BUSINESS CONCEPTS 3rd unit

8/7/2019 BUSINESS CONCEPTS 3rd unit

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UNIT III-PURCHASING

DEFINITION

Purchasing, a branch of Logistics is a business term meaning buying raw

materials and other necessary commodities for manufacturing products. Purchasing

loosely refers to the department of procurement, which carries out the task of releasing

purchase orders for goods. In India, purchasing is directly linked up with supply chain

management, transportation and distribution, manufacturing and production and

procurement. India as a developing nation thrives on effective business.

Purchasing is the "process of buying". Many assume purchasing is solely the

responcibility of the purchasing department. However, the function is much broader and,

if it is carried out efficiently, all departments in the company are invloved. Obtaining the

right material, in the right quantities, with the right delivery (time and place), right

quality, from the right source, and at the right price are all purchasing functions.

Choosing the right material requires input from the marketing, engineering,

manufacturing, and purchasing departments. Quantities and delivery of finished goods

are established by the needs of the marketplace. However, manufacturing planning and

control (MPC) must decide when to order which raw materials so that marketplace

demands can be satisfied. Purchasing is then responsible for placing the orders and forensuring that the goods arrive on time.

Its majorobjectives are to (1) maintain the quality and value the firm'sproducts,

(2) minimize cash tied-up in inventory, (3) maintain the flow of inputs to maintain the

flow ofoutputs, and (4) strengthen the firm's competitive position. Purchasing may also

involve (a) development and review of the product specifications, (b) receipt and

processing ofrequisitions, (c) advertising forbids, (d) bid evaluation, (e) award ofsupply

contracts, (f) inspection of good received, and (g) their appropriate storage and release.

Clearly, the purchasing function involves more than obtaining the best price. It also

involves buying the best value, which means buying:

The right quantity and quality

At the best price

From suppliers who are reliable and provide good service
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One way to obtain the best value on a purchase is to set purchasing objectives and

carefully follow the procurement cycle. This is explained later in this section.

PURCHASING OBJECTIVES

It is often helpful to state the goals of purchasing for your business. In this way,

you will never lose sight of the purpose of the purchasing function and will be able to

make more intelligent purchasing decisions.

Here is a sample list of purchasing objectives:

To provide an uninterrupted flaw of materials and services for company

operations

To find reliable alternative sources of supply

To buy at the most economic order quantities

To buy the best value: a combination of right quality at the best price with the best

supplier service

To maintain good relations with vendors

PROCUREMENT CYCLE

Effective procurement consists of a series of steps which form a cycle. The steps

in the cycle can be described as follows:

1. Determine needs:

Before you buy anything, it is necessary to know what you need to buy and how

much. It is important to remember that determining what you need involves not only

quantity, but quality decisions as well. Determining and specifying appropriate quality

requirements, in some situations, is a more difficult task than deciding what quantity to

buy.

2. Select the supplier(s):

When there are many suppliers to choose from, it is not simple to choose those

who will give the best value - not only in price but in service, and consistent quality as

well. Selection of suppliers may also mean finding more than one acceptable vendor if

the purchased product is so important that you would suffer substantial losses if it were

not available. In such a situation, in case the primary supplier cannot meet your needs as

a result of a heavy workload, strike, unavailability of raw materials, etc.


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When deciding to use more than one supplier, you have to weigh these advantages

against the possible disadvantages of higher price and poorer service when you buy

smaller quantities from two vendors rather than larger quantities from a single, reliable

one.

3. Negotiate the purchase:

In addition to specifying quantities and obtaining agreement on price, this can

involve guarantees, method of payment, containers and packaging, delivery dates and

other details of the purchase. Proper documentation of the purchase agreement is part of

negotiation and assures that any questions or disputes that may arise will be settled in line

with your expectations.

4. Follow-up:

Here you look at the quality of product and service as well as the accuracy of

quantities to determine what improvements, if any, are needed for the future.

IDENTIFYING AND SELECTING SUPPLIERS

1. Qualifying Suppliers

Having selected target-countries, and in order to identify prospective suppliers,

you need to define the traits of candidates according to your objectives. That profile will

help you identify, short-list and screen prospective suppliers.

2. Research, Evaluate, Interview, and Select Suppliers

Then, contact all listed companies through air mail, fax or email. Clearly state your

business proposition, your objectives and the procedure of supplier selection. Once

prospective suppliers have indicated their interest in your offer, it is important to

determine their legitimacy and financial soundness. The financial condition of

prospective suppliers should figure heavily when determining the appropriate working

relationship. Some of the respondents will certainly not pass this stage of the selection

process.

