DESIGNING AND MANAGING CHANNELS

AND DISTRIBUTIONBY:

ABANG ANDY ZULFILDA BIN ABANG SAHREL

2

THE IMPORTANT ISSUES

1. VALUE CHAINS

2. DISTRIBUTION CHANNELS

Supply Chains & the Value Delivery Network

Supply Chain

Supply chain is the connected chain of all of the business entities, both internal and external to the company, that perform or support the logistics function.

Supply Chains & the Value Delivery Network

Supply Chain

Upstream activities: the whole process of the supply of resources for the production of products.

Downstream activities: the process from the distribution of finished goods to the manufacturers’ reseller to the delivery of products to the end.

5

6

7

8

Supply Chains & the Value Delivery NetworkValue Delivery Network

Value delivery network is a network made up of the

company suppliers, distributor, and ultimately, customers who “partner”

with each other to improve the performance of the

entire system.

9

Supply Chains & the Value Delivery NetworkValue Delivery Network

10

Value-Chain Issues

1. Physical distribution efficiency

2. Supply chain efficiency management

3. Logistics efficiency management

4. Cost efficiency

5. Impacts of technological changes

DISTRIBUTION CHANNEL

12

INTRODUCTION

Manufacturers/products

Agents/brokers

Wholesalers/distributors

RetailersRetailers

Consumers and organizational end users

Basic Distribution Channel

13

DEFINITION OF DISTRIBUTION CHANNEL

• System of marketing institutions that promotes the physical flow of goods and services, along with ownership title, from producers to consumer or business user.

• Also called as Channel of Distribution

14

CHANNEL INTERMEDIARYCHANNEL INTERMEDIARY

• A list of channel members

• Wholesaler or retailer that operates between producers and consumers or business users

• Also called a middleman

15

IMPORTANCE OF DISTRIBUTION CHANNELS

1. Growing Power of Distributors

2. Reduction of Distribution Cost

3. Stress on Growth

4. Increasing Role of Technology

5. Increase the efficiency of distribution

6. Increase the customers satisfaction

7. Reduction of time consume in handling the goods

16

CHANNEL INTERMEDIARYCHANNEL INTERMEDIARY DISTRIBUTION CHANNEL MEMBERS

17

THE BASIC ROLES OF CHANNELS INTERMEDIARY IN MARKETING

STRATEGY

1. Channels provide the means by which the firm moves the goods and services it produces to ultimate users

2. Facilitate the exchange process by cutting the number of contacts necessary

3. Adjust for discrepancies in the market’s assortment of goods and services via sorting

4. Standardize exchange transactions

5. Facilitate searches by both buyers and sellers

19

Other Roles Performed by Channel Members

1. To KFC retailer to sell their products through the process of buying and selling.

2. To provide the storage services such as warehouses and containers

3. To help the retailer in the transferring the Title process

4. To facilitate and perform the processing orders from customers

20

BASIC DISTRIBUTION CHANNEL LEVELS

• Refers to the layer of intermediaries that perform some work in bringing the product and its ownership closer to the final buyer

1. Consumer market channel levels

2. Business markets channel levels

21

BASIC DISTRIBUTION CHANNEL LEVELS

• 3 Consumer market channel levels:

1. Manufacturer sells directly to consumer

2. Manufacturer sells to wholesaler and the wholesaler sells to the consumer

3. Manufacturer sells to the wholesaler and the wholesaler sells to the retailer and the retailer sells to the consumer

22

• BASIC DISTRIBUTION CHANNEL LEVELS (Consumer Market & Goods)

23

BASIC DISTRIBUTION CHANNEL LEVELS

• Business markets channel levels:

1. Manufacturer sells to the industrial buyers

2. Manufacturer sells to the business distributor who then sells to the industrial buyers

3. Manufacturer sells to the manufacturer’s representative who then sells to the industrial buyers

4. Manufacturer sells to the manufacturer’s representative who then sells to the business distributor who then sells to the industrial buyers

24

Basic Types of Channel Distribution

1. Conventional Distribution Systems

2. Vertical Marketing Systems

3. Multi-Channel Distribution Systems

25

Basic Types of Channel Distribution

1. Conventional Distribution Systems

Are a grouping of vertically-linked independent organizations

Each trying to look out for itself, with limited concern for the total performance of the channel

These channel relationships are generally informal

The focus of the channel organizations is on the buyer-seller transactions rather than on fostering close cooperation throughout the distribution channel.

