing lower prices may require a shift to lower-
price dealers such as discount mass merchandisers.
 Establishing a new firm, from scratch or as a result of mergers or acquisitions.

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  Adapting to changing existing intermediaries might make their policies so as to
inhibit the attainment of the firm‘s distribution objectives. For example, if
intermediaries begin to emphasize their own private brands, then the manufacturer may
want to add new distributors who will promote the company‘s products more
enthusiastically.
 Dealing with changes in availability of particular kinds of intermediaries.
 Opening up new geographic marketing areas (territories).
 Facing the occurrence of major environmental changes. These changes may be in the
economic, sociocultural, competitive, technological, or legal spheres.
 Meeting the challenge of conflict or other behavioral problems. For example, in
some instances conflict may become so intense that it is not possible to resolve it without
modifying the channel. A loss of power by a manufacturer to his or her distributors may
also foster the need to design an entirely new channel. Further, changing roles and
communication difficulties may confront the marketer with channel design decisions.
 Reviewing and evaluating. The regular periodic reviews and evaluations undertaken by
a firm may point to the need for changes in the existing channels and possibly the need
for new channels.
This list, although by no means comprehensive, offers an overview of the more common
conditions that may require the channel manager to make channel design decisions. It is
important to be familiar with this list because channel design decisions are not necessarily
obvious, especially those involving modification rather than the setting up of new channels.

Phase 2: Setting and Coordinating Distribution Objectives

Having recognized that a channel design decision is needed, the channel manager should try to
develop a channel structure, whether from scratch or by modifying existing channels that will
help achieve the firm‘s distribution objectives efficiently. Yet quite often at this stage of the
channel design decision, the firm‘s distribution objectives are not explicitly formulated,
particularly since the changed conditions that created the need for channel design decisions
might also have created the need for new or modified distribution objectives. It is important for
the channel manager to evaluate carefully the firm‘s distribution objectives at this point to see if
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new ones are needed. An examination of the distribution objectives must also be made to see if
they are coordinated with objectives and strategies in the other areas of the marketing mix
(product, price, and promotion), and with the overall objectives and strategies of the firm.

In order to set distribution objectives that are well coordinated with other marketing and firm
objectives and strategies, channel managers need to perform three tasks:

L. They should familiarize themselves with the objectives and strategies in the other
marketing mix areas and any other relevant objectives and strategies of the firm.
M. They should set distribution objectives and state them explicitly.
N. They should check to see if the distribution objectives they have set are congruent with
marketing and other general objectives and strategies of the firm.
Becoming Familiar with Objectives and Strategies.

Whoever is responsible for setting distribution objectives should also make an effort to learn
which existing objectives and strategies in the firm may impinge on the distribution objectives to
be set. In practice, often the same individual(s) who set(s) objectives for other components of
the marketing mix will do so for distribution. But even in this case, it is necessary to ―think
through‖ the interrelationships of the various marketing objectives and policies.

Setting Explicit Distribution Objectives

Distribution objectives are essentially statements describing the part that distribution is expected
to play in achieving the firm‘s overall marketing objectives. That is, to make products available
to the chosen/targeted market at the lowest possible cost.

Checking for Congruency

A congruency check in the context of channel design involves verifying that the distribution
objectives do not conflict with objectives in the other areas of the marketing mix (product, price,
and promotion) or with the overall marketing and general objectives and strategies of the
company. In order to make such a check, it is important to examine the interrelationships and
hierarchy of objectives and strategies in the firm.

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In the above figure, objectives and strategies for the four components of the marketing mix are
connected via two-way arrows. This meant to convey the idea that these areas are interrelated.
Hence, objectives and strategies pursued in any of these areas must generally be congruent with
the other areas.

The above figure also suggests a hierarchy of objectives and strategies in the sense that
objectives and strategies in each area of the marketing mix must also be congruent with higher-
level marketing objectives and strategies. These in turn must be congruent with the even higher
set of overall objectives and strategies of the firm.

Checking for congruency in this fashion is particularly important when setting distribution
objectives because distribution objectives can have a substantial long- term impact on the firm,
especially if the distribution objective departs significantly from established objectives and
strategies.

Phase 3: Specifying the Distribution Tasks

After the distribution objectives have been set and coordinated, a number of distribution tasks
(functions) must be performed if the distribution objectives are to be met. The channel manager
should, therefore, specify explicitly the nature of these tasks.

Over the years marketing scholars have discussed numerous lists of marketing tasks (functions).
These lists generally included such activities as buying, selling, communication, transportation,
storage, risk taking, financing, breaking bulk, and others.

The kinds of tasks required to meet specific distribution objectives must be precisely stated, such
as the following to make the products readily available:

 Gather information on target market shopping patterns

 Promote product availability in the target market
 Maintain inventory storage to assure timely availability
 Compile information about product features
 Provide for hands-on tryout of product

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  Sell against competitive products
 Process and fill specific customer orders
 Transport the product
 Arrange for credit provisions
 Provide product warranty service
 Provide repair and restringing service
 Establish product return procedure
Phase 4: Developing Possible Alternative Channel Structures

Having specified in detail the particular distribution tasks that need to be performed to achieve
the distribution objectives, the channel manager should then consider alternative ways of
allocating these tasks. The allocation alternatives (possible channel structures) should be in
terms of the following three dimensions.

 Number of levels in the channel

 Intensity at the various levels, and
 Types of intermediaries at each level
Number of Levels

The number of levels in a channel can range from one levels—which is the most direct
(manufacturer---user)—up to four levels and occasionally even higher.

The number of alternatives that the channel manager can realistically consider for this
structural dimension is often limited to no more than two or three choices. For example, it
might be feasible to consider going direct (one-level), using one intermediary (two-level),
or possibly two intermediaries (three-level).