The survivors of this first screening should undergo further research based mostly on

their past performance. After the financial test, past performance should be an important

part of your supplier qualifications process. Find out how the suppliers performance

ratings compare with average satisfaction scores for its industry and with our own goals.


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Contact randomly selected customers of your prospective supplier and asks them to

rate that supplier on key performance measurements, such as:

o Delivery timeliness

o Problem responsiveness

o Product quality

o Total cost

o Technical support

o Quantities delivered

o Personnel attitude

Calculate an overall satisfaction rating from ratings in the key performance

measurement categories. Then, illustrate the suppliers performance ratings compared to

each other and identify each suppliers weaknesses and strengths. Finally, rank your

prospective suppliers to create a list of preferred suppliers based, this time, on acceptable

risk and your internal standards. The following, and most important, step will be to

establish relationships with the preferred prospective suppliers. This should involve face-

to-face meetings with the principals. In addition, you need to negotiate the appropriate

legal agreement with the counterpart firm selected.

PURCHASING CYCLE

The Purchasing cycle consists of the following steps:

1. Receiving and analyzing purchase requisitions.

2. Selecting suppliers, finding potential suppliers, issuing requests for quotations,

receiving and analyzing quotations, and selecting the right supplier.

3. Determining the right price.

4. Issuing Purchase Orders.

5. Following up to assure delivery dates are met.

6. Receiving and accepting goods.7. Approving supplier's invoice for payment.

PRODUCTION

Production means application of processes (Technology) to the raw material to

add the use and economic values to arrive at desired product by the best method, with out

sacrificing the desired quality. We have three ways of Production, they are:


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(i) Production by Disintegration

By separating the contents of Crude oil or a mixture the desired products are

produced. For example the crude oil is disintegrated into various fuel oils. Similarly salt

production is also an example for product produced by disintegrated. We can use

Mechanical or Chemical or both technologies to get the desired product, so that it will

have desired use value.

(ii) Production by Integration

In this type of Production various Components of the products are assembled

together to get the desired product. In this process, Physical and Chemical Properties of

the materials used may change. The examples are: Assembly of Two wheelers, four

wheelers and so on.

(iii) Production by Service

Here the Chemical and Mechanical Properties of materials are improved without

any physical change. The example for this is Heat Treatment of metals. In real world, a

combination of above methods is used. In general production is the use of any process or

procedure designed to transform a set of input elements into a set of output elements,

which have use value and economic value.

DEFINITIONS OF PRODUCTION MANAGEMENT

It may be defined as the performance of the management activities with regards to

selecting, designing, operating, Controlling and updating production system.

It is the processes of effectively planning, coordinating and controlling the

production that is the operations of that part of an enterprise, it means to say that

production and operations Management is responsible for the actual transformation of

raw materials into finished products.

OBJECTIVE OF PRODUCTION MANAGEMENT

The objective of Production Management is to produce the desired product or

specified product by specified methods so that the optimal utilization of available

resources is met with. Hence the production management is responsible to produce the

desired product, which has marketability at the cheapest price by proper planning, the

manpower, material and processes.

Here it is better to distinguish between product, Service and Project, so as


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such, there are no hard and fast rule or guidelines to specify the function of Production

Management, but in the academic interest we can mention some of the functions, which

are looked after by the Production Management department. They are:

(i) Materials: The selection of materials for the product. Production manager must have

sound Knowledge of materials and their properties, so that he can select appropriate

materials for his product. Research on materials is necessary to find alternatives to satisfy

the changing needs of the design in the product and availability of material resumes.

(ii) Methods: Finding the best method for the process, to search for the methods to suit

the available resources, identifying the sequence of process are some of the activities of

Production Management.

(iii) Machines and Equipment: Selection of suitable machinery for the process desired,

designing the maintenance policy and design of layout of machines are taken care of by

the Production Management department.

(iv) Estimating: To fix up the Production targets and delivery dates and to keep the

production costs at minimum, production management department does a thorough

estimation of Production times and production costs. In competitive situation this will

help the management to decide what should be done in arresting the costs at desired level.

(v) Loading and Scheduling: The Production Management department has to draw the

time table for various production activities, specifying when to start and when to finish

the process required. It also has to draw the timings of materials movement and plan the

activities of manpower. The scheduling is to be done keeping in mind the loads on hand

and capacities of facilities available.

(vi) Routing: This is the most important function of Production Management department.

The Routing consists of fixing the flow lines for various raw materials, components etc.,

from the stores to the packing of finished product, so that all concerned knows what

exactly is happening on the shop floor.

