Discuss the barriers to the greater use of Inland Waterways Transport in China.

Question

Discuss the barriers to the greater use of Inland Waterways Transport in China. Provide examples where companies have moved freight from road to Inland Waterways. What were the drivers for this change?

The growth in e-commerce has led to significant changes in traditional distribution methods for products being sent from manufacturers to the end consumer. What are the delivery challenges faced by companies and what actions are they taking to overcome these challenges? (Potential areas to investigate are the design of distribution networks, types of vehicles, number and location of warehouses, DC’s, depots and expected lead-times).   

Explanation / Answer

Distribution channels are pathways along which products travel from producers and manufacturers to ultimate consumers. They are routes along which products, information, and finance flow. While some manufacturers deal directly with their customers, most manufacturers use a distribution channel to take products to consumers. Considerable thought, effort, and investment are required to create and maintain a distribution channel. Channel margins and the expense of sales efforts in managing channels can form a substantial proportion of total marketing costs. An effective channel can be a source of strategic advantage for companies. Channel design and channel management are therefore important elements in a company's competitiveness. Channels are also important from a public policy perspective since they employ a large number of people and are critical to the unhindered availability of food items and other products to customers across the socio-economic spectrum. Although channels are very important, little research exists about Indian distribution channels. This note and the accompanying round table presentations therefore attempt to focus on distribution channels in India, especially on the challenges that companies in India face in designing, constructing, and managing distribution channels. The aim is to identify important challenges, examine the relevance of research findings, and develop an agenda for future channel related research in India.

Distribution channels

Distribution channels can be understood by analysing their constituents, structure, functions, and contributions. Channels consist of networks of different types of independent businesses which need to be aligned to assist manufacturers in fulfilling and creating consumer demand for products and services. Channels consist of three categories of entities: agents, merchants, and facilitators. Agents promote products and generate sales but do not themselves buy and stock products. Agents can be independent or they may be employees of the company. Merchants such as retailers, wholesalers, and distributors buy, stock, and sell goods to others in the chain or to ultimate consumers. Merchants are usually independent but some companies may have their own wholesale trading units or retail outlets. Facilitators such as logistics service providers, independent warehouses, carrying and forwarding agents, and transporters facilitate movement, storage, and delivery of products but are not involved in promoting or trading. Distribution channels are configured by putting together agents, merchants, and facilitators in specific ways depending on the market, product, and competitive context.

Channel structures vary across countries and industries, but all channels can be described using simple concepts such as directness, levels, density, variety, and novelty. Directness refers to the process of direct sales between manufacturers and consumers without any intervening channel member. Indirect distribution occurs when a manufacturer uses channel members to sell to consumers. Researchers have identified a number of conditions which influence whether direct distribution or indirect distribution is appropriate (Rangan, Menezes, & Maier, 1992). The concept of levels indicates the number of different buying and selling entities that exist between a manufacturer and a consumer. In the automotive industry, manufacturers sell to franchised exclusive dealers who in turn sell to final consumers. This is termed as a one-level channel. In the FMCG industry it is common for companies to sell to stockists who sell to retailers who in turn sell to consumers. This is an example of a two level channel. Density refers to the number of outlets within a certain geographic area. The fewer the number of outlets, the more exclusive is the distribution, and the more the number of outlets, the more intensive the distribution. The distribution of luxury cars with just one or two outlets in a district or city can be termed as exclusive while the distribution of matchboxes with thousands of outlets may be termed as intensive. Variety refers to the number of different types of outlets. Biscuit distribution may exhibit high variety since biscuits are available in paan stores, groceries, general stores, supermarkets, canteens, vending machines, and even online; while distribution of silk sarees may exhibit low variety in terms of channels used. Novelty refers to the utilisation of new types of channels. Online channels and vending machines are comparatively new in India and would therefore be considered to have a higher level of novelty compared to direct marketing or network marketing channels. Distribution channels are evaluated using three major criteria: effectiveness, efficiency, and adaptability. There is little research in the Indian context on the factors that affect channel effectiveness and efficiency. A good understanding of the factors will aid in modifying channel structure in response to changes in the channel or environment.