These limitations result from a variety of factors such as the particular industry practices, nature
and size of the market, availability of intermediaries, and other variables.

Intensity at the Various Levels

Intensity refers to the number of intermediaries at each level of the marketing channel.
Traditionally this dimension has been broken into three categories:

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 1 Intensive-- (sometimes termed saturation) means that as many outlets as possible are
used at each level of the channel. Many consumer convenience goods and industrial
operating supplies fit this category.
2 Selective—means that not all possible intermediaries at a particular level are used, but
rather that those included in the channel are carefully chosen. Consumer shopping goods
are often in this category.
3 Exclusive—is actually a way referring to a very highly selective pattern of distribution?
In this case only one intermediary in a particular market area is used. Specialty goods
often fit this category.
The intensity of distribution dimension is a very important aspect of channel structure because it
is often a key factor in the firm‘s basic marketing strategy and will also reflect the firm‘s overall
corporate objectives and strategies.

Generally, if a firm‘s basic marketing strategy emphasizes mass appeal for its products it will
most likely have to develop a channel structure that stresses intensive distribution, whereas a
marketing strategy that stresses more narrow segmented marketing will most probably call for a
more selective channel structure.

Types of Intermediaries

The third dimension of channel structure deals with the particular types of intermediaries to be
used (if any) at the various levels of the channel. In the previous chapter we discussed different
types of intermediaries available. The emphasis of the channel manager‘s analysis at this point
should focus on the basic types of distribution tasks performed by these intermediaries.

Phase 5: Evaluating the Variables Affecting Channel

Structure

Having laid out several possible alternative channel structures, the channel manager should then
evaluate a number of variables to determine how they are likely to influence various channel
structures.

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Although there are a myriad of such variables, six basic categories can be formed in the analysis
of alternative channel structures:

 Market variables
 Product variables
 Company variables
 Intermediary variables
 Environmental variables
 Behavioral variables
In the course of discussing the variables in these categories, we will often cite a number of
heuristics (rules of thumb) that relate these variables to channel structure. An example of one
such heuristic is as follows:

If a product is technically complex, the manufacturer should sell directly to its user instead
of through intermediaries.

Here a product variable (technical complexity) seemingly yields a simple prescription for
channel structure. It would be nice if things were this simple, but unfortunately such is not the
case.

With this caveat in mind, we turn to a discussion of these six categories of variables and some of
the related heuristics relevant to choosing channel structure.

Market variables

All of modern marketing management including channel management is based on the underlying
philosophy of the marketing concept, which stresses customer (market) orientation. In
developing and adapting the marketing mix, then, marketing managers should take their basic
cues from the needs and wants of the target markets at which they are aiming. Hence, just as the
products a firm offers, the prices it charges, and the promotional messages it employs should
closely reflect the needs and wants of the target market, so too should the structure of its
marketing channels. Market variables are therefore the most fundamental to consider when
designing a marketing channel.

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Four basic subcategories of market variables are particularly important in influencing channel
structure. They are:

Market Geography - refers to the geographical size of markets and their physical location and
distance from the producer or manufacturer. From a channel design standpoint, the basic tasks
that emerge when dealing with market geography are the development of a channel structure that
adequately covers the markets in question and provides for an efficient flow of products to those
markets.

A general heuristic for relating market geography to channel design can be stated at this point:

The greater the distance between the manufacturer and its markets, the higher the probability that
the use of intermediaries will be less expensive than direct distribution.

Market Size - the number of customers making up a market (consumer or industrial) determines
the market size. From a channel design standpoint, the larger the number of individual
customers, the larger the market size.

The usual operational measures of market size are the actual number of potential consumers or
firms in the consumer and industrial markets, respectively. Birr volume is typically not a good
measure of market size because of the wide variations in Birr volume; that is, it is possible to
have high Birr volumes from a small number of customers and vice versa. Only if Birr volume
is highly correlated with the number of customers will it serve as a reliable measure of market
size.

A very general heuristic about market size relative to channel structure is as follows:

If the market is large, the use of intermediaries is more likely to be needed. Conversely, if the
market is small, a firm is more likely to be able to avoid the use of intermediaries.

Market Density - the number of buying units (consumers or industrial firms) per unit of land
area determines the density of the market. A market having 1,000 customers in an area of 100
square miles is denser than one containing the same number of customers in an area of 500
square miles.

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 In general, the less dense the market, the more difficult and expensive is distribution. This is
particularly true for the flow of goods to the market, but it also applies to the flow of
information. Consequently, a typically cited heuristic for market density and channel structure is
as follows:

The less dense the market, the more likely it is that intermediaries will be used. Stated
conversely, the greater the density of the market, the higher the likelihood of eliminating
intermediaries.

Market Behavior - refers to the following four types of buying behaviors:

 How customers buy,

 When customers buy,
 Where customers buy, and
 Who does the buying?
Each of these patterns of buyer behavior may have a significant effect on channel structure. The
following table provides some examples. Here again we should keep in mind that the heuristics
shown in the table are merely rough indicators of what is typical. There are many exceptions to
these heuristics under differing sets of circumstances. The material in the table should be seen as
providing illustrative examples only; and not as a source of reference for choosing a channel
structure.

Buying Habits Corresponding Channel Structure Heuristics

How Use long channels (perhaps several levels of

intermediaries) to reach the market.
Customers typically buy in very
small quantities.

When Add intermediaries to the channel to perform the storage

function, thereby reducing peaks and valleys in
Buying is highly seasonal.
production.

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Where Eliminate wholesale and retail intermediaries and sell
direct.
Consumers increasingly tend to
shop at home.

