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Channel Management / Distribution

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STUDENTS WILL….

Understand the concepts and processes needed to identify, select, monitor, and evaluate sales channels

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STUDENTS WILL….

Acquire foundational knowledge of channel management to understand its role in marketing.

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A channel of distribution comprises a set of institutions

which perform all of the activities utilised to move a

product and its title from production to consumption

Bucklin - Theory of Distribution Channel Structure

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Channels of Distribution

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Distribution

How did the merchandise get to the stores?

Where is the merchandise kept before it goes to the store?

How does the owner of a store know when to order more merchandise?

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Objectives

1. Explain the nature and scope of channel management

2. Explain the relationship between customer service and channel management

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Physical distribution is…

Organizing and moving products through the channels

aka: Logistics = ordering, transporting, storing, handling and inventory control

The 3rd largest expensefor most businesses

(#1 Materials #2 Labor)

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OBJECTIVE ONE:Explain the nature andscope of channel management

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Explain how channel members add value

Right PLACE Right TIME

Place UTILITYLocation – having the product where customers can buy it

Time UTILITYHaving the product available when the customer

wants/needs it

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Explain how channel members add value

Right PLACE Right TIME

Place UTILITYLocation – having the product where customers can buy it

Time UTILITYHaving the product available when the customer

wants/needs it

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Channel members add value to a product by performing certain channel activities expertly

MarketingPackagingFinancingStorageDeliveryMerchandisingPersonal selling

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Adding Value through Distribution

Intermediaries provide value to producers because they often have expertise in certain areas that producers do not have.

Intermediaries are experts in displaying, merchandising, and providing convenient shopping locations and hours for customers.

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• Information• Promotion• Contact• Matching• Negotiation• Physical distribution• Financing• Risk taking

CHANNEL FUNCTIONS

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CHANNEL FUNCTIONS (cont.)• Providing marketing information:

– Companies rely on market research to determine their target markets’ needs and wants

– Ex: small business producing handmade greeting cards

• Promoting products:– Can be expensive– Retailers often take a large portion of

promotion responsibilities• Ex: local supermarkets/discount stores

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CHANNEL FUNCTIONS (cont.)

• Contact• Matching• Negotiating with the customers:

– Different prices are paid by the wholesaler, retailer and consumers based on negotiation

• Physical distribution• Financing and risk taking:

– Moving products through a channel costs money– When channel members work together to finance activities

and to assume financial risks, channels will be more effective

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Negotiation

Promotion

Contact

Transporting and storing

Financing

Packaging

Money

Goods

Today’s system of exchangeProducers

Users

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Explain key channel tasks

• Marketing

• Packaging

• Financing

• Storage

• Delivery

• Merchandising

• Personal selling

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Explain key channel tasks (cont.)• Providing marketing information

– Rely on market research to determine their target markets’ needs and wants

• Promoting products– Costs and responsibilities can be shared

• Negotiating with customers– Offering to deliver and install products

• Reducing discrepancies– Selling large quantities of products to wholesalers and

retailers • Financing and risk-taking

– Work together to finance activities to become more effective

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Tasks of Intermediaries - Wholesalers

• Break down ‘bulk’• Buys from producers and sell small quantities to

retailers• Provides storage facilities• Reduces contact cost between producer and

consumer

• Wholesaler takes some of the marketing responsibility e.g sales force, promotions

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Tasks of Intermediaries - Retailer

• Much stronger personal relationship with the consumer

• Hold a variety of products

• Offer consumers credit

• Promote and merchandise products

• Price the final product

• Build retailer ‘brand’ in the high street

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Tasks of Intermediaries - Internet

• Sell to a geographically disperse market• Able to target and focus on specific segments• Relatively low set-up costs• Use of e-commerce technology (for payment,

shopping software, etc)• Paradigm shift in commerce and consumption

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Tasks of a Logistics Manager

• plans the flow of materials in a manufacturing organization (beginning with raw materials and ending with delivery of finished products to channel intermediaries or end customers) and coordinates the work of departments involved in the process, such as procurement, transportation, manufacturing, finance, legal, and marketing.