(vii) Dispatching: The Production Management department has to prepare various

documents such as Job Cards, Route sheets, Move Cards, Inspection Cards for each and

every component of the product. These are prepared in a set of five copies. These

documents are to be released from Production Management department to give green

signal for starting the production. The activities of the shop floor will follow the


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instructions given in these documents. Activity of releasing the document is known as

dispatching.

(viii) Expediting or Follow up: Once the documents are dispatched, the management

wants to know whether the activities are being carried out as per the plans or not.

Expediting engineers go round the production floor along with the plans, compare the

actual with the plan and feed back the progress of the work to the management. This will

help the management to evaluate the plans.

(ix) Inspection: Here inspection is generally concerned with the inspection activities

during production, but a separate quality control department does the quality inspection,

which is not under the control of Production Management. This is true because, if the

quality inspection is given to production Management, then there is a chance of

qualifying the defective products also.

(x) Evaluation: The Production department must evaluate itself and its contribution in

fulfilling the corporate objectives and the departmental objectives. This is necessary for

setting up the standards for future. What ever may be the size of the firm; Production

management department alone must do Routing, Scheduling, Loading, Dispatching and

expediting. This is because this department knows very well regarding materials,

Methods, and available resources etc.

Managing the Manufacturing ProcessManufacturing process: -

Physical flow is quite universal

Specific differences between firms must be taken into account

Differences:

Production process vast differences among different types of production

processes

Four broad classes are job shop, batch production, mass production, and

continuous

Flow process

Job shopWide range products are manufactured (quantity usually small)

Parts are routed to work centers depending on the production steps required

Manufacture customized product

Job shops are typically inefficient and have long lead times, large work-in-

process inventory, and high costs

Major performance criterion is utilization of equipments


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Eg:- Special purpose machine tools, Commercial printer, Boilers, etc

Batch production

Involves the manufacture of medium-size lots of the same item or product

The lots may be produced only once or they may be produced at regular

intervals

Lot sizes and the frequency of production of a single item are tied up with theInventory control policies adopted by marketing

Product demand characteristics may lead to different kind of production

management especially production control

Usually the products produced in a batch production have somewhat-

continuous Demand

But the production rate is usually higher than the demand rate and hence batchProduction method is traditionally adopted

The items that go into the final products generally standardized

Such production of standardized items on a continuous basis is called

Repetitive Production

For repetitive production, demand does not have to be large, just stable enough sothat final assembly schedule can be smoothed (ie, have relatively level daily

Production output)

Combining production of different products is feasible as long as productDifferences are add-on features or options and not differences in fundamental

Design, major components or production processes

Grouping different items usually resulted in a particular way of configuring the

system for achieving the better operational efficiency and control

Such configuration is called cellular manufacturing orgroup layout

Mass production

Continuous specialized manufacture of identical products

One or a few products travel through a set of fabrication activities specially arranged

for the particular products (The entire plant is designed and operated for manufacture of asingle product type)

The equipment is dedicated to the manufacture of a single product type such as

Automobile, light bulbs, appliances

A very high fixed investment is required for one-of-a-kind specialization of

Production facilities, such as fixed transfer lines, dedicated conveyors, buffers, etc

Each piece of equipment is optimized in terms of cost and time for the operation it

performs and material movement is automatedContinuous flow process

Continuous dedicated production of large amounts of bulk product

Product types are few and volumes are high

Continuous flow material through a serious of sequential operations

Eg:- chemical plants, oil refineries, plastics, iron and steel, and textile industries


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MARKETING

IntroductionBusiness is an economic activity which involves production of goods and services for

the purpose of their distribution among customers with the objective of making profit.

Thus the basic activities of business are Production of goods and services and their sale.You must have visited markets in your area and purchased various goods. You may have

also observed that normally after using these goods some of your needs are fulfilled and

you feel satisfied.

Meaning and role of marketing

The term marketing may be interpreted in the traditional sense and the Modern sense. Letus examine each one.

Traditional concept of marketing

According to this concept, marketing consists of those activities which are concerned

with the transfer of ownership of goods from producers to consumers. Thus, marketing

means selling of goods and services. In Other words, it is the process by which goods are

made available to Ultimate consumers from their place of origin. The traditional conceptof marketing corresponds to the general notion Of marketing, this means selling goods

and services after they have Been produced. The emphasis of marketing is on sale of


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Objectives of marketingMarketing activities are organized to achieve the following objectives:

1. Consumer satisfaction: Marketing activities are organized with theobjective of ensuring that consumers get maximum satisfaction from the use of the

product. Consumer satisfaction ensures steady and growing demand for firms products.

2. Product development:This objective aims at developing new and betterproducts, which may provide greater satisfaction to consumers. Product development is

necessary for the survival and growth of the firm.

