distribution channels

Physical distribution and distribution channels

Distribution Channels

• A set of interdependent organizations (intermediaries) involved in the process of making a product or service available for use or consumption.

• Channel decisions– affect other marketing decisions– involve long-term commitments

Role of Intermediaries

• Greater efficiency in making goods available to target markets.

• Intermediaries provide– Contacts– Experience– Specialization– Scale of operation

• Match supply and demand.

Channel Functions•Information

•Promotion

•Contact

•Matching

•Negotiation

•Physical Distribution

•Financing

•Risk taking

Physical Distribution - Nature and Importance

- Physical distribution: Moving tangible products through distribution channels

- Physical distribution (or logistics) consists of all activities involved in moving the right amount of the right products to the right place at the right time

- In the past years, the surge of e-commerce has underscored the importance of physical distribution the challenge relates to fulfillment, which entails having the merchandise that is ordered by a customer in stock and then packing and shipping it in an efficient, timely manner

THE ROLE OF MARKETING CHANNELSIN MARKETING STRATEGY

• Marketing channels are key because they are the means of making goods and services available to ultimate users.

• Four functions of marketing channels:

• Channels facilitate the exchange process by reducing the number of marketplace contacts necessary to make a sale.

• Distributors adjust for discrepancies in the market’s assortment of goods and services via sorting, channeling products to meet the buyer’s and producer’s needs.

• Channel members tend to standardize payment terms, delivery schedules, prices, purchase lots, and other conditions.

• Channels facilitate searches by both buyers and sellers and bring them together to complete the exchange process.

TYPES OF MARKETING CHANNELS

• Most channel options involve at least one marketing intermediary, an organization that operates between producers and consumers or business users.

• A retailer owned and operated by someone other than the manufacturer of the products it sells.

• A wholesaler who takes title to the goods it handles and then distributes these goods to retailers, other distributors, or sometimes end consumers.

• Service firms market primarily through short channels because they sell intangible products and need to maintain personal relationships within their channels.

DIRECT SELLING

• Direct channel—carries goods directly from a producer to the business purchaser or ultimate user.

• Direct selling—a marketing strategy in which a producer establishes direct sales contact with its product’s final users.

• Internet and direct mail are also potentially important tools for direct selling.

CHANNELS USING MARKETING INTERMEDIARIES

• For some products, using intermediaries may be more efficient, less expensive, and less time-consuming.

DUAL DISTRIBUTION

• Movement of products through more than one channel to reach the firm’s target market.

• Used to maximize the firm’s coverage in the marketplace or to increase the cost-effectiveness of the firm’s marketing effort.

REVERSE CHANNELS

• Channels designed to return goods to their producers.

• Growing importance because of rising prices for raw materials, increasing availability of recycling facilities, and passage of additional antipollution and conservation laws.

• Also used for recalls and repairs.

CHANNEL STRATEGY DECISIONS

SELECTION OF A MARKETING CHANNEL

• Multiple factors affect selection of a marketing channel.

Market Factors

Product Factors

Organizational Factors

Competitive Factors

DETERMINING DISTRIBUTION INTENSITY

• Intensive distribution Distribution of a product through all available channels.

• Selective distribution Distribution of a product through a limited number of channels.

• Exclusive distribution Distribution of a product through a single wholesaler or retailer in a specific geographic region.

• Restrictions are illegal if they reduce competition or create a monopoly.

WHO SHOULD PERFORM CHANNEL FUNCTIONS?

• Intermediary must provide better service at lower costs than manufacturers or retailers can provide for themselves.

• Consolidation of channel functions can represent a strategic opportunity for a company.

CHANNEL MANAGEMENT AND LEADERSHIP• Marketers have relationships with intermediaries in distribution channels.

• Channel captain Dominant and controlling member of a marketing channel.

CHANNEL CONFLICT• Horizontal conflict—disagreements among channel members at the same level, such as two competing discount stores.

• Vertical conflict occurs among members at different levels of the channel.

• The gray market—goods produced for overseas markets that re-enter the U.S. market and compete against domestic versions.

ACHIEVING CHANNEL COOPERATION• Best achieved when all members of channel see themselves as equal components; channel captain should provide this leadership.

VERTICAL MARKETING SYSTEMS

• Vertical marketing system (VMS) Planned channel system designed to improve distribution efficiency and cost-effectiveness by integrating various functions throughout the distribution channel.

CORPORATE AND ADMINISTERED SYSTEMS• Corporate marketing system—single owner runs organizations at each stage of the marketing channel.

• Administered marketing system—dominant channel member exercises power to achieve channel coordination.

CONTRACTUAL SYSTEMS• Contractual marketing system—coordinates distribution through formal agreements among channel members.

• Include wholesaler-sponsored voluntary chains, retail cooperatives, and franchises.