A major challenge in channel management is keeping channel members motivated to support the principal, especially when markets are tough. Channel member profitability is a major driver but not the only factor affecting channel member satisfaction and motivation. Skilled channel managers make concerted efforts to measure and monitor channel profitability and channel members' return on investment (ROI). In addition to ensuring healthy ROI, firms utilise a variety of financial and non-financial incentives to motivate channel members. Channel incentives can range from credible channel policies, market development support, supplemental contact, high powered incentives, and end-user contact (Gilliland, 2004). Research is required in the Indian context about the motivational effectiveness of various types of channel incentives. Conjoint studies of channel member margin and incentive packages may be useful.

The nature and characteristics of channels also depends on the level of economic development. Research has suggested that channels in developed countries are likely to have larger wholesalers, larger retailers, and fewer levels in the channel when compared to channels in less developed countries (Olson & Granzin, 1992). Channels in developed markets are also characterised by organised retail and wholesale chains, considerable use of technology and data by channel members, informed customers, high Internet penetration, sophisticated logistics, and strong implementation of laws and regulations. Distribution channels in emerging markets are characterised by unorganised retailing and wholesaling; smaller, independent retailers and wholesalers; more levels in the distribution chain; less use of technology and data by channel members; scantier penetration of Internet; evolving logistics infrastructure; and poor implementation of laws and regulations. Emerging markets also have large base-of-pyramid (BOP) and rural markets which pose unique challenges for distribution. Channels change over time even if changes appear to be very slow. Channel change may be influenced by market drivers such as volatility in consumer needs, consumer sophistication and channel sophistication; environment drivers such as volatility in competitors' strategies and environment conflict; and firm drivers like company size and scope economies (Coelho & Easingwood, 2008).

Distribution channel structure in India

The distribution channel structure in India is largely traditional and quite unique. The major channel components are the retail network, wholesale network, and the logistics infrastructure. The retail network in India consists of over nine million outlets. These include traditional outlets like paan shops; grocers or kirana stores; general stores; specialised shops for footwear, clothing, jewellery, watches, mobile phones, and consumer durables; newer formats like supermarkets, hypermarkets, and online stores; and service outlets like fast food outlets, beauty parlours, fitness centres, coaching centres, and so on. Traditional outlets are spread across urban and rural India but the newer formats are mostly located in urban areas. The penetration of organised retail in India which is less than 8% is quite low even in comparison to other emerging markets. The average retail outlet in India is very small in terms of area, number of employees, and number of stock keeping units (SKUs) stocked. Traditional retail in India offers consumers a number of advantages like convenience, home delivery, credit, and personalised service. On the other hand, modern retail offers periodic promotional offers, lower prices, wider assortment, a better ambience, and higher quality brands. The continued existence of traditional retail in India has been based on factors such as lower rentals, lower labour costs, credit from suppliers, low or no liability on taxes, and a legal framework which prevented foreign direct investment (FDI) in retailing until quite recently. Traditional stores have managed to hold their own against organised Indian retailers so far by making some changes in their operating practices. It will be interesting to see how traditional Indian stores will fare in future after the entry of price aggressive international retailers. Research in Latin America suggests that small traditional stores have lower sales per floor area and lower gross margins compared to modern retailers but they survive because of higher inventory turnover (D'Andrea, Lopez-Aleman & Stengel, 2006). Research in Chile suggests that local retailers can successfully compete with foreign retailers by implementing best practices and focussing on the requirements of local customers (Bianchi & Mena, 2004).