Who Distribute through retailers who successfully cater to

both spouses
Consumer market: Husband and
wife are generally both involved Direct distribution for greater control of sales force to
in the purchase successfully reach all parties Responsible for making
purchase decisions.
Industrial market: Many
individuals influence the
purchasing decision.

Product Variables

Product variables are another important category to consider in evaluating alternative channel
structures. Some of the most important product variables are:

Bulk and Weight—heavy and bulky products have very high handling and shipping costs
relative to their value. The producer of such products should therefore attempt to minimize these
costs by shipping only in large lots to the fewest possible points. Consequently, the channel
structure for heavy and bulky products should, as a general rule, be as short as possible—usually
direct from producer to user. The major exception to this occurs when customers buy in small
quantities and need quick delivery. In this case it may be necessary to use some form of
intermediary.

Perishability—products subject to rapid physical deterioration (such as fresh foods) and those
that experience rapid fashion obsolescence are considered to be highly perishable. The

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necessary condition of channel design in this case is rapid movement of the product from
production to its final user to minimize the risks attendant to high perishability. The following
heuristic is appropriate;

When products are highly perishable, channel structures should be designed to provide for rapid
delivery from producers to consumers.

When producers and consumers are close, such channel structures can often be short. When
greater distances are involved, however, the only practical and economical way to provide the
necessary speed of delivery may be by using several intermediaries in the channel structure.

Unit Value—In general, the lower the unit value of a product, the longer the channels should be.
This is because the low unit value leaves a small margin for distribution costs. Such products as
convenience goods in the consumer market and operating supplies in the industrial market
typically use one or more intermediaries so that the costs of distribution can be shared by many
other products that the intermediaries handle, thus creating economies of scale and scope.

Degree of Standardization—custom-made products go directly from the producer to the user,

but as products become more standardized, the opportunity to lengthen the channel by including
intermediaries increases.

Technical Versus Nontechnical—in the industrial market, a highly technical product will
generally be distributed through a direct channel. The overriding reason for this is that the
manufacturer needs sales and service people who are capable of communicating the product‘s
technical features to potential customers and who can provide continuing liaison, advice, and
service after the sale is made. In consumer markets, relatively technical products such as
personal computers are usually distributed through short channels for the same reasons.

Newness—many new products in both consumer and industrial markets require extensive and
aggressive promotion in the introductory stage to build primary demand. Usually, the longer the
channel, the more difficult it is to achieve this kind of promotional effort from all of the channel
members. Consequently, in the introductory stage, a shorter channel is generally viewed as an
advantage for gaining product acceptance. Further, the degree of selectivity also tends to be

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higher for new products because a more carefully selected group of intermediaries is more likely
to provide more aggressive promotion.

Company Variables

The most important company variables affecting channel design are:

Size—in general, the range of options for different channel structures is a positive function of a
firm‘s size. The power bases available to large firms—particularly those of reward, coercion,
and expertise—enable them to exercise a substantial amount of power in the channel. This gives
large firms a relatively high degree of flexibility in choosing channel structures, compared to
smaller firms. Consequently, the larger firm‘s capacity to develop channel that at least approach
an optimal allocation of distribution tasks is typically higher than for smaller firms.

Financial Capacity—generally, the greater the capital available to a company, the lower is its
dependence on intermediaries. In order to sell directly to ultimate consumers or industrial users,
a firm often needs its own sales force and support services or retail stores, warehousing, and
order processing capabilities. Larger firms are better able to bear the high cost of these facilities.
There are, of course, exceptions to this pattern, particularly when direct mail-order channels are
used or more recently in the case of electronic channels utilizing the Internet. In both of these
cases, even small firms with very limited financial capacities can find it feasible to sell directly
to ultimate consumers.

Managerial Expertise—some firms lack the managerial skills necessary to perform distribution
tasks. When this is the case, channel design must of necessity include the services of
intermediaries, which may include wholesalers, manufacturers‘ representatives, selling agents,
brokers, or others. Over time, as the firm‘s management gains experience, it may be feasible to
change the structure to reduce the amount of reliance on intermediaries.

Objectives and Strategies—Marketing and general objectives and strategies (such as a desire to
exercise a high degree of control over the product and its service) may limit the use of
intermediaries. Further, such strategies as an emphasis on aggressive promotion and rapid
reaction to changing market conditions will constrain the types of channel structures available to
those firms employing such strategies.

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 Intermediary Variables

The key intermediary variables related to channel structure are:

Availability—in a number of cases, the availability of adequate intermediaries will influence

channel structure.

Costs—the cost of using intermediaries is always a consideration in choosing a channel

structure. If the channel manager determines that the cost of using intermediaries is too high for
the services performed, the channel structure is likely to minimize the use of intermediaries.

Services—the services offered by intermediaries, is closely related to the problem of selection.

Environmental Variables

Environmental variables may affect all aspects of channel development and management.
Economic, sociocultural, competitive, technological, and legal environmental forces can have a
significant impact on channel structure. Indeed the impact of environmental forces is one of the
more common reasons for making channel design decisions.

Behavioral Variables

When choosing a channel structure, the channel manager should review the behavioral variables.
For example, developing more congruent roles for channel members can reduce a major cause of
conflict. Giving more attention to the influence of behavioral problems that can distort
communications fosters a channel structure with a more effective communications flow.

By keeping in mind the power bases available, the channel manager ensures that the final choice
of a channel structure is more likely to reflect a realistic basis for influencing channel members.
A channel manager who needs a very high level of control to achieve his or her distribution
objectives may find that the legitimate power base should serve as the basis for the channel
structure. These and many other implications of behavioral variables may in particular instances
be relevant for choosing an appropriate channel structure.