26

Basic Types of Channel Distribution

2. Vertical Marketing Systems

(VMS) can be defined as the channel systems consisting of horizontally coordinated and vertically aligned establishments that are professionally managed and centrally coordinated to achieve optimum operating economies and maximum market impact.

A primary characteristic of the VMS is the management (or coordination) of the distribution channel by one organization.

This said organization is in effect, the channel manager as it programs and coordinates all channel activities.

27

Basic Types of Channel Distribution2. Vertical Marketing System

Many marketer see the vertical distribution channel as the answer to overcoming the disagreements which are found in the traditional distribution channel

3 Types of VMS:

1. Corporate / Ownership VMS one channel member owns another channel member in the distribution channel. For

example, a manufacturer may own a wholesaler company

2. Contractual VMS three independent channel members sign an agreement to work together for a common

purpose

3. Administered VMS one channel member is so rich or powerful that the other channel members have no

choice but to do whatever he asks of them

28

Vertical Marketing Systemi. Forward integration In the case where a manufacturer owns

an intermediary at the next level down in the channel.

PadiniHoldings for instance, manufactures apparel under various brand names such as Padini, Seed, P & Co, and PDI, and also owns retail stores.

ii. Backward integration Retailer may own a manufacturing

operation.

Kroger supermarkets from the US operate manufacturing facilities that produce everything from aspirin to cottage cheese, for sale under the Kroger label.

Corporate / Ownership VMS

29

Basic Types of Channel Distribution

3. Multi-channel Distribution Systems

One company may use a variety of distribution channels in order to reach a single or several market segments

For example

Coca Cola sells its drinks through vending machines, convenience stores, provision stores, supermarkets and even hypermarkets

30

FACTORS INFLUENCE THE DIRECT DISTRIBUTION STRATEGIES

1. Buyer Considerations

2. Product characteristics

3. Competitive considerations

4. Financial and control considerations

31

OTHER FACTORS INFLUENCE THE DIRECT DISTRIBUTION STRATEGIES

32

DEFINITION OF DISTRIBUTION STRATEGIES

• The techniques that facilitating the process of making a product or service available for use or consumption by a consumer or business user.

• The ways of moving a product or service from producer to consumer in certain sectors.

• The styles and methods of passing the product down the chain to the next organization, before it finally reaches the consumer or end-user

33

3 DISTRIBUTION STRATEGIES

There are three strategies available for manufacturers in distributing their products or services. They are:

Intensive distribution (I)

Selective distribution (S)

Exclusive distribution (E)

34

SELECTIVE DISTRIBUTION • Under this distribution strategy, the company is actually

covers broad area of market exposure between intensive and exclusive distribution.

• It uses more than one intermediaries who are willing to carry a particular product and contribute to sales volume and profit goals.

• The producers may use this strategy to eliminate those retailers who are inefficient in moving the products and have poor credit risk.

• The distributors expect better than average selling efforts, and a greater market control.

35

INTENSIVE DISTRIBUTION • This strategy aims for maximum market coverage• Here, the producers can stock their products in as many

outlets as possible• By doing this, the producer making it easy and convenient for

customers in making their purchases.• the producers stock up their products in supermarkets, grocery

stores and a variety of shops.• This strategy is most suitable for convenience goods that are

inexpensive, have a place utility and frequently purchased in a highly competitive markets.

• Example:– Soap, cigarettes, toothpaste and – Many other convenience goods

36

INTENSIVE DISTRIBUTION

• Advantages:– Broad market coverage than selective and exclusive

distribution.– Fast growth on market share

• Disadvantages– Poor control and high cost than selective and intensive

distribution– Risk of image destruction

37

SELECTIVE DISTRIBUTION• The distribution of products only to those wholesalers or retailers

who (a) agree to sell the product for no less than a certain price, (b) patronize the distributor on a regular basis or for at least a certain dollar amount annually, or (c) meet specific requirements established by the distributor as outlined by the manufacturer.

• Selective distribution is used primarily for hard goods, such as appliances, stereo equipment, or furniture.

• It allows manufacturers to maintain more control over the way their products are sold and minimizes price competition among sellers of the products.