Notwithstanding the many advantages offered by traditional retailers in India, modernisation has picked up in many sectors such as apparel retail, watch retail, and footwear retail. Modernisation seems to have resulted from both supply side and demand side factors. Supply side factors supporting modernisation are the large investments in retail made by brand owners in watches, textiles, and footwear; development of malls and shopping centres; and the entry of large Indian business groups into grocery and electronics retailing. Demand side factors include increased disposable income among consumers, greater brand consciousness, greater appreciation of ambience and air conditioning, and perception of shopping as a rewarding leisure activity. One important sector where the pace of modernisation has been very slow in India is the food retail sector. The bulk of food purchasing in India still happens from traditional kirana stores and traditional commodity markets. Preliminary research in India suggests that format choice in food products is influenced by consumer demographic and psychographic factors, and by distance travelled to the store (Prasad & Aryasri, 2011). The popularity of traditional retail in India could be explained by the presence of a large rural and BOP consumer segment which does not have access to modern food retail outlets. Cultural barriers may also prevent consumers from lower socio-economic strata from patronising modern retail stores. Research in Israel has found that cultural factors and distance from modern stores influence consumers' purchase of perishable food items from traditional stores (Goldman & Hino, 2005). Other factors which affect consumers' channel choices are retail brand image, store loyalty, store status hierarchy, variety seeking behaviour and leisure and entertainment habits of consumers. More research is required to understand Indian consumers' preferences regarding traditional and modern outlets. In this context, biological models and simulation studies may help in forecasting growth of modern retail.

The public distribution system in India requires immediate attention from the Central and State governments. India was one of the earliest among emerging countries to think of making essential food grains and edible oil available to its citizens at affordable prices. A comprehensive system of procurement, storage, and distribution via Central and State agencies and a large network of fair price shops was set up across the country. This system has however been plagued by inefficiencies and leakages. Several modifications have been made to the original scheme to ensure better targetting of people below the poverty line. Research suggests that much still needs to be done in view of the substantial leakages in many states.

Regulations regarding FDI in Indian retail have now been eased; foreign companies can now freely participate in single brand retail. Foreign direct investment in multi-brand retail is also possible in large cities subject to clearance by the State government, provided the foreign company meets conditions regarding the size of the investment; investment in the back-end, and proportion of sourcing in India. It is too early to say if these new regulations will attract substantial FDI in Indian retail. The Indian market is not an easy one to understand, and according to press reports, several large Indian business groups who made significant investments in retailing are yet to attain profitability. There are some fundamental differences between retailing in developed countries and retailing in India. Consumers in developed countries tend to spend more per purchase occasion as they purchase a wider assortment, larger quantities, and higher value products. Retailing in the developed countries is characterised by large format supermarket, hypermarket, and category speciality stores in suburban locations with ample parking. Large format stores are unlikely to be successful in India because of constraints of transport, lack of storage space at home, and lower income levels. Format choice is likely to be an important decision in the Indian market and research findings in this area will be useful for retailers who want to enter the Indian market. Format preferences of consumers are difficult to forecast a-priori but conjoint analysis has been used successfully for examining format choices.

The e-retailing format has made significant strides in developed markets especially in categories such as books, durables, phones, and apparel. Many brick and mortar retailers have started e-retail operations in response to the growth of stand-alone e-tailers. Internet penetration in India was traditionally considered too low to support e-retailing but the rapid growth in the smart phone category allows mobile phone owners to access the Internet easily. This may have implications for growth in e-retailing in India.