3. Sustaining Customer loyalty : If customers continue to make repeatedpurchases of goods and services, it is possible to sustain the demand for the products of

the firm.

4.Earning profits

:Business must earn sufficient profit. Marketing activities areorganized with the objective of earning adequate profits for the firm.

5. To secure competitive advantage : This objective of marketingensures that a firms products are preferred over competitors product. Competitiveadvantage is achieved through cost efficiency and quality improvements of the products.

6. Growth in Sales:Marketing aims at increasing the sale of firms products.This is necessary to maintain or increase the market share of the firm. Market share

means percentage demand satisfied by the firm for a particular product. Growth in sales

ensures survival of the firm in the long run.

7. Creation of goodwill:This objective of marketing ensures that a businessfirm is regarded as a useful part of society engaged in satisfying consumer needs. This

help business firms to survive and grow.

Marketing mix

The term marketing mix refers to the four major areas of decision making in themarketing process that are blended to obtain the results desired by the organization. The

four elements of the marketing mix are sometimes referred to the four Ps of marketing.The marketing mix shapes the role of marketing within all types of organizations, bothprofit and nonprofit. Each element in the marketing mixproduct, price, promotion, and

placeconsists of numerous sub elements. Marketing managers make numerous

decisions based on the various sub elements of the marketing mix, all in an attempt to

satisfy the needs and wants of consumers.
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Product

The first element in the marketing mix is the product. A product is any combination of

goods and services offered to satisfy the needs and wants of consumers. Thus, a productis anything tangible orintangible that can be offered for purchase or use by consumers. A

tangible product is one that consumers can actually touch, such as a computer. Anintangible product is a service that cannot be touched, such as computer repair, income

tax preparation, or an office call. Other examples of products include places and ideas.For example, the state tourism department in New Hampshire might promote New

Hampshire as a great place to visit and by doing so stimulate the economy. Cities also

promote themselves as great places to live and work. For example, the slogan touted bythe Chamber of Commerce in San Bernardino, California, is "It's a great day in San

Bernardino." The idea of wearing seat belts has been promoted as a way of saving lives,

as has the idea ofrecycling to help reduce the amount of garbage placed in landfills.

Typically, a product is divided into three basic levels. The first level is often called the

core product, what the consumer actually buys in terms of benefits. For example,consumers don't just buy trucks. Rather, consumers buy the benefit that trucks offer, like

being able to get around in deep snow in the winter. Next is the second level, or actualproduct, that is built around the core product. The actual product consists of the brand

name, features, packaging, parts, and styling. These components provided the benefits to

consumers that they seek at the first level. The final, or third, level of the product is theaugmented component. The augmented component includes additional services and

benefits that surround the first two levels of the product. Examples of augmented product

components are technical assistance in operating the product and service agreements.

Products are classified by how long they can be useddurabilityand their tangibility.

Products that can be used repeatedly over a long period of time are called durable goods.Examples of durable goods include automobiles, furniture, and houses. By contrast,

goods that are normally used or consumed quickly are called nondurable goods. Someexamples of nondurable goods are food, soap, and soft drinks. In addition, services are

activities and benefits that are also involved in the exchange process but are intangible

because they cannot be held or touched. Examples of intangible services included eye

exams and automobile repair.

Another way to categorize products is by their users. Products are classified as either

consumer or industrial goods. Consumer goods are purchased by final consumers for

their personal consumption. Final consumers are sometimes called end users. The

shopping patterns of consumers are also used to classify products. Products sold to thefinal consumer are arranged as follows: convenience, shopping, specialty, and unsought

goods. Convenience goods are products and services that consumers buy frequently and

with little effort. Most convenience goods are easily obtainable and low-priced, itemssuch as bread, candy, milk, and shampoo. Convenience goods can be further divided into

staple, impulse, and emergency goods. Staple goods are products, such as bread and milk,

that consumers buy on a consistent basis. Impulse goods like candy and magazines areproducts that require little planning or search effort because they are normally available
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in many places. Emergency goods are bought when consumers have a pressing need. An

example of an emergency good would be a shovel during the first snowstorm of the

winter.

Shopping goods are those products that consumers compare during the selection and

purchase process. Typically, factors such as price, quality, style, and suitability are usedas bases of comparison. With shopping goods, consumers usually take considerable time

and effort in gathering information and making comparisons among products. Majorappliances such as refrigerators and televisions are typical shopping goods. Shopping

goods are further divided into uniform and no uniform categories. Uniform shopping

goods are those goods that are similar in quality but differ in price. Consumers will try tojustify price differences by focusing on product features. Non uniform goods are those

goods that differ in both quality and price.

