1

Some Distribution Related Successes and Failures

A company whose exclusive dealer network was an enormous strength, but turned into a liability as consumer shopping patterns changed.

A company whose stock is up 20,000% since 1990, sales have grown at 54% per year, and in a commoditizing market.

A company which faces a class action for incompetent management from 200 of its franchisees; whose much hyped new product bombed on the market.

2

The Role of the Traditional Distributor is Changing

High

Sales

Volume

Low

Low High

Customer Need for Value

OEMDirect

OutsourcingJIT Contracts

TraditionalDistributor

Mail OrderWholesaleClubs

SpecialtyDistributors

3

Relationships With Manufacturers Are No Longer Working

%Agreeing Distb. ManufManufacturers generally give

distributors adequate support33 70

Distributors are doing the necessaryplanning to enhance performance

34 4

Distributors are doing a good job inperforming marketing functions forcustomers

56 29

Distributors are doing a good job inperforming marketing functions formanufacturers

73 31

5

Why Use Channel Intermediaries?

Why Use Channel Intermediaries?

Wholesaleror Retailer

With Intermediaries

Milk P1 Bread P2 ShampooP3 Soap P4

C1 C2 C3

3 + 3 + 3 + 3 = 12 Transactions

P1 P2 P3 P4

C1 C2 C3

Without Intermediaries

Reducing Transaction Costs

6

Other Reasons

Customers buy baskets or “assortments” of goods. Economizes on the time cost of shopping.

Retail Service is most efficiently provided by an intermediary» faster check-out, product demonstration, after-sales service

Inventory carrying» Intermediaries provide inventory buffer and hedge against

demand fluctuations for the manufacturers.

7

Intermediary Functions

3

Channel Intermediary Functions

Logistical Functions

Facilitating Functions

Transactional Functions

Contacting and Promoting

Negotiating

Physical Distribution

Sorting

Market Research

Financing

Sorting out

Assorting

Accumulation

Allocation

8

Channel Control: Manufacturer Objectives

Manufacturers must find ways to maximize total channel profits. » Why?

The incremental profits can be used in two ways:» Absorbed by the manufacturer leaving the retailer

or other down stream channel member no worse than before.

» Shared with the channel members to reward them for providing better service.

The challenge is to get the retailers to “behave”.

9

Problems with an Independent Channel

The lack of channel coordination:

» Each member has own private interests or profits in mind.» National vs. Local perspective » Perspective is short-term profits.

» Examples» “Free-Riding” McDonald’s franchisees in a region.» Manufacturer shirking on advertising and retailer on retail

service.» Retailer pricing is either “too high” or “too low”.

10

Contracts Help Achieve Coordination

Types of Contracts:» Exclusive dealers - high end clothing. » Provides incentives to manufacturers to invest in advertising

and retailers to invest in service» Exclusive territories: - beer distributors, auto dealerships » Prevents free-riding of retail services» Quantity Forcing: - Auto companies» Ensures that the right level of price and retail service is

provided.» Price Floors

– Nintendo MAP and allowances.– Why Price Floors?

11

Factors Affecting Channel Choice: Retail Competition

CompanyOwned

Independent

High RetailCompetition

XX

Low RetailCompetition XX

Channel intermediaries shield manufacturers from excessive retail competition

12

Factors Affecting Channel Choice: Role of Sales Volume

With growing IT expertise, many manufacturers and industries are moving from independent dealers to corporate distribution (e.g., Dell, Gateway, Apple)

Corporate Independent

High Volume xx

Low Volume xx