Phase 6: Choosing the ―Best‖ Channel Structure

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In theory, the channel manager should choose an optimal channel structure alternative. Such a
structure would offer the desired level of effectiveness in performing the distribution tasks at the
lowest possible cost. If the firm‘s goal is to maximize its long-term profits, an optimal channel
structure would be completely consistent with that goal.

In reality, choosing an optimal channel structure, in the strictest sense of the term, is not
possible. To do so would require the channel manager to have considered all possible alternative
channel structures and to be able to calculate the exact payoffs associated with each alternative
structure in terms of some criterion (usually profit). The channel manager would then choosing
the one alternative offering the highest payoff.

Why is this not possible? First, as we pointed out in the section on Phase 4, management is not
capable of knowing all the possible alternatives. The amount of information and time necessary
to develop all possible alternative channel structures for achieving a particular distribution
objective would be prohibitive. Moreover, even if management were willing to expend this time
and effort, it would have no way of knowing when it had actually specified all of the possible
alternatives.

Second, even if it were possible to specify all possible channel structures precise methods do not
exist for calculating the exact payoffs associated with each of the alternative structures.

Approaches for Choosing Channel Structure

1. Characteristics of Goods and Parallel Systems Approach

First laid out in the late 1950s by Aspinwall, this approach places the main emphasis for
choosing a channel structure on product variables, arguing that all products may be described in
terms of the following five characteristics;

 Replacement rate—the rate at which a good is purchased and consumed by users in order to
provide the satisfaction a consumer expects from the product.
 Gross margin—the difference between the lain-in cost and the final realized sales price.
(This includes the sum of all gross margins as products move through the channel.)
 Adjustment—services applied to goods in order to meet the exact needs of the consumer.

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 Time of consumption—the measured time of consumption during which the product gives
up the utility desired.
 Searching time—a measure of average time and distance from the retail store.
2. Financial Approach

Lambert offers another approach, developed in the 1960s, which argues that the most important
variables for choosing a channel structure are financial:

Examination of the process of choosing a trade channel leads to the conclusion that the
choice is determined primarily by financial rather than what are generally thought of as
marketing considerations. This is shown to be the case regardless of whether the firm has
adequate or limited financial resources to expand marketing operations. It is equally true
whether the firm is contemplating shortening the channel, which requires more capital, or
lengthening the channel, which will make funds formerly used in distribution available for
other employment.

According to Lambert, choosing an appropriate channel structure is analogous to an investment

decision of capital budgeting. Basically this decision involves comparing estimated earnings on
capital resulting from alternative channel structures in light of the cost of capital to determine the
most profitable channel.

3. Transaction Cost Analysis Approach

Transaction cost analysis (TCA), based on the work of Williamson, has become the focus of
much attention in the marketing channels literature since the mid 1970s. TCA addresses the
choice of marketing channel structure only in the most general case situation of choosing
between the manufacturer performing all of the distribution tasks itself through vertical
integration versus using independent intermediaries to perform some or most of the distribution
tasks.

The main focus of TCA is on the cost of conducting the transactions necessary for a firm to
accomplish its distribution tasks. Transaction costs are essentially the costs associated with
performing tasks such as gathering information, negotiating, monitoring performance, and a
variety of others.

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4. Management Science Approaches

It would certainly be desirable if the channel manager could take all possible channel structures,
along with all the relevant variables, and ―plug‖ these into a set of equations, which would then
yield the optimal channel structure. Such an approach is possible in theory. In fact, some
pioneering attempts have been made to use management science methods, such as operations
research, simulation, and decision theory, in an effort to design optimal marketing channels.

5. Judgmental—Heuristic Approaches

As the name suggests, these approaches to choosing channel structure rely heavily on managerial
judgment and heuristics, or rules of thumb. There are, however, variations in the degree of
precision of judgmental-heuristic approaches. Some attempt to formalize the decision-making
process to some degree, whereas others attempt to incorporate cost and revenue data.

Phase 7: Selecting the Channel Members

The actual selection of firms that will become marketing channel members is the last phase of
channel design. We should point out, however, that selection decisions are frequently necessary
even when channel structure changes have not been made; that is, selection decisions may or
may not be the result of channel design decisions.

Two other points about the relationship of channel design to selection should also be mentioned.
First, an obvious point that is sometimes forgotten is that firms with a direct (manufacturer—
user) channel structure do not have to worry about selection decisions. Because their allocation
of the distribution tasks did not specify the use of intermediaries, they need not select any. The
second point deals with the relationship between the structural dimensions of intensity. As a
general rule, the greater the intensity of distribution, the less the emphasis on selection.

The Selection Process

The channel member selection process consists of the following three basic steps:
 Finding prospective channel members
 Applying selection criteria to determine the suitability of prospective channel
members
 Securing the prospective channel members as actual channel members

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CHAPTER SEVEN:- CONFLICT IN THE MARKETING CHANNEL
Chapter objectives

At the end of this unit, you should be able to:

 Identify Conflict versus Competition in marketing channel
 Identify Causes of Channel Conflict
 Identify mechanisms of Managing Channel Conflict
 Discuss methods of Resolving Conflict