Specialty goods are products with distinctive characteristics or brand identification for

which consumers expend exceptional buying effort. Specialty goods include specific

brands and types of products. Typically, buyers do not compare specialty goods withother similar products because the products are unique. Unsought goods are those

products or services that consumers are not readily aware of or do not normally considerbuying. Life insurance policies and burial plots are examples of unsought goods. Often,

unsought goods require considerable promotional efforts on the part of the sellerin order

to attract the interest of consumers.

Industrial goods are those products used in the production of other goods. Examples ofindustrial goods include accessory equipment, component parts, installations, operating

supplies, raw materials, and services. Accessory equipment refers to movable items and

small office equipment items that never become part of a final product. Office furniture

and fax machines are examples of accessory equipment. Component parts are productsthat are turned into a component of the final product that does not require further

processing. Component parts are frequently custom-made for the final product of which

they will become a part. For example, a computer chip could be produced by onemanufacturer for use in computers of other manufacturers. Installations are capital goods

that are usually very expensive but have a long useful life. Trucks, power generators, and

mainframe computers are examples of installations. Operating supplies are similar toaccessory equipment in that they do not become part of the finished product. Operating

supplies include items necessary to maintain and operate the overall firm, such as

cleaners, file folders, paper, and pens. Raw materials are goods sold in their original formbefore being processed for use in other products. Crops, crude oil, iron ore, and logs are

examples of raw materials in need of further processing before being used in products.

The last category of industrial goods is services. Organizations sometimes require the useof services, just as individuals do. Examples of services sought by organizations include

maintenance and repair and legal counsel.
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Price

The second element in marketing mix is price. Price is simply the amount of money

that consumers are willing to pay for a product or service. In earlier times, the price wasdetermined through a barter process between sellers and purchasers. In modern times,

pricing methods and strategies have taken a number of forms.

Pricing new products and pricing existing products require the use of different strategies.

For example, when pricing a new product, businesses can use either market-penetrationpricing or a price-skimming strategy. A market-penetration pricing strategy involves

establishing a low product price to attract a large number of customers. By contrast, a

price-skimming strategy is used when a high price is established in order to recover thecost of a new product development as quickly as possible. Manufacturers of computers,

videocassette recorders, and other technical items with high development costs frequently

use a price-skimming strategy.

Pricing objectives are established as a subset of an organization's overall objectives. As acomponent of the overall business objectives, pricing objectives usually take one of four

forms: profitability, volume, meeting the competition, and prestige. Profitability pricing

objectives mean that the firm focuses mainly on maximizing its profit. Under profitabilityobjectives, a company increases its prices so that additional revenue equals the increase

in product production costs. Using volume pricing objectives, a company aims to

maximize sales volume within a given specific profit margin. The focus of volume

pricing objectives is on increasing sales rather than on an immediate increase in profits.Meeting the price level of competitors is another pricing strategy. With a meeting-the-

competition pricing strategy, the focus is less on price and more on nonprice competition

items such as location and service. With prestige pricing, products are priced high and

consumers purchase them as status symbols.

In addition to the four basic pricing strategies, there are five price-adjustment strategies:

discount pricing and allowances, discriminatory pricing, geographical pricing,

promotional pricing, and psychological pricing. Discount pricing and allowances includecash discounts, functional discounts, seasonal discounts, trade-in allowances, and

promotional allowances. Discriminatory pricing occurs when companies sell products or

services at two or more prices. These price differences may be based on variables such asage of the customer, location of sale, organization membership, time of day, or season.

Geographical pricing is based on the location of the customers. Products may be priced

differently in distinct regions of a target area because of demand differences. Promotional

pricing happens when a company temporarily prices products below the list price orbelow cost. Products priced below cost are sometimes called loss leaders. The goal of

promotional pricing is to increase short-term sales. Psychological pricing considers prices

by looking at the psychological aspects of price. For example, consumers frequentlyperceive a relationship between product price and product quality.
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Promotion

Promotion is the third element in the marketing mix. Promotion is a communication

process that takes place between a business and its various publics. Publics are thoseindividuals and organizations that have an interest in what the business produces and

offers for sale. Thus, in order to be effective, businesses need to plan promotionalactivities with the communication process in mind. The elements of the communication

process are: sender, encoding, message, media, decoding, receiver, feedback, and noise.The sender refers to the business that is sending a promotional message to a potential

customer. Encoding involves putting a message or promotional activity into some form.