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REVIEW key channel tasks

• Concentration/Equalization/Dispersion

• Must consummate transactions between buyers and sellers, i.e., fix the discrepancies in

• Quantity• Assortment• Time• Place

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Describe when a channel will be most effective

The channel must be properly managedRecognize the importance of their task

and make informed decisionsEach member is assigned tasks it can

do best

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Describe when a channel will be most effective (cont.)

Channel members share a common goalCommitment to quality of the productSatisfying the target market’s needs

and wantsAll members cooperate to attain overall

channel goals

If the channel is not effective, conflict occurs…..

Why Channel Conflicts arise

Each channel member wanting to pursue his own goal.

Each wants to retain his independence

Limited resources

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Reasons for Channel conflict

Roles not defined properly Resource scarcity Different perception on the business

environment Decision domain disagreements Goal Incompatibility Communication difficulties.

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Stages in the Channel Conflict

Latent: Some discord exists but does not affect the working of the partners

Perceived : Discord becomes noticeable

but still the channel members do their work.

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Stages in the Channel Conflict

Felt: Stage of worry and alarm where channel partners try to outsmart each other and working of channel is affected.

Manifest: Stage of open confrontation

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Distinguish between horizontal and vertical conflict (cont.)

Vertical Conflict: occurs between channel members at different levels within the same channel

Producers and wholesalers, wholesalers & retailers, or producers and retailers

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Distinguish between horizontal and vertical conflict

Horizontal Conflict: occurs between channel members at the same level

Good, old-fashioned business competition

Ex: two retailers selling pet supplies compete to sell to the same target market

Managing conflict

Understanding the nature and measuring its intensity

Tracing the source of the conflict

Understand the impact of the conflict

Strategy and plan of action for resolution

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Conflict resolution

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CHANNEL MANAGEMENT DECISIONS

Channel strategy is not formulated in a vacuum Channel strategy and product strategy

Channel strategy and price strategy

Channel strategy and promotion strategy

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Describe channel management decisions

Decisions about a product’s physical movement and transfer of ownership from producer to consumer.

• FIRST - Setting channel objectives– Determine what the company is trying to achieve– Meet the needs and wants of their target market – Give their product a competitive edge

• SECOND - Channel members:– Selection– Management– Motivation– Evaluation

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1. Selecting Channel MembersDetermine the types of members the belong

in the channel, as well as the channel length (total number of channel members)– Usually based on the nature of the product– Factors to consider:

• Create product value that others cannot or are not willing to provide

• Channel the product to its desired market• Have a pricing and promotion strategy compatible

with the product’s needs• Offer customer service compatible with the

products needs• Be willing and able to work cooperatively with other

members within the product’s channel

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1. Selecting Channel Members (cont.)

Involves determining the characteristics that distinguish the better ones by evaluating channel members

• Do they: Provide value? Perform a function? Expect an economic return ?

• Years in business• Lines carried• Profit record• Policies, strategies, & image• Experience & track record

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1. Selecting Channel Members (cont.)

Selecting intermediaries that are sales agents involves evaluating

• Number and character of other lines carried

• Size and quality of sales force

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1. Selecting Channel Members (cont.)• Market segment - must know the specific segment

and target customer

• Selecting intermediates that are retail stores that want exclusive or selective distribution involves evaluating

• Store’s customers

• Store locations

• Growth potential

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2. Managing Channel Members

• Determining channel responsibilities• Members must work together appropriately

and perform the tasks they are best suited for

• The company must sell not only through the intermediaries but also to/with them

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2. Managing Channel Members (cont.)

• Partner relationship management (PRM) and supply chain management (SCM) software are used to • Forge long-term partnerships with channel

members• Recruit, train, organize, manage, motivate, and

evaluate channel members

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3. Motivating Channel Members

• Develop a cooperative/collaborative and balanced relationship with the partner

• Understand the partner’s customers – their needs, wants, and demands

• Understand the partner’s business – operationally and financially and what’s really important to them

• Look at the partner’s needs in terms of customer support, technical support, and training

• Establish clear and agreed upon expectations and goals• Develop recognition programs focusing on the partner’s

contributions• Build internal support systems and dedicate resources to the

partner

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3. Motivating Channel Members (cont.)