38

SELECTIVE DISTRIBUTION • This strategy is ideal especially for shopping

goods and many other.

• Selective distribution means placing shopping goods (clothing, shoes, etc) in “selected department stores” that fit the image of the product and fit the characteristics of the targeted market.

• Examples:– Famous cosmetics like Tia Amelia, Nona

Roguy, Jus Mate, Estee Lauder, Mac factor, Kose, Shisedo can be found at selective beauty Boutiques ONLY

39

SELECTIVE DISTRIBUTION

• Advantages:– Better market coverage than exclusive distribution– More control and less cost than intensive distribution– Concentrate effort on few productive outlets– Selected firms capable of carrying full product line and

provide the required service

40

SELECTIVE DISTRIBUTION

• Disadvantages:– May not cover the market adequately– Difficult to select dealers (retailers) that can

match your requirement and goals

41

EXCLUSIVE DISTRIBUTION• In this strategy, the distributors may limit the number of

dealers by granting the exclusive right to one or two dealers to distribute their products in a certain area or a respective territory.

• This strategies involves the stronger selling support from the producers to the distributors and the distributors have more control over dealer prices, promotion, credit, and services.

• Instead, this strategy also enhances the product image and allows higher markups.

42

EXCLUSIVE DISTRIBUTION• The retail selling strategy typically used by

manufacturers of high-priced, generally upscale merchandise, such as cars or jewelry, whereby manufacturers grant certain dealers exclusive territorial rights to sell the product.

• The retailer benefits from the lack of competition, and the manufacturer benefits from a greater sales commitment on the part of the retailer.

• Additionally, exclusive distribution gives the manufacturer greater control over the way the product is merchandised

43

EXCLUSIVE DISTRIBUTION• Exclusive distribution also means placing specialty products

(expensive jewelry, perfumes, etc.) in few stores that maintain a prestige image that match the store with the product.

• It uses routine decision making (habitual purchases) so require intensive distribution. Intensive, widespread distribution refers to placing the product is as many convenient outlets as possible (vending machines, convenience stores, grocery stores, etc.)

• The distribution of goods under this strategy is rather confined to consumer specialty goods, a few shopping goods and major industrial equipments and many other.

44

EXCLUSIVE DISTRIBUTION

• Examples:

– Roll Royce automobiles, Ferrari automobiles, BMW and Mercedes. Those products are distributed under exclusive territories given to NAZA Corporation.

– Even some special toys like Playschool and Mattel are marketed exclusively through a selected retail store only.

– AVON cosmetics only can be bought at any AVON Outlets or Exclusive dealer ONLY.

45

EXCLUSIVE DISTRIBUTION:

• Advantages – Maximize control over service level/output– Enhance product’s image & allow higher

markups– Promotes dealers loyalty, better forecasting,

better inventory and merchandising control– Restricts resellers from carrying competing

brands– Less competition

46

EXCLUSIVE DISTRIBUTION:

• Disadvantages

– Betting on one dealer in each market

– Only suitable for high price, high margin, and low volume products

47

CHANNEL CONFIGURATION

• The final step in selecting the appropriate distribution strategy is making decisions with regard to:

1. How many levels of organizations to include in the vertical channel

2. The specific kinds of intermediaries to be selected at each level

48

CHANNEL CONFIGURATION

1. End-user considerations

2. Product characteristics

3. Manufacturer’s Capabilities and Resources

4. Required Functions

5. Availability and Skills of Intermediaries

49

CHANNEL CONFIGURATION

1. End-user considerations The determination of the type of intermediary depends on

where the targeted end user can be found and/or expected to purchase the product of interest.

2. Product characteristics The type of product, in terms of its complexity, its application

requirements and after-sales needs are useful in guiding the choice of the type of intermediary.

3. Manufacturer’s Capabilities and Resources Large organizations with expansive resources have a great

deal of flexibility in choosing their intermediaries since they possess bargaining power.

50

CHANNEL CONFIGURATION

4. Required Functions The nature of the distribution functions to move

products and services from manufacturer to end-user.

Example: Warehousing, transportation, servicing will guide

companies to ascertain the appropriate intermediary. A direct-selling company is likely to depend on independent

agents.

5. Availability and Skills of Intermediaries The capabilities and resources of intermediaries that

are under consideration to become channel members need to be properly evaluated.

