DISTRIBUTION NETWORK MANAGEMENT

UNIT – 4

Concept Of Distribution ChannelThe term ‘Distribution Channel’ connotes a

route or pathway taken by products as they flow from the point of production to the point of ultimate consumption.

According to William J. Stanton, “ A distribution channel consists of the set of people and firms involved in the transfer of title to a product as the product moves from product to ultimate consumer or business user.”

Definitions Of Distribution Channel

“Every producer seeks to link together the set of marketing intermediaries that best fulfill the firm’s objectives. The set of marketing intermediaries is called the marketing channel or trade channel or distribution channel.”

--Philip Kotler“Channel of distribution is the structure of intra

company organization units and extra company agents and dealers, wholesale and retail, through which a commodity, a product or service is marketed.”

--American Marketing Association

Characteristics of Distribution Channel

¤ Route or pathway¤ Flow of goods¤ Composition¤ Functions¤ Remuneration¤ Mercantile agents

Role of Distribution Channel

→Distribution channel reduces the cost of any transaction by routinisation of purchasing decisions.

→Distribution channel acts as communication agent often guided the consumers in the right direction to fulfill their wants.

→Persuading and influencing the prospective buyers to favor a certain product and its manufacturer.

→Offering a pre-sale and post-sale services to consumers.

→Transferring a new technology to the users along with the supply of products and playing the role of changing agents.

→Looking after all physical distribution functions.→Providing feedback information, marketing

intelligence and sales forecasting services for their regions to their manufacturers.

Functions of Distribution Channel

Contact b/w producer and consumersSatisfaction to the consumersTransferring the title Fixing pricesPerforming promotional activitiesFunction of financing

Function of distributionFunction of communication informationHelps in production functionCreating time and place utilities

Types of Distribution Channel

CONVENTIONAL NON-CONVENTIONAL

Direct Indirect Vertical Horizontal

One-level Two-level Multi-level

Administered Contractual Corporate

Conventional Distribution Channel

• In Conventional Distribution Channels it is assumed that each enterprise working in the channel is separately owned and operated concern.

• In other words, these are the channels in which the participants operate on the basis of self-interest, concerned only with the organization from where they buy and to whom they sell.

• In this, there are four channel designs such as :-– Direct: Zero level– Indirect: one level, two level , multi level

Conventional Channels for Consumer Products

• Conventional channels are the fragmented networks where in the manufacturers and the consumers are loosely linked by intermediaries in the process of exchange.

• Conventional channels are of two types:-– Direct Distribution Channel– Indirect Distribution Channel

Direct Distribution Channel

• This is the oldest, simplest and shortest type of distribution channel. Under this channel the producer directly sells his products to the ultimate consumers without any middlemen.

• That is why, it is called as direct channel and zero level distribution channel.

Manufacturer Ultimate Consumer

Advantages of Direct Distribution Channel

• Consumers get the product in their pure form.• The price of products remain low because of

less cost.• It is economical method of selling.• Close contact b/w producer and consumers.• Consumer’s demand estimated directly by the

manufacturers.

Disadvantages of Direct Distribution Channel

• It is not suitable in case of mass production and sales at large scale.

• It is not suitable when consumers are widely scattered.

• Consumers has to pay a price fixed by the manufacturer.

• The sales level remain low.• All the risks and losses lies with the

manufacturers.

Indirect Distribution Channels

• Indirect channel is one which the manufacturer sells his products with the help of intermediaries. The whole process of indirect channel of distribution looks like a chain.

One level Manufacturer ………………… Retailers …………….. ConsumersOne level Manufacturer ……………….. Wholesalers ………… ConsumersTwo level Manufacturer ………………. Wholesalers …. Retailers ….

…. ConsumersMulti level Manufacturer …. Selling Agents …. Wholesalers ….. Retailers ….

…. Consumers

One – level Channel of Distribution

• Under this system, manufacturers sell their product to retailers and retailers sell them in turn to ultimate consumers.

• The wholesalers and selling agents are totally eliminated.• It is suitable when the products are perishable.• Manufacturer to wholesaler is also preferred in

distributing industrial goods.

Manufacturer Retailers Consumers

Manufacturer Wholesalers Consumers

Two – level Channel of Distribution

• There are two middlemen in this channel, namely, wholesalers & retailers.

• Under this channel, the manufacturer sells products in large quantities to the wholesalers.

• The wholesalers distribute the products to retailers as per their requirements in small quantities.