–Motivation can be positive or negative• Sanctions may be imposed on

middlemen not performing well• Chargebacks – financial penalties

assessed for a variety of problems• Incentives may be offered for

reaching performance goals

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4. Evaluating Channel Members

Produces must evaluate intermediaries performance against such standards as:

• Sales quota attainment

• Average inventory levels

• Customer delivery time

• Treatment of damaged and lost goods

• Cooperation in promotional and training programs.

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4. Evaluating Channel Members (cont.)

Should constantly evaluate the channel:

• What is working?

• What is not working?

• What can be improved?

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4. Evaluating Channel Members (cont.)

Risks & Dangers of Distribution Decisions

• Transaction costs both apparent & hidden

• Risks include loss in transit, destruction, negligence, non-payment and so on.

• So, careful choice & evaluation of each & every channel partner is a necessity.

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Distribution Decisions - Major Considerations…

– Multiple channels

– Control vs. costs

– Intensity of distribution desired

– Involvement in e-commerce

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1. Multiple Channels

• Some products meet the needs of both industrial and consumer markets.

• J & J Snack Foods sells its pretzels, drinks and cookies using multiple channels to:– Supermarkets– Movie Theaters– Stadiums– Schools– Hospitals

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2. Control vs. Costs• All manufacturers and producers must

weigh the control they want to keep over the distribution of their products against the costs and profitability.– Direct sales force – company employees are

expensive with payroll, benefits, expenses; may set sales quotas and easily monitor performance

– Agents – work independently, running their own businesses; less expensive = less control; agents sell product lines that make them more money

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Management’s Desire for Control of Distribution

• In general, the shorter the channel structure, the higher the degree of control, and vice versa.

• The lower the intensity of distribution, the higher the degree of control, and vice versa.

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3. Distribution Intensity

How widely a product will be distributed; marketers want to achieve the ideal market exposure; determining distribution patterns.

Achieve ideal market exposure (make their product available without over exposing and losing money)

To achieve market exposure, marketers must determine distribution intensity

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Distribution Intensity

– Exclusive Distribution

– Selective Distribution

– Intensive Distribution

– Integrated Distribution

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Intensity of Channel Structure

• Channel intensity: the number of intermediaries at each level of the marketing channel.

All PossibleIntermediaries

Relatively FewIntermediaries

Just OneIntermediary

Intensive ExclusiveSelective

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Intensive Distribution

• The use of all suitable outlets to sell a product.

• The objective is complete market coverage and the ultimate goal is to sell to as many customers as possible, wherever they choose to shop.

• Ex. Motor oil is sold in quick-lube shops, farm stores, auto parts retailers, supermarkets, drugstores, hardware stores, warehouse clubs, and other mass merchandisers.

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Selective Distribution• A limited number of outlets in a given geographical area

are used to sell the product.

• Very important to select channel members that maintain the image of the product & are good credit risks, aggressive marketers & good inventory planners.

• Ex. Armani Brand sell their clothing only through top department stores that appeal to the affluent customers who buy its merchandise. It does not sell in a chain megastore or a variety store.

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Exclusive Distribution• Protected territories for distribution of a product in a

given geographic area; business maintains tight control over a product

• Ex. Franchisor legally requires a franchisee to sell only the franchisor’s products

Comparison of Intensive, Exclusive, and Selective Retail Coverage Strategies

Which Alternative Is Best?

• Multichannel distribution– Companies are increasingly using multiple

channels.– Some use dual distribution systems.– Hybrid system is a variation.– Multichannel systems employ separate

channels to reach different target segments. – Members of a hybrid system perform

complementary functions for the same customer segment.

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Example of a Hybrid Marketing Channel

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Integrated Distribution

Manufacturer acts as wholesaler and retailer for its own products.

• EX. Sherwin-Williams Paint, Merle Norman

• Ex. The Gap or Ann Taylor sells its clothing in company-owned retail stores.

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Dual distribution

• A manufacturer may sell its products through multiple outlets at the same time:

– Toll-free phone system– Company website– Multiple retailers

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4. Involvement in E-commerce

• = means by which products are sold to customers and industrial buyers through the Internet.