Symbols are formed to represent the message. The sender transmits these symbolsthrough some form of media. Media are methods the sender uses to transmit the message

to the receiver. Decoding is the process by which the receiver translates the meaning of

the symbols sent by the sender into a form that can be understood. The receiver is theintended recipient of the message. Feedback occurs when the receiver communicates

back to the sender. Noise is anything that interferes with the communication process.

There are four basic promotion tools: advertising, sales promotion, public relations, and

personal selling. Each promotion tool has its own unique characteristics and function. Forinstance, advertising is described as paid, no personal communication by an organization

using various media to reach its various publics. The purpose of advertising is to inform

or persuade a targeted audience to purchase a product or service, visit a location, or adoptan idea. Advertising is also classified as to its intended purpose. The purpose of product

advertising is to secure the purchase of the product by consumers. The purpose of

institutional advertising is to promote the image or philosophy of a company. Advertising

can be further divided into six subcategories: pioneering, competitive, comparative,advocacy, reminder, and cooperative advertising. Pioneering advertising aims to develop

primary demand for the product or product category. Competitive advertising seeks todevelop demand for a specific product or service. Comparative advertising seeks tocontrast one product or service with another. Advocacy advertising is an organizational

approach designed to support socially responsible activities, causes, or messages such as

helping feed the homeless. Reminder advertising seeks to keep a product or companyname in the mind of consumers by its repetitive nature. Cooperative advertising occurs

when wholesalers and retailers work with product manufacturers to produce a single

advertising campaign and share the costs. Advantages of advertising include the ability toreach a large group or audience at a relatively low cost per individual contacted. Further,

advertising allows organizations to control the message, which means the message can be

adapted to either a mass or a specific target audience. Disadvantages of advertising

include difficulty in measuring results and the inability to close sales because there is nopersonal contact between the organization and consumers.

The second promotional tool is sales promotion. Sales promotions are short-term

incentives used to encourage consumers to purchase a product or service. There are three

basic categories of sales promotion: consumer, trade, and business. Consumer promotiontools include such items as free samples, coupons, rebates, price packs, premiums,

patronage rewards, point-of-purchase coupons, contests, sweepstakes, and games. Trade-
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promotion tools include discounts and allowances directed at wholesalers and retailers.

Business-promotion tools include conventions and trade shows. Sales promotion has

several advantages over other promotional tools in that it can produce a more immediateconsumer response, attract more attention and create product awareness, measure the

results, and increase short-term sales.

Public relations are the third promotional tool. An organization builds positive public

relations with various groups by obtaining favorable publicity, establishing a goodcorporate image, and handling or heading off unfavorable rumors, stories, and events.

Organizations have at their disposal a variety of tools, such as press releases, product

publicity, official communications, lobbying, and counseling to develop image. Publicrelations tools are effective in developing a positive attitude toward the organization and

can enhance the credibility of a product. Public relations activities have the drawbackthat

they may not provide an accurate measure of their influence on sales as they are notdirectly involved with specific marketing goals.

The last promotional tool is personal selling. Personal selling involves an interpersonalinfluence and information-exchange process. There are seven general steps in the

personal selling process: prospecting and qualifying, pre-approach, approach,presentation and demonstration, handling objections, closing, and follow-up. Personal

selling does provide a measurement of effectiveness because a more immediate response

is received by the salesperson from the customer. Another advantage of personal sellingis that salespeople can shape the information presented to fit the needs of the customer.

Disadvantages are the high cost per contact and dependence on the ability of the

salesperson.

For a promotion to be effective, organizations should blend all four promotion tools

together in order to achieve the promotional mix. The promotional mix can be influencedby a number of factors, including the product itself, the product life-cycle stage, and

budget. Within the promotional mix there are two promotional strategies: pull and push.

Pull strategy occurs when the manufacturer tries to establish final consumer demand andthus pull the product through the wholesalers and retailers. Advertising and sales

promotion are most frequently used in a pulling strategy. Pushing strategy, in contrast,

occurs when a seller tries to develop demand through incentives to wholesalers andretailers, who in turn place the product in front of consumers.

Place

The fourth element of the marketing mix is place. Place refers to having the rightproduct, in the right location, at the right time to be purchased by consumers. This properplacement of products is done through middle people called the channel of distribution.

The channel of distribution is comprised of interdependent manufacturers, wholesalers,

and retailers. These groups are involved with making a product or service available foruse or consumption. Each participant in the channel of distribution is concerned with

three basic utilities: time, place, and possession. Time utility refers to having a product

available at the time that will satisfy the needs of consumers. Place utility occurs when a
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firm provides satisfaction by locating products where they can be easily acquired by

consumers. The last utility is possession utility, which means that wholesalers and

retailers in the channel of distribution provide services to consumers with as fewobstacles as possible.