7.1 Conflict versus Competition

Conflict in the marketing channel should not be confused with competition, which also occurs in
the channel. Competition is behavior that is object-centered, indirect, and impersonal. Conflict,
on the other hand, is direct, personal, and opponent-centered behavior. Thus, in a conflict
situation it is not the forces of the impersonal market that firms attempt to overcome, but other
firms in the system with whom they are in conflict. Schmidt and Kochan make this distinction
quite well:
In the process of both competition and conflict the goals (of the various
units) are perceived to be incompatible, and the units are striving
respectively to attain these goals. In this context, competition occurs
where, given incompatible goals, there is no interference with one
another’s attainment. The essential difference between competition and
conflict is in the realm of interference or blocking activities.
7.2 Causes of Channel Conflict
Analysis and research have pointed to many possible causes of channel conflict. Such causes as
misunderstood communications; divergent functional specializations and goals of channel
members, as well as failings in joint decision-making processes have been cited. Other causes
include differing economic objectives, ideological differences of channel members and
inappropriate channel structure. Still other studies found conflict associated with such factors as
differing perceptions, leadership styles, financial terms of sale, and goals.
Although the research just cited appears to suggest that the causes of channel conflict are
extremely diverse, in essence most can be placed into one or more of the following seven
categories of underling causes of channel conflict:

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  Role incongruities,
 Resource scarcities,
 Perceptual differences,
 Expectational differences,
 Decision domain disagreements,
 Goal incompatibilities, and
 Communication difficulties.
Role Incongruities—a role is a set of prescription defining what the behavior of position
members should be. When applied to the marketing channel any given member of the
channel has a series of roles that he or she is expected to fulfill.
Resource Scarcities—sometimes conflict stems from a disagreement between channel
members over the allocation of some valuable resources needed to achieve their
respective goals.
A common example of this is the allocation of retailers between a manufacturer and
wholesalers. The retailers are viewed by both the manufacturer and the wholesaler as
valuable resources necessary to achieve their distribution objectives. Frequently the
manufacturer will decide to keep some of the higher volume retailers as house accounts
(stores to which the manufacturer will sell direct). This leads to objections by the
wholesaler over what is considered to be an unfavorable allocation of this resource (the
retailers). This kind of dispute often leads to conflict.
Another important example of resource scarcity as a cause of conflict involves site
selections in franchised channels. In this case, the resource is the market in which
particular franchisees operate.
Perceptual Differences—perception refers to the way an individual selects and interprets
environmental stimuli. The way such stimuli are perceived, however, is often quite
different from objective reality. In a marketing channel context, the various channel
members may perceive the same stimuli but attach quite different interpretations to them.
A common example of this in the marketing channel is in the use of point-of –purchase
(POP) displays. The manufacturer who provides these usually perceives POP as a
valuable promotional tool needed to move products off retailer‘s shelves. The retailer, on

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the other hand, often perceives point-of-purchase material as useless junk that serves only
to take up valuable floor space.
A manufacturer of hardwood floors, for example, produced what it thought were
beautiful four-color brochures illustrating the use of its floors in magnificent homes.
These were meant to be given to customers at the point of purchase as a way of
conveying the quality, beauty, and range of applications for the flooring. Several
thousands of these brochures were sent to a major home center retailer along with a floor
display. But rather put the brochures out with the display, the retailer used them mainly
to crumple up as carton packing material for merchandise returns!
Expectational Differences—various channel members have expectations about the
behavior of other channel members. In practice, these expectations are predictions or
forecasts concerning the future behaviors of other channel members. Sometimes these
forecasts turn out to be inaccurate, but the channel member who makes the forecast will
take action based on the predicted outcomes.
By doing so, a response behavior can be elicited from another channel member, which
might not have occurred in the absence of the original action. In effect, a self-fulfilling
prophecy is created.
Decision Domain Disagreements—channel members explicitly or implicitly carve out
for themselves an area of decision making that they feel is exclusively theirs. In
contractual channel systems, such as franchise, these decision domains are quite explicit
and are usually spelled out meticulously in the franchise contract.
A traditional and pervasive example of this has been in the area of pricing decisions.
Many retailers feel that pricing decisions are in their decision-making domain. Some of
the manufacturers supplying these retailers, however, believe that they should have a say
in price-making decisions.
Goal Incompatibilities—each member of the marketing channel has his or her own
goals. When the goals of two or more of the members are incompatible, conflict can
result. Incompatible goals often arise between channel members.
Communication Difficulties—communication is the vehicle for all interactions among
the channel members, whether such interactions are cooperative or conflicting. A foul-up

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or breakdown in communications can quickly turn a cooperative relationship into a
conflicting one.
Channel Conflict and Channel Efficiency
Channel analysts have postulated several possible relationships between channel conflict
and channel performance. The most common view is that the effects of conflict on
channel performance are generally negative and even a threat to the survival of the
channel while others have discussed possible positive effects.
The key question about the effects of conflict from the channel manager‘s point of view
is how conflict affects channel efficiency. Does conflict reduce the efficiency with which
distribution objectives are achieved? Can it increase efficiency? Might it not have any
effect at all? While little empirical data on these questions are available, some
conceptual models have been presented on how conflict can affect channel efficiency.
Before discussing these relationships, however, we will define more precisely what we
mean by channel efficiency.
Channel efficiency may be defined as the degree to which the total investment in the
various inputs necessary to achieve a given distribution objective can be optimized in
terms of outputs.
The greater the degree of optimization of inputs in carrying out a distribution objective,
the higher the efficiency is, and vice versa. These inputs can include any thing necessary
to achieve the distribution objective.
Negative Effect—Reduced Efficiency---A negative relationship indicates that the level
of conflict increases when channel efficiency declines.
No Effect—Efficiency Remains Constant---The existence of conflict has caused no
change in channel efficiency. Hence, the effect of conflict on input levels necessary to
achieve distribution objectives is insignificant.
Positive Effect—Efficiency Increased---Here conflict is shown to cause an increase in
channel efficiency. The conflict might serve as an impetus for either or both of the
channel members to reappraise their respective policies.
7.3 Managing Channel Conflict
Our previous discussion on conflict in the marketing channel points to the following four
generalizations:

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  Conflict is an inherent behavioral dimension in the marketing channel.
 Given the numerous causes from which conflict may stem, it is a pervasive
phenomenon in marketing channels.
 Conflict can affect channel efficiency.
 Various levels of conflict may have both negative and positive effects on channel
efficiency, or possibly no effect.
Some approaches for managing conflict have been discussed in the literature. These will
be discussed in terms of helping the manager to:
o Detect conflict or potential conflict,
o Appraise the possible effects of conflict, and
o Resolve channel conflict.
Detecting Channel Conflict—In practice, conflict is usually spotted after it is well
developed and obvious. This ―after the fact‖ approach to the detection of channel
conflict is unsatisfactory because the potentially negative effects of the conflict may have
gotten a head start and may already be festering. So, it is better if the channel manager
has some kind of ―early warning system.‖
In what was perhaps the first study aimed at finding a method for early detection of
channel conflict, Foster and Shuptrine suggest that a channel member can help spot
potential conflict areas by surveying other channel member‘s perceptions of his or her
performance. The research on which their suggestion is based measured retailers‘
perceptions of wholesalers‘ and manufacturers‘ performances in five distribution related
tasks. In order to be of real value, however, the study noted that these perceptual
measurements would have to be taken on a regular and continuing basis. Such regular
surveys of channel members to help spot potential conflict are just as relevant today as
they were when Foster and Shuptrine suggested this approach over a quarter of a century
ago. But today with the availability of the internet and widespread use of e-mail, such
surveys can be done much more quickly and easily electronically.
Independent research firms can also conduct surveys of channel members to identify
areas of conflict. Not only might the outside research firms or consultant have greater
expertise in designing and executing this type of study, but also the independence of the
outside party helps to avoid bias.

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Surveys of channel members‘ perceptions of potential conflict areas can also be
performed by outside parties such as trade associations or trade magazine publishers.
Appraising the Effect of Conflict—a growing body of literature has been emerging to
assist the channel manager in developing formal methods for measuring conflict and its
effects on channel efficiency. Shortly thereafter, Rosenberg and Stern investigated a
channel for household durable goods and developed a scale for measuring the intensity of
channel conflict measure to the performance of the channel.
For the present, most attempts to measure conflict and appraise its effects on channel
efficiency will still be made at a conceptual level that relies on the manager‘s subjective
judgment.
Resolving Conflict—when conflict exists in the channel, the channel manager should
take action to resolve the conflict if it appears to be adversely affecting channel
efficiency.
7.4 Resolving Conflict
There is only a limited body of empirical work to guide the channel manager in
attempting to resolve channel conflict, but the literature does suggest some approaches
and recommendations.
Some 25 years ago, Rosenberg made several suggestions for dealing with channel
conflict, which are just as relevant today:
 A channel wide committee might be established for periodic evaluations of
emerging problems related to conflict. Such a committee could function in a
crisis management capacity by providing a forum for the diverse points of view of
the various channel members. Rosenberg suggests that some committee members
could be appointed as representatives by the manufacturer, while distributors and
retailers could elect their own representatives to the committee.
 Joint goal setting by the committee (or some other vehicle), which takes into
account the goals and special capacities of the various channel members, the
needs of consumers, and environmental constraints—would help to mitigate the
effects of conflict. Even if it is not possible to develop joint goals that are in
perfect harmony, the dialogue attendant to the attempt would in itself be
beneficial in reducing conflict.

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  A distribution executive position might be created for each major firm in the
channel. The individual (s) filling this position would be responsible for
exploring the firm‘s distribution related problems. Further, this individual could
try to make other executives in the firm more aware of the potential impact of
conflict on the firm‘s efficiency.
Finally, he or she could seek to identify the current shape of conflict issues in the
channel.
Another approach for resolving channel conflict, suggested by Weigand and Wasson, is
to have the parties involved submit to arbitration. Weigand and Wasson point to the
following five advantages of arbitration for resolving channel conflicts.
 Arbitration is fast. The parties to a dispute can be quickly informed that a
quarrel exists and told the time of a hearing; the evidence can be heard by a panel
and the decision rendered—all within a few weeks.
 Arbitration preserves secrecy. Outside parties can be barred from the hearings.
Decisions that are not matters of public record can be kept secret.
 Arbitration is less expensive than litigation. There is an element of ―corner
cutting‖ That takes place, which reduces the cost of a tolerable decision.
 Arbitration confronts problems in their incipient stage when they are easier
to resolve. The attitude can become: ―We have a potential problem here; let us
solve it before positions and options get too fixed.‖
 Arbitration often takes place before industry experts. In many instances, the
arbitrator or the arbitration panel is composed of those who know the industry and
its practices. Some argue that this produces a fairer decision.
An approach, suggested by Stern and Heskett, is for the channel to set up a special
organization for planned information gathering. Such an organization would be charged
with providing all of the channel members with information relevant to all aspects of the
channel.
Finally, the most recent research on conflict resolution, conducted by Dant and Schul in
franchised channels for fast food, suggests that direct interaction between channel
members that focuses on joint problem solving can be effective in resolving conflict.
However the authors also found that when the conflict involves high stakes, complexity,

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or major policy issues, and if the franchisee dependency level on the franchiser is high,
resolution of the channel conflict is likely to require the intervention of an outside (third)
party.
The feasibility and applicability of any of these approaches for resolving conflict will
vary for different kinds of channels and under differing sets of circumstances.
What is more important than the specifics of any of these particular approaches, however,
is the underlying principle common in all of them. It may be stated as follows: Creative
action on the part of some party to the conflict is needed if the conflict is to be
successfully resolved.
Thus, it is up to the channel manager to develop approaches for doing this, whether it be
through arbitration, a channel wide committee, organizational development, bargaining
processes, or even a ―peace conference‖ between channel members.