• This channel is suitable most for the products which have widely scattered markets such as, groceries, drugs, food items and shopping products.

Manufacturer Wholesalers Retailers Consumers

Multi–level Channel of Distribution

• This is the longest channel of distribution.• This channel is mostly used by small scale companies who

cannot afford to develop their own sales force.• A company with diversified product mix may find it more

appropriate to adopt a variety of distributions channels.• This channel is used where the wholesalers are scattered

throughout the country and selling agents undertakes marketing on behalf of the manufacturers.

Manufacturer Selling agents Wholesalers Retailers Consumers

Non Conventional Channel of Distribution

• Non conventional channels of distribution or integrated channels of distribution are the networks in which channels components participate in full co-ordination and cohesion manner rather than working in a loose manner.

• The non conventional channel are of two types:– Vertical Distribution Channel System– Horizontal Distribution Channel System

Vertical Distribution Channel System

A vertical marketing system is the result of failure of conventional channels where each channel participant works with independent separate identity, seeking to achieve its own objectives.

A vertical marketing system comprises the manufacturer, wholesalers and retailers acting as a unified system. One channel member own the other members of the channel.

Vertical Distribution Channels are professionally managed and centrally programmed networks, pre-engineered to achieve operating economies and maximum market impact.

These are rationalized and capital intensive networks, designed to achieve technological, managerial and promotional economies though the integration, coordination and synchronization of marketing flows from point of production to the point of sale.

• There are three types of virtually integrated marketing channels:

Corporate System : In this, a single firm owns both production and distribution facilities.

Eg. Bata, Tata, Modi, Godrej, DCM, etc. have their own production units and retail outlets.

This system gives a company maximum control over marketing of its products.

Administrated Vertical System : these are coordination of all the functions of production and distribution achieved through the use of programme developed by one or number of limited firms throughout the whole marketing system. Thus, one firm, develop the distributors strategies and policies and the other firms agree to function according to that dominant firm’s distribution marketing strategies which enjoys a major portion of market share and substantial customer’s loyalty.

Contractual Marketing System: In this channel, independent channel components manufacturer, wholesalers and retailers are employed on a voluntary basis to develop a more efficient system on a contractual basis, so as to obtain economies of scale and increases market impact.

Thus, the manufacturer hire the services of other units on contract basis who agree to follow his distribution policies in return of certain benefits, like financing, advertising, centralised buying.

Horizontal Distribution Channel System

Horizontal channel is a new trend in distribution in which, two or more companies join hands to exploit a marketing opportunity or opportunities , either by themselves or by creating an independent unit.eg: Maruti Udyog and HDFC Bank, Sugar Syndicate of India, Associated Cement Company(ACC).

The reasons for horizontal integration are- the ever changing markets, cut-throat competition, changing pace of technology, excess capacity, cyclical and seasonal changes in consumer demand and the incapacity to take financial risks single handed, and so on.

Distribution Channels for Industrial Products

• The channels of distribution for consumer products are generally long while channels for industrial products are shorter as retailers are not needed.

• Distribution channels for industrial products are less complicated because industrial products have more or less fixed pattern of buying and selling.

• Distribution channels used for industrial products is as follows:i. Zero-level Distribution Channelii. One-level Distribution Channeliii. Two-level Distribution Channeliv. Three-level Distribution Channel

Zero-level Distribution Channel

• This is the most popular and commonly used channel in the distribution of industrial products, since industrial users place orders with the manufacturers of industrial products directly.

Manufacturer Industrial Users

• This system is most suitable if the products are sold to few industrial users. This will help in maintaining close contact with customers and prospective buyers and create opportunities for more sales. Manufacturers of plant and machineries, generating sets, heating plants, air conditioning plants, solar energyPlants and refineries, etc. prefer to use this channel.

One-level Distribution Channel• In this channel, the manufacturer sells his output to

wholesalers/ selling agents, who in turn sell them to individual users.

• This channel of distribution is beneficial when the market is scattered. This channel is useful for small scale manufacturers of equipment for air conditioning plants, boilers, hand tools, office suppliers, building materials, etc.

• The wholesalers working in this channel are also called as industrial distributors.

Manufacturer Wholesalers Industrial Users

Two-level Distribution Channel• This is the longest and popular channel of distribution which is

mostly adopted by large-sized industrial enterprises for selling their products.

• In this the manufacturer uses the selling agents, to sell their products to industrial distributors, who in turn sell them to industrial users. The selling agents may be commission agents, brokers, consignees, professional distribution houses. Such selling agents are arranged on area wise basis.