51

CHANNEL MANAGEMENT

• It must be noted that these management issues are just as important as the earlier activities since once established, the channel design may be difficult to modify, or worse, very expensive to rectify.

• The activities involve:1. Choosing how to assist and support intermediaries2. Developing SOPs3. Providing incentives4. Selecting promotional programs5. Assessing channel results.

52

9 ISSUES IN CHANNEL MANAGEMENT

1. Channel Leadership 2. Management Structure and Systems3. Physical Distribution Management4. Channel Relationships5. Channel Globalization6. Multi-channeling7. Conflict Resolution8. Channel Performance9. Legal & Ethical Considerations

53

9 ISSUES IN CHANNEL MANAGEMENT

1. Channel Leadership

The bigger or stronger organization will usually exercise its authority and power to assume leadership over other channel members.

This leadership role is taken up because of this organization's size, financial strength, experience, environmental factors and its ability to capitalize on these said factors.

54

9 ISSUES IN CHANNEL MANAGEMENT

2. Management Structure and Systems Channel coordination and management are often the

responsibility of the sales function of an organization. E.g. A manufacturer’s sales force is responsible for developing

buyer-seller relationships with wholesalers and/or retailers.

3. Physical Distribution Management This activity, also referred to as logistics, is to enhance and

improve the distribution of supplies, goods in process and finished products.

Physical distribution is a primary channel function, and as such it is an important part of channel strategy and management.

55

9 ISSUES IN CHANNEL MANAGEMENT

4. Channel Relationships

Relationships between channel members are influenced by these issues:

1. Degree of collaboration

2. Commitment and trust among channel members

3. Power and dependence

56

9 ISSUES IN CHANNEL MANAGEMENT

4. Channel Relationships (i) Degree of collaboration

Channel relationships are usually transactional in conventional channels, but are collaborative in VMSs.

The extent of this collaboration depends on the potential benefits of collaboration, the willingness of channel members to work together for mutual benefit and the type and complexity of the product or service.

57

9 ISSUES IN CHANNEL MANAGEMENT

4. Channel Relationships

(ii) Commitment and trust among channel members

This is likely to be higher in VMS as compared to conventional channels.

Effective collaborations necessitate high levels of commitment and trust between the channel partners since this type of arrangement will see exchange of information and processes that may be confidential.

Example: market data and confidential product plans).

58

9 ISSUES IN CHANNEL MANAGEMENT

4. Channel Relationships

(iii) Power and dependence

Power in conventional channels is not so obvious unless any one of the organizations in this distribution relationship superior than all other channel members.

In VMS, power is concentrated in the hands of one organization and other channel members are dependent on this channel member.

59

9 ISSUES IN CHANNEL MANAGEMENT

5. Channel Globalization

We are also witnessing the growing power of consumer goods suppliers and retail chains as they expand their operations globally.

For example, Wal-Mart and Carrefour. Given this new-found ability to source and merchandise globally, plus the

development of efficient supply chains, and the power of information technology, major retailers have more bargaining power than many of their suppliers.

Increasingly, industry-wide forms include online exchanges on the Internet.

In retail there are Sears Roebuck (US), Sainsbury (UK), Metro (Germany) and Carrefour (France) have come together to form GlobalNet Exchange/GNX (Cravens & Piercy, 2006, p 307). The concept is to link key retailers with their suppliers throughout the world to compete with each other through a single Web portal with complete price transparency.

60

9 ISSUES IN CHANNEL MANAGEMENT

6. Multi-channeling An important trend in distribution is using

multiple channels to access end-users. Example:

The Hong Kong-based Dairy Farm operates multiple formats

Coke also operates multiple formats

61

9 ISSUES IN CHANNEL MANAGEMENT

7. Conflict Resolution

Conflicts do occur between channel members and in multi-channeling because of differences in objectives, corporate cultures, and priorities.

One of channel management’s focus should be to foster effective communications before and after establishing channel relationships in order to reduce, if not eliminate channel conflict.

62

9 ISSUES IN CHANNEL MANAGEMENT

8. Channel Performance

The performance of the channel is important because

1. Each member is interested in how well the channel is meeting the member’s objectives

2. The organization that is managing or coordinating the channel is concerned with its performance and the overall performance of channel members.

Aiming to reduce distribution costs and the time in moving products to end users are high-priority action areas for many companies.