Channels of distribution operate by one of two methods: conventional distribution or avertical marketing system. In the conventional distribution channel, there can be one or

more independent product manufacturers, wholesalers, and retailers in a channel. Thevertical marketing system requires that producers, wholesalers, and retailers to work

together to avoid channel conflicts.

How manufacturers store, handle, and move products to customers at the right time and at

the right place is referred to as physical distribution. In considering physical distribution,manufacturers need to review issues such as distribution objectives, product

transportation, and product warehousing. Choosing the mode of transportation requires an

understanding of each possible method: rail, truck, water, pipeline, and air. Rail

transportation is typically used to ship farm products, minerals, sand, chemicals, and automobiles. Truck transportation is most suitable for transporting clothing, food, books,

computers, and paper goods. Water transportation is good for oil, grain, sand, gravel,metallic ores, coal, and other heavy items. Pipeline transportation is best when shipping

products such as oil or chemicals. Air transport works best when moving technical

instruments, perishable products, and important documents.

Another issue of concern to manufacturers is the level of product distribution. Normallymanufacturers select from one of three levels of distribution: intensive, selective, or

exclusive. Intensive distribution occurs when manufacturers distribute products through

all wholesalers or retailers that want to offer their products. Selective distribution occurs

when manufacturers distribute products through a limited, select number of wholesalersand retailers. Under exclusive distribution, only a single wholesaleror retailer is allowed

to sell the product in a specific geographic area.

CHANNELS OF DISTRIBUTION

Meaning of Channels of Distribution

The main purpose of trade is to supply goods to the consumers living in far off places. As

goods and services move from producer to consumer they may have to pass through

various individuals. Thus, a channel of distribution is the route or path along which goodsmove from producers to ultimate consumers.
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Types of Channels

Normally goods and services pass through several hands before they come to the hands of

the consumer for use. But in some cases producers sell goods and services directly to theconsumers without involving any middlemen in between them, which can be called as

direct channel. So there are two types of channels, one direct channel and the other,

indirect channel. From the above diagram it can be found that there is just one direct

channel i.e. from producer to the consumer. There are many indirect channels like


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(i) Direct ChannelIn this channel, producers sell their goods and services directly to the consumers.

There is no middleman present between the producers and consumers. The producersmay sell directly to consumers through door-to-door salesmen and through their own

retail stores. For example, Bata India Ltd, HPCL, Liberty Shoes Limited has their own

retail shops to sell their products to consumers. For certain service organizationsconsumers avail the service directly. Banks, consultancy firms, telephone companies,

passenger and freight transport services, etc. are examples of direct channel of

distribution of service.

(ii) Indirect ChannelIf the producer is producing goods on a large scale, it may not be possible for him to

sell goods directly to consumers. As such, he sells goods through middlemen. These

middlemen may be wholesalers or retailers. A wholesaler is a person who buys goods in

large quantities from producers; where as a retailer is one who buys goods from

wholesalers and producers and sells to ultimate consumers as per their requirement. Theinvolvement of various middlemen in the process of distribution constitutes the indirect

channel of distribution. Let us look into some of the important indirect channels ofdistribution. This is the common channel for the distribution of goods to ultimate

consumers. Selling goods through wholesaler may be suitable in case of food grains,

spices, utensils, etc. and mostly of items, which are smaller in size. Under this channel,the producers sell to one or more retailers who in turn sell to the ultimate

Consumers. This channel is used under the following conditions

(i) When the goods cater to a local market, for example, breads, biscuits, patties, etc.(ii) When the retailers are big and buy in bulk but sell in smaller units, directly to the

consumers.Departmental stores and super bazaars are examples of this channel.Producer Wholesaler Retailer

Wholesalers and RetailersWholesalers and retailers are important middlemen who generally facilitate flow of goods

from the producers to the consumers. Let us study in details about them.


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i. WholesalersWholesalers are one of the important middlemen in the channel of distribution who deals

with the goods in bulk quantity. They buy goods in bulk from the producers and sell themin relatively smaller quantities to the retailers. In some cases they also sell goods directly

to the consumers if the quantity to be purchased is more. They usually deal with a limited

variety of items and also in a specific line of product, like iron and steel, textiles, paper,electrical appliances, etc. Let us know about the characteristics of wholesaler.

Characteristics of WholesalersThe followings are the characteristics of wholesaler:

(i) Wholesalers buy goods directly from producers or manufacturers.

(ii) Wholesalers buy goods in large quantities and sells in relatively smaller quantities.(iii) They sell different varieties of a particular line of product. For example, a wholesaler

who deals with paper is expected to keep all varieties of paper, cardboard, card, etc.

