BUAD 307 DISTRIBUTION Lars Perner, Ph.D., Instructor 1

DISTRIBUTION• Intermediaries—functions• Intermediaries—structures and their

justifications• Selectivity of distribution—do we

want our product available at K-Mart?

• Parallel Distribution Structures• Diversion

BUAD 307 DISTRIBUTION Lars Perner, Instructor 2

Intermediaries Tend to Reduce Costs and Add Value

• Specialization of Labor– Development of expertise

in specific area– Spreading of costs over

more products

• Overcoming Discrepancies– Quantity– Assortment– Temporal

BUAD 307 DISTRIBUTION Lars Perner, Instructor 3

Discrepancies

• Quantity: Delivering products in quantities desired– By end consumer– By retailers

• Assortment: Wholesalers and retailers can combine products from several manufacturers for convenience of– Retailers

– Consumers

• Temporal: Having products available at the right time—e.g.,

– Thanksgiving Turkeys– Summer fashions

BUAD 307 DISTRIBUTION Lars Perner, Instructor 4

Intermediaries: Adding Value

MANUF. 1

MANUF. 2

MANUF. 3

WHOLE-SALER

(or agent) 1

WHOLE-SALER

(or agent) 2

RETAILER

PRODUCTS FROMOTHER MANUFS.

Value added:•Breaking bulk (quantity discrepancy reduced)•Consolidating supplies (assortment discrepancy reduced)•Holding inventory (temporal discrepancy reduced)

BUAD 307 DISTRIBUTION Lars Perner, Instructor 5

Distribution Efficiencies

• Certain VERY LARGE retail chains—e.g., Wal-Mart and Safeway—may be able to distribute more efficiently than independent wholesalers– Integration with own demand

forecasts

• For most other retailers, buying through wholesalers is more efficient

BUAD 307 DISTRIBUTION Lars Perner, Instructor 6

Potential Channel Structures (U.S.)

Agents/Brokers

Wholesalers

Retailers

Customer

Producer

Wholesalers

Retailers

Customer

Producer

Customer

Producer

Retailers

Customer

Producer

RegionalWholesalers

Retailers

Customer

Producer

NationalWholesalers

BUAD 307 DISTRIBUTION Lars Perner, Instructor 7

Approaches to Distribution

• These strategies require tradeoffs:– Wide--essential to low

involvement goods– Selective--desire to

maintain image– Exclusive--very high

prestige needed or very high service requirements

BUAD 307 DISTRIBUTION Lars Perner, Instructor 8

Product Characteristics That May Favor Direct-to-Customer Sales

• High need for customization—especially if the work can be done by the customer

• Rapid decline in the value of inventory

• High value/bulk ratio• Low need for customer to

manually inspect the product• Highly specialized product

requiring a very large assortment of inventory

BUAD 307 DISTRIBUTION Lars Perner, Instructor 9

Parallel Distribution Structures(Multi-channel Distribution)

MANUFAC-TURER

DISTRI-BUTOR

RETAILER

MAJORCHAIN

(e.g., Wal-Mart)

FACTORYOUTLET

DIRECTMARKETING

BUAD 307 DISTRIBUTION Lars Perner, Instructor 10

Diversion• Products often end up where

manufacturers did not intend them to go– Trade promotions in one region

• Within countries (Difficult to do today since sales at a given time can be verified by scanner data)

• Between countries--different price sensitivities and structures may exist (e.g., pharmaceuticals, luxury autos

– “Over-purchases” by small authorized retailers to supply unauthorized distributors (e.g., Levis’ for Costco)—disliked by full service retailers who have to compete

BUAD 307 DISTRIBUTION Lars Perner, Instructor 11

Over-Purchase Diversion Example

• Joe’s Jeans Shop normally buys and sells 500 pairs of Levi’s XBM/P jeans per week at $22.00 and sells at $32.

• A “consolidator” asks Joe to buy his usual 500 plus an extra 200. This increase is not big enough to make Levi’s suspicious.

• The consolidator pays Joe 200*($22+$3)=$5,000.

• Joe makes an extra $3*200=$600.• The consolidator resells to a large discount

chain.

BUAD 307 DISTRIBUTION Lars Perner, Instructor 12

Retail Trends

• Divergence—growth in both low cost, low service and high cost, high service stores more than in the middle

• Growth of – Mega stores: large stores with a wide

assortment (e.g., Wal-Mart)– Category killers: stores emphasizing an

area (e.g., electronics)• Large buying power based on large volume

purchases within select categories• Tendency to make large deals early on in

order cycle– Manufacturer gets a large quantity guaranteed

sale– Category killer gets a low price