Companies gain a strategic advantage by improving distribution productivity.

63

9 ISSUES IN CHANNEL MANAGEMENT

9. Legal and Ethical Considerations

Legal issues whether in the areas of restrictive contracts that govern products and/or geographical coverage, pricing practices, arrangements between channel members that inhibit competition, laws, etc all can affect channel management.

Besides legal matters, channel decisions that impact other channel members may create ethical situations.

As such many companies have established internal standards on how business should be conducted

Example: Target Corporation’s Standards of Vendor Engagement).

64

Channel Conflict

• Refers to any type of disagreement and argument among marketing channel members on the following:

1. Goals of distributing the products

2. Roles (who should do what)

3. Rewards

65

Types of Channel Conflict

Horizontal conflictdisagreement between channel members located at

the same level of a distribution channel for a similar product and different products

Example: • Conflict between wholesaler of Maggi Instant Noodles and

Maggi Sauces• Conflict between Wholesaler of Maggi Instant Noodles in

Kepong and Wholesaler of Maggi Instant Noodles in Cheras

66

Types of Channel Conflict

Vertical conflict

disagreement between channel members located at different levels of a distribution channel for a similar products ONLY.

Example: conflict between wholesaler of Maggi Instant

Noodles and retailers of Maggi Instant noodles.

67

CONCLUSIONS

• Distribution is very important in marketing because the availability of the product needed is depend on the effectiveness of distribution processes implemented by the company of the product.

• If the distribution activities related to the product are effective and well succeed, we will definitely get the product available at anywhere we go for our consumption.

68

CONCLUSIONS• The value chain consists of the organization, systems and processes that

add to customer value in moving goods and services to end-users.

• The core of the value-chain is the distribution channel.

• A strong distribution channel can give the organization a competitive advantage over its competitors.

• The choice between company distribution to end-users and the use of intermediaries is guided by end-user needs and characteristics, product characteristics and financial and control characteristics.

• Manufacturers select the type of channel to be used, determine distribution intensity, design the channel configuration, and manage various aspects of channel operations.

• The choice of a channel strategy begins when the organization decides whether to manage the channel or to assume a participant role.

69

CONCLUSIONS

• Strategic analyses examines and assess channel alternatives, by considering access to the target market, channel functions to be undertaken, financial considerations, and legal and control considerations.

• A strategic value-chain perspective aims to align and modify/rectify the company’s value-chain depending on customer and competitive requirements amidst a changing marketplace.

70

List of References

Topics

Victor Ong (2010) Marketing Strategy: Module, Center for Graduate Studies, Open University Malaysia.

Subash C. Jain (2004) Marketing: Planning & Strategy, 7th Edition, Thomson.

Boone, L., & Kurtz, D. (2009). Contemporary Business. Denvers: John Wiley & Sons, Inc.

Cravens, D.W. (2000), Strategic Marketing, 6th Edition, McGraw Hill.

Kotler P& Armstrong.G., (2004) Principles of Marketing, 10th edition, Pearson.

Kotabe, Masaki & Kristian Helsen (2001). Global Marketing Management 2nd Edition John Wiley & Son. Inc New York.

71

List of References

Topics

Ebert, R., & Griffin, R. (2003). Business Essential, 4th Edition. New Jersey: Prentice Hall.

Ferrel, O., Hirt, G., & Ferrel, L. (2009). Business: A Changing World. New York: McGraw Hill.

khalid, K. e. (2008). Business Management: A Malaysian Perspective. Kuala Lumpur: Oxford University Press.

McDaniel, C., & Gitman, L. (2008). The Future of Business. Ohio: Thomson- South Western.(2008). The Future of Business. Ohio: Thomson- South Western.

72

List of References

Topics

(n.d.). Retrieved April 13, 2009, from BuckInvestor.com: http://www.buckinvestor.com/basics/economic_systems.shtml

(n.d.). Retrieved April 13, 2009, from EconGuru Economics Guide: http://www.econguru.com/econ/production-factors.shtml

(n.d.). Retrieved April 13, 2009, from tutor2u: http://tutor2u.net/economics/gcse/revision_notes/basics_factors_of_production.htm

Boone, L., & Kurtz, D. (2009). Contemporary Business. Denvers: John Wiley & Sons, Inc.