DISTRIBUTION CHANNELS

DISTRIBUTION CHANNELS

CHAPTER 2-CHANNEL DESIGN DESIONS

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Synopsis:

2.0 Introduction

2.1 Analyze Customers Desired Service Output Levels

2.2 Establish objectives and constraints

2.3 Identify & evaluate major channel alternatives2.0 Introduction

Channel design decisions are of great importance, as they involve huge expense to establish a new marketing channel or refining an existing channel. Any flaw in the design will be disastrous due to huge cost involved in such a decision. Marketing channel design decision involves two major tasks viz., (a) designing the right channel and (b) implementing that channel.

Design step involves segmenting the market, identifying optimal positioning responses to segments demands, targeting the segments to focus channels efforts, establishing the channel to manage in market place.

Implementation step involves understanding each channel members sources of power and dependence, an understanding of the potential for channel conflict. Effective execution of optimal channel design is called channel coordination.

Others things being equal (particularly price), end users will prefer to deal with a marketing channel that provides a higher level of service outputs. Channel design decision calls for a fine art of balancing the cost involved and meeting the expected service level outputs of the end-user.

2.1 Analyze Customers Desired Service Output Levels

Marketing channel system design and management, like the management of any other marketing activity, requires starting with the end-user. The channel manager must first understand the nature of end-users demands in order to design a well-working channel that meets or exceeds those demands. The most useful demand-side insights for marketing channel design are not about what end-users want to consume, but about how end-users want to buy and use the products or services being purchased. Here, marketing effort is more focused on how to sell rather than on what to sell.To understand the desired service output levels, it is critical to know the end-user demands and preferences in the market places. The demand for service output varies depending on the time taken to search, waiting time, storage and other costs. The service output levels differ depending on the end-user preferences and the market segment to which he belongs to. Consider the following table for more clarity:

FAMILYOFFICE EMPLOYEE

Service OutputDescriptorService Output Demand LevelDescriptorService Output Demand Level

Bulk-breakingI buy groceries weekly for my family, and all of us like soft drinksLowI am on my coffee break and I have time for only one can of soft drinkHigh

Spatial ConvenienceI drive to supermarkets in my area to shopLowI have only 15 minutes for my break, so I need to buy whatever is handyHigh

Waiting and delivery timeWe actually have some extra cans of soft drink in the house, so I will just come back the next time if I cant find the soft drinks I want on this trip.LowIf I dont get my soft drink right at 3.00 when my break starts, I will never have a chance to go back later and get one. High

Assortment and varietyMy husband and I like Coke and Pepsi, but our kids are not permitted to drink caffeinated soft drinks. They like caffeine-free HighI cant be too particular about which soft drink I pick. It is important to me to get one, as long as it has caffeine.Moderate

Above referred service output list is a generic one. This can be customized to any particular application. These four service output categories cover the major types of demands end-users make of different channel systems.

Bulk-breaking: Bulk-breaking refers to the end-users ability to buy its desired (possibly small) number of units of a product or service, even though they may be originally produced in large, batch-production lot sizes. When the marketing channel system allows end-users to buy in small lot sizes, purchases can more easily move directly into consumption, reducing the need for the end-user to carry unnecessary inventory. However, if end-users must purchase in larger lot sizes i.e., benefit from less bulk-breaking, some disparity between purchasing and consumption patterns will emerge, burdening end-users with product handling and storage costs. Consequently, the more bulk-breaking the channel does, the smaller the lot-size the end-users can buy and the higher the channels service output level is to them. This in turn can lead to a higher price for the end-user.Spatial Convenience: Spatial convenience provided by market decentralization of wholesale or retail outlets increases consumers satisfaction by reducing transportation requirements and search costs. Community shopping centres and neighbourhood supermarkets, convenience stores, vending machines, and gas stations are but a few examples of channel forms designed to satisfy customers demand for spatial convenience.