(iv) They may employ a number of agents or workers for distribution of products.

(v) Wholesalers need large amount of capital to be invested in his business.

(vi) They generally provide credit facility to retailers.(vii) He also provides financial assistance to the producers or manufacturers.Channels of Distribution

(viii) In a city or town they are normally seen to be located in one particular area of the

market. For example, you can find cloth merchants in one area, book publishers and

sellers in one area; furniture dealers in one area etc.

Functions of WholesalersYou have well understood the meaning of wholesaler and listed their characteristics. Nowlet us know about the functions of wholesalers. Following are the functions, which a

wholesaler usually performs.

(a) Collection of goods: A wholesaler collects goods from manufacturers or producersenlarge quantities.

(b) Storage of goods: A wholesaler collects the goods and stores them safely in

warehouses, till they are sold out. Perishable goods like fruits, vegetables, etc. are storedin cold storage.

(c) Distribution: A wholesaler sells goods to different retailers. In this way, he also

performs the function of distribution.

(d) Financing: The wholesaler provides financial support to producers and manufacturers

by sending money in advance to them. He also sells goods to the retailer on credit. Thus,

at both ends the wholesaler acts as a financier.

(e) Risk taking: The wholesaler buys finished goods from the producer and keeps them

in theWarehouses till they are sold. Therefore, he assumes the risks arising out of changes in

Demand, rise in price, spoilage or destruction of goods.


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ii. RetailersRetailers are the traders who buy goods from wholesalers or sometimes directly from

producers and sell them to the consumers. They usually operate through a retail shop andsell goods in small quantities. They keep a variety of items of daily use.

Characteristics of Retailers

The following are the characteristics of retailers:(i) Retailers have a direct contact with consumers. They know the requirements of the

Consumers and keep goods accordingly in their shops.

(ii) Retailers sell goods not for resale, but for ultimate use by consumers. For example,you buy fruits, clothes, pen, pencil etc. for your use, not for sale.

(iii) Retailers buy and sell goods in small quantities. So customers can fulfill their

requirement without storing much for the future.(iv) Retailers require less capital to start and run the business as compared to wholesalers.

(v) Retailers generally deal with different varieties of products and they give a wide

choice to the consumers to buy the goods.

Functions of RetailersAll retailers deal with the customers of varying tastes and temperaments. Therefore, they

should be active and efficient in order to satisfy their customers and also to induce themto buy more. Letups see what the retailers do in distribution of goods.

(i) Buying and assembling of goods: Retailers buy and assemble varieties of goods from

Different wholesalers and manufacturers. They keep goods of those brands and varietyWhich are liked by the customers and the quantity in which these are in demand.

(ii) Storage of goods: To ensure ready supply of goods to the customer retailers keeptheir goods in stores. Goods can be taken out of these stores and sold to the customers as

and when required. This saves consumers from botheration of buying goods in bulk and

storing them.

(iii) Credit facility: Although retailers mostly sell goods for cash, they also supply goods

on credit to their regular customers. Credit facility is also provided to those customers

who buy goods in large quantity.

(iv) Personal services: Retailers render personal services to the customers by providing

expert advice regarding quality, features and usefulness of the items. They givesuggestions considering the likes and dislikes of the customers. They also provide free

home delivery service to customers. Thus, they create place utility by making the goods

available when they are demanded.

(v) Risk bearing: The retailer has to bear many risks, such as risk of:

(a) Fire or theft of goods

(b) Deterioration in the quality of goods as long as they are not sold out.(c) Change in fashion and taste of consumers.Channels of Distribution


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(vi) Display of goods: Retailers display different types of goods in a very systematic and

Attractive manner. It helps to attract the attention of the customers and also facilitates

quick delivery of goods.

(vii) Supply of information: Retailers provide all information about the behavior, tastes,

fashions and demands of the customers to the producers through wholesalers. They

become a very useful source of information for marketing research.

Distinction between Wholesaler and RetailerYou have studied about wholesaler and retailer. You might have noticed that both ofthem differ

in their style and function. Let us find out these differences.

Wholesaler Retailer

(i) Buys goods in large quantities. (i) Buys goods in small quantities.

(ii) Buys goods directly from producers. (ii) Generally buys goods from the

wholesalers.

(iii) Deals with limited variety of goods. (iii) Deals with wide range of products.(iv) Requires more capital to start (iv) Requires less capital to start and run

And run the business. The business.(v) Sell goods for resale purpose. (v) Sell goods for consumption.

(vi) No direct contact with consumers. (vi) Direct contact with consumer.

(vii) No special attention is given to (vii) In order to attract the attention ofDecoration of shop.

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