Tasks in Physical Distribution Management

- Physical distribution refers to the actual physical flow of products

- In contrast, physical distribution management is the development and operation of processes resulting in the effective and efficient physical flow of products

- Effective physical distribution management requires careful attention to five interrelated activities:

1. Order processing

2. Inventory control

3. Inventory location and warehousing

4. Materials handling

5. Transportation


1. Order Processing

- The starting point in a physical distribution system is order processing, which is a set of procedures for receiving, handling, and filling orders promptly and accurately

- Electronic data interchange (EDI):

- Between customer and supplier orders, invoices, and other business functions are transmitted by computer

- Originally, EDI required a direct computer link between supplier and customer, now it is being conducted via the Internet

- EDI can trim the cost of order processing significantly, which in turn may reduce purchase prices


2. Inventory Control

- The goal of inventory control is to satisfy the order-fulfillment expectations of customers while minimizing both the investment and fluctuations in inventories

- Just-in-Time:

- JIT combines inventory control, purchasing, and production scheduling

- Applying JIT, a firm buys in small quantities that arrive just in time for production and then it produces in quantities just in time for sale


2. Inventory Control (continued)

- Just-in-Time:- …- Benefits of JIT are:

- Dramatic cost savings- Shortened and more flexible and reliable production and

delivery schedules- Quick responses to quality problems

- Market-Response Systems:- The central promise is that those who intend to consume a

product should activate a process to produce and deliver replacement items

- In this way, a product is pulled through a channel on the basis of demand


3. Inventory Location and Warehousing

- Management must make critical decisions about the size, location, and transportation of inventories

- These areas are interrelated, often in complex ways- One key consideration in managing inventories is

warehousing, which embraces a range of functions, such as assembling, dividing, and storing products and preparing them for reshipping


4. Materials Handling

- Selecting the proper equipment to physically handle products, including the warehouse building itself, is the materials handling subsystem of physical distribution management

- Equipment that is well matched to the task can minimize losses from breakage, spoilage, and theft

- Efficient equipment can reduce handling costs as well as time required for handling


5. Transportation

- Management must decide on both the mode of transportation and the particular carriers

- The leading modes of transportation are railroads, trucks, pipelines, water vessels, and airplanes

- Using two or more modes of transportation to move freight is termed intermodal transportation; this approach is intended to seize the advantages of multiple forms of transportation

Designing the Marketing Channel

Decisions involving the development of new marketing channels either where none had

previously existed or to the modification of existing channels

Channel Design:

Channel Design

1. A decision made by the marketer

2. The creation or modification of channels

3. The active allocation of distribution tasks in an attempt to develop an efficient structure

4. The selection of channel members

5. A strategic tool for gaining a differential advantage

Distinguishing points of the definition include:

Who Engages in Channel Design?

• Producers, manufacturers, serviceproviders, franchisors

• Look down the channel

toward the market

• Look up the channel

to secure suppliers

• Look both up and down

the channel

Firms WholesalersRetailers

Channel Design Paradigm

1. Recognize the need forchannel design decision

7. Selectchannel members

5. Evaluaterelevant variables

6. Choose the “best”channel structure

2. Set & coordinatedistribution objectives

3. Specifydistribution tasks

4. Develop alternative channel structures

When to Make a ChannelDesign Decision

Developing a new product or product line

Aiming an existing product at a new market

Making a major change in some other component of the marketing mix

Establishing a new firm Adapting to changing

intermediary policies that may inhibit attainment of distribution objectives

Dealing with changes in availability of particular kinds of intermediaries

Opening up new geographic marketing areas

Facing the occurrence of major environmental changes

Meeting the challenge of conflict or other behavioral problems

Reviewing and evaluating

Distribution Objectives

Setting distribution objectives requires knowledge of which,

if any, existing objectives & strategies may impinge

on these distribution objectives.

Channel Structure Dimensions

1. Number of levels in the channel

2. Intensity at the various levels

3. Types ofintermediariesat each level

Allocation Alternatives

Number of Levels

Range from two to five or more Number of alternatives is limited to two or

three choices Limitations result from the following

factors: Particular industry practices Nature & size of the market Availability of intermediaries

Intensity at the Various Levels

Intensive Selective Exclusive

Many Few One

Intensity Dimension

Numbers of Intermediaries (retail level)

Relationship between the intensity of distribution dimension & number of retail intermediaries used in a

given market area

Types of Intermediaries

Numerous types Manager’s emphasis on types of

distribution tasks performed by these intermediaries

Watch emerging types Electronic online auction firms (eBay) Industrial products sold in B2B markets (Chemdex, Converge.com)

Variables Affecting Channel Structure

1. Market Variables2. Product Variables3. Company Variables4. Intermediary Variables5. Environmental Variables6. Behavioral Variables

Categories of Variables

Market Geography Location, geographical size, & distance from producer

Market Size Number of customers in amarket

Market Density Number of buying units (consumers or industrial firms)per unit of land area

Market Behavior Who buys, & how, when, andwhere customers buy

Market Variables

Product Variables

Bulk & WeightPerishabilityUnit Value

Degree of StandardizationTechnical versus Nontechnical

Newness

Company Variables 6

Size The range of options isrelative to a firm’s size

Financial The greater the capital, theCapacity lower the dependence on

intermediaries

Managerial Intermediaries are necessaryExpertise when managerial experience

is lacking

Objectives Marketing & objectives may& Strategies limit use of intermediaries

Intermediary Variables 6

Availability Availability of intermediariesinfluences channel structure.

Cost Cost is always a consideration inchannel structure.

Services Services that intermediaries offer are closely related to the

selection of channel members.

Environmental Variables

The impact of environmental forces isa common reason for making

channel design decisions.

Economic

Sociocultural

Competitive

Technological Legal

Behavioral Variables

Develop congruent roles for channel members.

Attend to the influence of behavioral problemsthat can distort communications.

Be aware of available power bases.

RAJESH KUMAR,DMS,PONDICHERRY UNIVERSITY

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