Waiting Time: Waiting time or delivery time, the third service output, defined as the time period that the end-user must wait between ordering and receiving goods. The longer the waiting time, the more inconvenient it is for the end-user, who is required to plan or predict consumption far in advance. Usually, the longer end-users are willing to wait, the more compensation (i.e., the lower the prices) they receive. Usually, the longer end-users are willing to wait, the more compensation (i.e., the lower the prices) they receive.Breadth of Assortment: Finally, the wide the breadth of assortment or the greater the product variety available to the end-user, the higher is the output of the marketing channel system and the higher are overall distribution costs, because greater assortment typically entails carrying more inventories.2.2 Establish objectives and constraints

Firms decide their marketing channel objectives in terms of targeted levels of customer service. Normally, a firm can identify several segments wanting different levels of service. It should decide which segment; the company wants to minimize the total channel cost of meeting customer service requirements.Channel objectives are also influenced by the nature of the company, its products, its marketing intermediaries, its competitors and the environment. A companys size and financial situation determine which marketing function it can handle itself and which it must give to intermediaries. Companies selling perishable products may require more direct marketing to avoid delays and too much handling.

In some cases a company may want to compete in or near the same outlets that carry competitors products. In other cases, producers may avoid the channels used by competitors. For example, it normally takes eight to twelve weeks to get a custom-ordered piece of furniture, because furniture typically have not engaged in flexible manufacturing for quick response to product demands. In such a situation, a manufacturer that currently supplies furniture in four to six weeks already beats the competition on the waiting and delivery time service output dimension. Finally environmental factors such as economic conditions and legal constraints may affect channel objectives and design. For example, in a depressed economy, producers want to distribute their goods in the most economical way, using shorter channels and dropping unneeded services that add to the final price of the goods. With the recent spiraling inflation in India, the FMCG companies like HUL, Britania and ITC have not reduced the prices of their packed goods, instead have marginally reduced the quantities in the standard packaged goods they used to deliver. This is the off-shoot of the objective of satisfying the consumers price consciousness.

Constraints: Constraints refers to legal constraints that restrict the optimal level of a chosen distribution channel. For example, consider banking service as a channel. Suppose a particular bank wants to increase its footprint in a particular area, so as to be available to the customers within the closest proximity. Customers prefer to avail banking services, if the bank within the shortest distance from their homes/offices/businesses. But RBI has its own regulations in place, for any bank to open a branch. There are stipulations to maintain certain distance from branch to branch and as well as bank to bank. Similar is the constraint for distribution channels implemented by the oil distribution companies. Likewise there are several legal and environmental constraints that bar the distribution channels from their optimal performance. Therefore the companies have to consider such constraints while deciding their marketing policies.Following table gives us examples of certain legal constraints that are faced by Indian enterprises::S.No.ACTKey Provisions How a Constraint

1Industrial Development & Regulation ActSubstantial expansion of production requires licence from Government.A company wants to take up Intensive distribution and the costs are prohibitive. To meet the additional cost of distribution and at the same time not to increase the prices, intends to minimise the cost of production by increasing the production

2Small Scale Industry foregoes certain fiscal concessions if its investment in plant and machinery exceeds a certain prescribed limitSame as above

3Chapter IIIB containing Section 18G deals with powers of the Central Government to control the supply, distribution and price, etc. of certain articlesCompany's distribution policy's freedom gets restricted

4MRTP Act If a manufacturer stipulates a condition that the wholesale purchaser shall sell only his products and not of others or shall resell the goods only at the prices stipulated by him or forces the wholesale purchaser to procure the entire line of manufacture from him, the result may be a distortion of competition in the market.Registration of such agreements is mandatory. Refusal of registration on the ground of restriction of competition is a possible hindrance to the channel planned for.

5The Competition Act, 2002Exclusive distribution agreement includes any agreement to limit, restrict or withhold the output or supply of any goods or allocate any area or market for the disposal or sale of the goodsOnus is on the company to prove that there is no appreciable adverse effect competition

2.3 Identify & evaluate major channel alternatives:Identification: The channel alternatives are identified in terms of types of intermediaries, the number of intermediaries and the responsibilities of each channel member.

Types of intermediaries to use: Given that the decision has been made to use intermediaries, the manufacturers need to decide what sorts of intermediaries to use. Nonretail or retail intermediaries can be used. Some questions are common to the decision to add either a non-retail intermediary or a retail intermediary. One is what channel flow or flows must be performed by that intermediary to meet target end-users service output demands. For example, if it is important to have product stocked throughout a market area in the warehouse of an intermediary i.e. the intermediary must perform the physical possession flow in order to meet demands for spatial convenience, an independent sales representative is not a good choice, because usually they do not hold stock. On the other hand, suppose end-users value customer education more than spatial convenience. Then the promotion flow, as represented by sales effort, is the crucial input and not physical possession and stocking. The manufacturer can then choose an independent sales rep agency rather than an employee sales force and be able to meet service output demands very well. The following table lists other possibilities for types of intermediaries capable of performing particular flows.Intermediaries and their flows mapped:Flow to be performedExamples of Intermediaries that can perform flow