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 CHAPTER EIGHT
MOTIVATING THE CHANNEL MEMBERS
Chapter objectives

At the end of this unit, you should be able to:

 Finding out the needs & problems of channel members
 Offering support to channel members

Introduction

In this chapter we begin with the premise that a channel structure with channel members capable
of serving the target markets effectively and efficiently has already been developed. At this
point, then, the channel manager needs to stress the realization of this potential. Thus, managing
the marketing channel becomes the main focus of attention. Channel management can be
defined as the administration of existing channels to secure the cooperation of channel members
in achieving the firm‘s distribution objectives. Three points should be particularly noted in this
definition.

First, note that channel management deals with existing channels; that is, we are assuming that
the channel structure has already been designed (or it has evolved) and that all of the members
have been selected. Channel design decisions are therefore viewed as separate from channel
management decisions. In practice, this distinction may be obscured at times. This is
particularly the case when a channel management decision quickly lapses into a channel design
decision. Perhaps this distinction can be grasped best by thinking of channel design decisions as
concerned with ―setting up‖ the channel, whereas channel management deals with ―running‖
what has already been set up.

The second point covers the phrase secures the cooperation of channel members. Implied in this
is the notion that channel members do not automatically cooperate merely because they are
members of the channel. Rather, administrative actions are necessary to secure their
cooperation. If a manufacturer enjoys substantial cooperation from channel members without
having to administrate, this is not managing—it is simply a matter of being lucky.

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Third, distribution objectives are statements describing the part that the distribution comment of
the marketing mix is expected to play in achieving the firm‘s overall marketing objectives. In
the context of managing the channel, carefully delineated distribution objectives are needed to
guide the management of the channel.

Clearly, without knowing what the objectives are, it is difficult for the channel manager to know
what direction to pursue in managing the channel.

In this chapter we will examine one of the most fundamental and important aspects of channel
management—motivation refers to the actions taken by the manufacturer to foster strong channel
member cooperation in implementing the manufacturer‘s distribution objectives.

The discussion is structured around three basic facets involved in motivation management in the
channel. These are:

 Finding out the needs and problems of channel members

 Offering support to the channel members that is consistent with their needs and problems
 Providing leadership through the effective use of power
8.1 Finding out the Needs and Problems of Channel Members
Before the channel manager can successfully motivate channel members, an attempt must be
made to learn what the members want from the channel relationship. They may perceive needs
and face problems quite different from those of the manufacturer. McVey has pointed to these
differences with several classic propositions that can be summarized as follows:

 The middleman does not consider himself a ―hired link in a chain forged by the
manufacturer.‖
 The middleman acts first and foremost as a purchasing agent for his customers, and only
secondarily as a selling agent for suppliers. His interest is in selling whatever products
his customers wish to buy from him.
 The middleman views all the products he offers as a ―family‖ of items that he sells as a
packaged assortment to individual customers. He directs his selling efforts primarily at
obtaining orders for the assortment, rather than for individual items.
 Unless given some incentive to do so, the middleman will not maintain separate sales
records by brands sold. Information that might be useful to manufacturers in product

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 development, pricing, packaging, or promotion planning is ―buried‖ in the middleman‘s
own records, sometimes even purposely kept from suppliers.
Approaches for learning about channel member needs and problems

All marketing channels have a flow of information running through them as part of the formal
and informal communication systems that exist in the channel. The following figure provides an
overview of most of the major components that go into making up a typical channel
communications system.

Ideally, such a channel communications system would provide the manufacturer with all of the
information needed on channel member needs and problems. Given the many sources in the
channel communications system from which information can be generated, one might think it
unlikely that any important information can be generated; one might think it unlikely that any
important information would be missed. In practice, however, this is far from true. Most
marketing channel communication systems have not been formally planned and carefully
constructed to provide a comprehensive flow of timely information. Rather, in many cases they
have evolved haphazardly over a period of years with little thought given to correcting
imperfections in the systems. And even those channel communication systems that have been
carefully planned and improved are a long way from being perfect. Consequently, the channel
manager should not rely solely on the regular flow of information coming from the existing
channel communication system for accurate and timely information on channel member needs
and problems. Rather, there is a need to go beyond the regular system and make use of one or all
of the following four additional approaches for learning about channel member needs and
problems:

 Research studies of channel members conducted by the manufacturer,

 Research studies by outside parties,
 Marketing channel audits, and
 Distributor advisory councils.

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Research Studies of Channel Members—while it has become fairly common for
manufacturers to conduct research studies dealing with their ultimate customers—to learn the
kinds of products that customers want, what their brand preferences are, the kinds of shopping
behaviors they engage in , and many other types of information—research studies of channel
member needs and problems are much rarer. Indeed, most manufacturers—even large and
sophisticated ones—never conduct such research at all.

Marketing Channel Audits—as with the periodic accounting audit, which virtually all firms
have performed, the channel manager can conduct a marketing channel audit periodically. The
basic thrust of this approach should be aimed at gathering data on how channel members
perceive the manufacturer‘s marketing program and its component parts, where the relationships
are strong and weak, and what is expected of the manufacturer to make the channel relationship
viable and optimal. For manufacturer may want to gather data from channel members on what
their needs and problems are in such areas as:

 Pricing policies, margins, and allowances

 Extent and nature of the product line
 New products and their marketing development through promotion
 Servicing policies and procedures such as invoicing, order dating,
 Sales force performance in serving the accounts.

Further, the marketing channel audit should identify and define in detail the issues relevant to the
manufacturer-wholesaler and/or manufacturer-retailer relationship.

Another point to note involves cross-referencing. Whatever areas and issues are chosen for a
particular marketing channel audit, ideally they should be cross-tabulated or correlated as to kind
of channel members, geographical location of channel members, sales volume levels achieved,
and any other variables that might be relevant.