Wholesalers have always been an important part of the distribution channel in India. Wholesalers purchase products from manufacturers and sell to retailers. They perform services like storage, bulk breaking, credit provision, and information provision for manufacturers. Most wholesalers in India are small in relation to their counterparts in developed countries and they operate in a limited geographical territory. Wholesalers may specialise in a narrow product range across a few brands and deal with a small number of retailers. Fast moving consumer goods (FMCG) companies in India have developed a category of exclusive wholesalers called stockists or redistributors. These stockists are expected to operate in a defined geographic territory and service a defined set of retailers by providing regular product delivery to retailers using dedicated transport units which ply on fixed routes. Stockists are expected to employ sufficient number of salespersons and promotional personnel to ensure proper stocking and display of the manufacturer's products. The number of stockists used by a single FMCG manufacturer for all-India distribution may run up to a few thousand and these stockists may cover over a million retailers using systematic physical distribution. In recent years, there have been reports that even while pursuing value and volume growth, companies are reducing the number of stockists they employ. The implication is that stockists now have a larger territory to operate in and will actually or potentially be handling a larger turnover as compared to previous years. Controlled distribution through stockists is usually supplemented by using non-exclusive traditional wholesalers who cater to retailers who are not covered by stockists. Traditional wholesalers can help in expanding brand presence by several million more outlets. Practitioner wisdom suggests that traditional wholesalers operate on very low margins, yet provide useful services. Traditional wholesalers are an important element of distribution in India but there is hardly any published research about their business models and operating strategy.

A new breed of organised, pan-India, professionally managed wholesale companies have made their appearance in the electronics trade, specifically in IT hardware, technology products, and mobile phones. Large organised international companies have also entered the cash and carry wholesale format with a pan-India footprint. If this trend continues, we can envisage the appearance of professional wholesaling in other sectors of the Indian economy in the not too distant future. The growth of large, organised wholesalers has profound implications for manufacturers in India. So far manufacturers have had to deal with relatively small stockists and wholesalers with the power balance firmly lying with manufacturers. The power balance can change drastically when manufacturers have to deal with large, powerful wholesalers. The growth of organised wholesaling offers research opportunities for future distribution research in India.

Logistics is an important part of distribution channel management in India. The design of the warehouse network in India has hitherto been influenced more by the taxation structure and less by actual distance, transport, and demand considerations. Due to the presence of the inter-state Central Sales Tax, companies have tried to avoid inter-state sales by setting up warehouses in almost every state. This has necessitated the location of warehouses in almost every state. For cost reasons, these state level warehouses are usually outsourced to specialist entities called carrying and forwarding agents (CFAs). The location of CFAs within a state is determined by demand factors and transportation considerations. The tax structure distorts rational network design and can give rise to cost inefficiencies (Avittathur, Shah, & Gupta, 2005). Future changes in the tax regime may permit companies more freedom to redesign their distribution for locating distribution centres to minimise costs and maximise service.

Many leading companies have implemented technology initiatives in their distribution channels. These include provision of computer systems and billing software to CFAs and stockists and connecting CFAs' and stockists' computers with their manufacturing databases, providing handheld devices to stockist salespersons for accurate billing, using GPS enabled transport vehicles, and so on. Companies are also experimenting with analytics and big data to understand retail demand. Firms must also address the softer aspects of channel capabilities through upgrading the channel human resources and management capabilities of stockists and wholesalers via in-house or outsourced training initiatives. Informal surveys among channel members suggest that the human resources area is a bottleneck for most channel members.

Only a few of the millions of retail outlets in India are registered with a national authority. Hence data on the size and measurable characteristics of the distribution channel in India is very difficult to obtain. Consequently retail audit measurements are extremely important for companies in estimating their volume and value of market share, distribution coverage, and retail presence. Sophisticated retail audit services with pan-India urban and rural sampling covering various types of retail outlets and products are now available in India for most FMCG categories. This needs to be extended to cover many more product and service categories. In addition to sample based audits, census of retail and wholesale outlets is required to understand the Indian distribution system. The Central Statistical Organisation of the Government of India has in the past carried out a trade census which yielded useful information on the scope and characteristics of trade in India. The census was supposed to be carried out on a periodic basis but no fresh data has been available since 1996–97. The trade census requires updating at the earliest. Other interesting areas for study in the context of Indian retail and distribution channels are franchising and franchisee operations; transaction cost analyses; horizontal integration; retail employee satisfaction and validity of the service profit chain framework; store location models; factors affecting private label activity; and retail access of BOP consumers.

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