Physical PossessionContract warehouseShipping Company (eg. FedEx, Gati, TCI, UPS)DistributorRetailers (including bricks and mortar, catalog, on-line)

OwnershipContract warehouse

Distributor

Retailers (including bricks and mortar, catalog, on-line)

PromotionContract warehouse

Distributor

Retailers (including bricks and mortar, catalog, on-line)

Independent Sales Representative

Broker

Franchisees

NegotiationDistributor

Export Marketing Company

Independent Sales Representative

FinancingBroker

Distributor

Retailers (including bricks and mortar, catalog, on-line)

Credit Card Company

Banks

Franchisees

RiskingDistributor

Retailers (including bricks and mortar, catalog, on-line)

Credit Card Company

Franchisees

OrderingDistributor

Independent sales representative

Retailers (including bricks and mortar, catalog, on-line)

Franchisees

PaymentDistributor

Retailers (including bricks and mortar, catalog, on-line)

Shipping company

Franchisees

Number of Marketing IntermediariesCompanies must also determine the number of channel members to use at each level. Three strategies are available intensive distribution, exclusive distribution and selective distribution.

Producers of convenience products and common raw materials typically seek intensive distribution- a strategy in which they stock their products in as many outlets as possible. These goods must be available where and when consumers want them. For example, toothpaste, candy and other similar items are sold in millions of outlets to provide maximum brand exposure and consumer convenience.

By contrast, some producers purposely limit the number of intermediaries handling their products. The extreme form of this practice is exclusive distribution, in which the producer gives only a limited number of dealers the exclusive right to distribute its products in their territories. Exclusive distribution is often found in the distribution of new automobiles and prestige womens clothing.

Between intensive and exclusive distribution lies selective distribution, -the use of more than one, but fewer than all, of the intermediaries who are willing to carry a companys products. Most television, furniture and small-appliance brands are distributed in this manner. Selective distribution gives producers good market coverage with more control and less cost than does intensive distribution.Evaluation of Major Alternatives:

Having identified several channel alternatives, selecting one among them fulfills the long-term objectives of the channel. Each alternative should be evaluated against economic, control and adaptive criteria.Using economic criteria, a company compares the likely sales, costs and profitability of different channel alternatives. The company must also consider control issues. Using intermediaries usually means giving them some control over the marketing of the product, and some intermediaries take more control than others. Other things being equal, the company prefers to keep as much control as possible. Finally, the company must apply adaptive criteria. Channels often involve long-term commitments, yet the company wants to keep the channel flexible so that it can adapt to environmental changes. Thus, to be considered, a channel involving long-term commitments should be greatly superior on economic and control grounds.The distribution strategy of any manufacturing firm should respond to market changes. As markets evolve, products mature, and competition intensifies, the distribution plan of the firm has to be modified. One cannot assume that a distribution plan, once evolved, will continue to deliver results for the entire period of the products life. This is because of changing buyer behavior and characteristics of customers who adopt the product at different time intervals. While in the introduction and early growth phases customers (innovators and early adopters) are willing to pay any price and go to any place to buy it, at the later stages of growth and early maturity, customers (or the early majority) demand convenience in buying it. But as products enter the later part of maturity, customers (late majority) become price and convenience sensitive. They shop for low prices, discounts, and even low period brands. Reflecting these changes in the distribution channels over the products life cycle, it is suggested that in planning the distribution strategy a firm should consider value addition by the channel and market growth rate.

High

Market

Growth

Rate

LowGrowth (b)Dedicated Stores

Computer Stores

Shoppers StopMature (c)Department Stores

Introductory (a)Specialist Channels like

Boutiques in fashion

Designer wearDecline (d)Discount Stores

Low cost alternatives

High Low

According to this distribution grid, at the introductory stage, value addition by the channel member is expected to be high. They are believed to attract innovators and early adopters. Specialist channels like boutiques in fashion goods are a common example. As the market expands, customer interest in the product grows and higher volume channels like specialty stores and stores dedicated to only one product group appear. Computer Point and Computer World were examples of such stores. Shoppers Stop is another example of a dedicated store for ready-made garments and all other fashion goods and accessories. Once the product enters the maturity phase, low-cost channels are required to keep the firm floating and finally in the decline phase the product is seen being traded in discount stores and discount sales counters in leading stores.5