Finally, for the marketing channel audit to work effectively, it must be done on a periodic and
regular basis so as to capture trends and patterns. Only in this way will it be possible to keep
track of those issues that remain constant, those that dissipate, or those that enlarge in scope.
Emerging issues are also more likely to be spotted if the audit is performed on a regular basis.

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Distributor Advisory Councils—another effective approach for learning about channel member
needs and problems is to set up a distributor advisory council. These councils should consist of
top management representatives from the manufacturer as well as representatives of the
principals from the Channel members. The top management people might consist of the vice
president of marketing, general sales manager, and other top members of sales management.

The distributor members should consists of a representative sample of distributors such as 5 to

10 percent of the total. However, all parties should limit the total number to allow for full
participation and exchange of dialog. In setting up a distributor advisory council provides a
vehicle for identifying and discussing mutual needs and problems that are not transmitted
through the regular channel information flow.

Three significant benefits emerge from the use of a distributor advisory council:

 It provides recognition for the channel members.

 It provides a vehicle for identifying and discussing mutual needs and problems that are
not transmitted through the regular channel information flow
 It results in an overall improvement of channel communications, which in turn helps the
manufacturer to learn more about the needs and problems of channel members, and vice
versa.
8.2 Offering Support to Channel Members
Support for channel members refers to the manufacturer‘s efforts in helping channel members to
meet their needs and solve their problems. Such support, if properly applied, should help to
create a more highly motivated group of channel members.
Unfortunately, support for channel members is all too often offered on a disorganized and ad hoc
basis. When channel members appear to lack motivation they are ―pumped up‖ with an extra
price incentive, advertising allowance, dealer contest, or even a pep talk by the manufacturer. Or
if they are having a problem in a particular area, the manufacturer may attempt to ―patch it up‖
and hope that the problem will not come back again—at least for a little while.

McCammon implied the attainment of a highly motivated cooperating ―team‖ of channel

members in an inter-organizational setting requires carefully planned programs. Such programs

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for providing channel member support can generally be grouped into one of the following three
categories:

 Cooperative,
 Partnership or strategic alliance, and
 Distribution programming.
While all three of these approaches should emphasize careful planning, the level of sophisticated
and comprehensiveness of the approaches varies greatly. The cooperative approach represents
the least sophisticated and comprehensive approach to channel member support, whereas
distribution programming is the most sophisticated and comprehensive. The partnership or
strategic alliance approach would generally fall somewhere between the other two.

Cooperative Arrangements—between the manufacturer and channel members at the wholesale

and retail levels have traditionally been used as the most common means of motivating channel
members in conventional, loosely aligned channels. The types of cooperative arrangements or
deals are quite diverse and are limited only by the creativity of the manufacturer.

Partnerships and Strategic Alliances—stress a continuing and mutually supportive relationship

between the manufacturer and its channel members in an effort to provide a more highly
motivated team, network, or alliance of channel members in an effort to provide a more highly
motivated team, network, or alliance of channel partners. The traditional ―us-against-them‖
mentality is replaced with a new, cooperative perception of ―us‖ in an effective channel
partnership or strategic alliance.

Distribution Programming—is the most comprehensive approach for achieving a highly

motivated channel team. Distribution programming goes well beyond the typical partnership or
strategic alliance because it deals with virtually all aspects of the channel relationship.
McCammon, who pioneered the concept of distribution programming, defines it as: A
comprehensive set of policies for the promotion of a product through the channel.

The essence of this approach is the development of a planned, professionally managed channel.
The program is developed as a joint effort between the manufacturer and the channel members to
incorporate the needs of both. If done well, the program should offer all channel members the

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advantages of a vertically integrated channel while at the same time allowing them to maintain
their status as independent business firms.

Providing Leadership through the Effective Use of Power

Even if the channel manager has developed an excellent system for learning about channel
members' needs and problems, and no matter what approach is used to support them, control
must still be exercised through effective leadership on a continuing basis to attain a well-
motivated team of channel members.

Seldom is it possible for the channel manager to achieve total control, no matter how much
power underlies his or her leadership attempts. This state would exist only if the channel
manager were able to predict all events related to the channel with perfect accuracy, and achieve
the desired outcomes at all times. For the most part, this is a theoretical state not achievable in
the reality of an inter-organizational system such as the marketing channel.

Little explained succinctly the problems of achieving very high levels of control and leadership
in this inter-organizational setting:

Because firms are loosely arranged, the advantages of central direction are in
large measure missing. The absence of single ownership, or close contractual
agreements, means that the benefits of a formal power (superior, subordinate)
base are not realized. The reward and penalty system is not as precise and is less
easily affected. Similarly, overall planning for the entire system is uncoordinated
and the perspective necessary to maximize total system effort is diffused. Less
recognition of common goals by various member firms in the channel, as
compared to a formally structured organization, is also probable.

As Little points out, the inter-organizational setting of the marketing channel creates a set of
conditions that makes strong leadership more difficult to achieve. This is particularly the case in
channels that have evolved as a group of loosely aligned firms. But even in channels that have
been designed to foster a higher degree of control, such as those based on contractual
commitments or distribution programming, the special circumstances attendant to inter-
organizational systems discussed by Little do not completely disappear.

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Thus, even though the basis for control through strong leadership is significantly greater in
formally structured or contractual channels, such as in franchised channels, it does not often
equal the level achieved in an intra-organizational setting. This is not meant to suggest that the
channel manager cannot hope to exercise a high level of leadership in an effort to motivate
independent channel members. Rather, it is simply pointing out that, in attempting to do so, the
channel manager will face a more difficult set of problems.

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