• Consumers have also become accustomed to buying products online.

• one-stop shopping and substantial savings for industrial buyers.

• E-marketplaces provide smaller businesses with the exposure that they could not get elsewhere

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Channel Design Decisions

• Channel design/structure = form or shape that a marketing channel takes to perform the tasks necessary to make products available to consumers.

• Includes ALL the parties involved

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Channel Design Decisions (cont.)

• Analyzing consumer needs

• Setting Channel Objectives

• Identifying Major Alternatives– Types of intermediaries

• Company sales force• Manufacturer’s agency• Industrial distributors

– Number of intermediaries– Responsibilities of intermediaries

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3 Dimensions of Channel Design

1.Length of the channel

2.Intensity of various levels (Exclusive, Selective, Intensive)

3.Types of intermediaries involved

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• Channel length = number of levels in a distribution channel.

Manufacturer Manufacturer Manufacturer Manufacturer

Consumer Consumer Consumer Consumer

Retailer Retailer Retailer

Wholesaler Wholesaler

Agent

2 level2 level 3 level3 level 4 level4 level 5 level5 level

Length of Channel

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Channel Design (cont.)

• Efficient movement of finished product from the end of the production line to customers.

• Coordinate the execution of distribution plans

• So as to provide good customer service at acceptable cost.

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Determinants of Channel Structure

1. The distribution tasks that need to be performed

2. The economics of performing distribution tasks

3. Management’s desire for control of distribution

4. Transaction Efficiency (refers to the effort to reduce the number of transactions between producers &consumers).

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Steps of Channel Structure/Design

1. Setting distribution objectives Meeting customer needs is the ultimate goal

2. Specifying distribution tasks who does what along the supply chain (channel of distribution)

3. Considering alternative channel structures Three dimensions:

• Length/Intensity/Types of intermediaries

4. Choosing optimal channel structures each participant in the marketing channel focuses on performing

those activities at which it is most efficient. This results in much greater efficiency and higher output.

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Discuss the relationship between the product being distributed

and the pattern of distribution it uses

• Consumer Good

• Consumer Service

• Industrial Good

• Industrial Service

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Pattern of distribution for SERVICES

• Consumer services = DIRECT

Service Provider >>> Consumer

• Industrial services = DIRECT

Service Provider >>> Industrial User

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OBJECTIVE TWO:Explain the relationship between customer service and channel management

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Explain how customer service facilitates order processing

• Ensures timely delivery of products

• Effective communication is important– Order processing

• Correct shipping information• Correct products• Handling complaints• Reducing the probability of complaints• Nice and friendly people

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Identify actions that customer service can take to facilitate order processing

• EX. In retail selling, bag the merchandise with care. Products such as glassware may require individual wrapping before bagging.Work quickly to bag your customer’s merchandise and complete the payment process.

• EX. In business-to-business sales, complete the paperwork quickly and leave a business card.

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Customer

Warehouse

Call Center

Online Order

Inventory Check

Items

in Stock?

No, Customer Notified of Backorder

Yes, Item Packed for Shipment

Accounts Receivable Processes Payment

Item Shipped

Actions to Facilitate

Order Processing

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Describe the role of customer service in following up on orders • Following up with your customers after the

sale is an important part of providing good customer service.

• Should customer have questions or problems it is your duty to make sure they have a positive experience with your company.

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Use of Technology in Distribution

Some businesses have the capacity to distribute most or all of their products through the internete-commerce: Products are sold to customers

and industrial buyers through the Internet.e-marketplace

Satellite tracking = a dispatcher has current knowledge of a delivery truck’s location and destination

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Use of Technology in Distribution (cont.)

Tracking of packageBar coding on packagePackage scanned at transition points in

distribution chainCustomer uses internet to follow package along

distribution chain; e-mail may be usedGlobal distribution: in some countries the postal

service is not reliable; package tracking facilitates global trade

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Use of Technology in Distribution (cont.)

Problems

Cost of technology

Changing technology = updating equipment

Need for compatible systems within and between businesses & countries

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