Manufacturer Selling Agents Industrial Distributors Industrial Users

Three-level Distribution Channel

• In this the manufacturer uses the services of selling agents who have enough resources, marketing network, expert knowledge and experience of handling technical products. These selling agents are appointed on the areas basis. In case the cost of distribution is low . This system is more suitable foe selling sophisticated industrial products.

Manufacturer Selling Agents Industrial Users

Factors Affecting the Choice of Distribution Channel

PRODUCT Consideration

•Nature of product•Perishability•Unit Value •Weight and technicality•Standardised product•Product Line•Seasonality•Newness and market acceptance

MARKET Consideration

•Consumer or industrial market•Number of customers•Geographical distribution•Buying habits of consumers•Size of order•Need of product

COMPANY Consideration

•Financial strength•Size of the company•Past channel experience•Reputation of the company•Product mix•Marketing policies•Marketing experience and managerial ability

MIDDLEMEN Consideration

•Availability of middlemen•Attitude of middlemen•Services provided by middlemen•Cost of channel•Sales volume potential•Financial ability

MiddlemenDefinition:

Middleman is one who specializes in performing operations or rendering services that are directly involved in the purchase and sale of goods in the process of their flow from producer to final buyer.

American Marketing Association

Functions of Middlemen

¤ Boost Large Scale Production¤ Purchase of Raw Materials¤ Price Determination¤ Warehousing Facilities¤ Financial Assistance¤ Standardization and Grading¤ Transport Facilities¤ Advertising Function¤ Launching of New Product

Types of Middlemen

• Marketing middlemen may be individuals or the organisations that help the producers to reach the ultimate consumers.

• Middlemen are broadly classified into two categories:i. Agent Middlemenii. Merchant Middlemen

Agent Middlemen

• Agent Middlemen are also known as “Functional Middlemen”. They do not handle the products in the capacity of owners, but they render important services for the exchange of products b/w the manufacturer and the consumer.

• They assist in the buying and selling of products by taking part in negotiating purchase and sale of products.

• Since, they do not own the product, they do not earn profits.

• But, they take their remuneration for the services rendered in the form of commission or brokerage.

Agent Middle-

men

Broker

Commission

Agent

Sole-selling Agent

Purchasing Agent

Auctioneer

Selling Agent

Forwarding Agent

Clearing Agent

Resident Buyers

Merchant Middlemen• Merchant Middlemen are those who take title to the

products and channelise the products from the previous channel step to the next channel step of the distribution channel.

• They buy and sell the products on their own account and risk.

• They take the title to the products. • They resell the products at a profit. • They take the marketing risk and perform many

marketing functions.• They are wholesalers and retailers.

Merchant Middlemen

Wholesalers Retailers

Full Function

Convertor Drop Shipper

Small- Scale Large-Scale

Street Traders

Market Traders

Unit Store

Hawkers Pedlars

Cheap Jacks

Sydicate Store

Mail Order Houses

Chain Stores

Department Stores

Super Market

Co-operativeSocieties

Wholesalers

• “Wholesalers buy and resell merchandise to retailers and other merchants and to industrial, institutional and commercial users, but do not sell in significant amount to ultimate consumers.”

- Cundiff and Still

Characteristics of Wholesalersi) Wholesalers purchase and assemble goods in large quantities.

ii) They deal in one commodity or one line of products, ex. : Fans, food grains, electrical fittings, furniture etc.

iii) They are financially healthy. This makes them to store the commodity in , large quantities and also keep them for larger duration.

iv) They provide credit facilities to the retailers.

v) Often, they advance funds to the producers for production of goods.

vi) Their profit margin is very low. Their profit margin is the difference between the price at which they buy from manufacturers and the price charged to the retailers. As they operate in large volumes, they charge a very reasonable price.

vii) Usually they appoint agents and brokers, through whom they deal with their customers.

viii) Wholesalers advertise their commodities. The benefit of this goes to manufacturers and retailers.

Functions of Wholesalers

• Buying and Assembling• Grading and Packaging• Selling• Warehousing• Transportation• Financing• Promotion• Risk-bearing• Providing Market Information

Services Rendered by Wholesalers

Services towards manufacturers

• Make possible the large scale production• Regularisation of Production Cycle• Better use of capital • Inventory of goods • Standardisation of goods• Help in price determination• Helpful in advertising• Financial assistance• Performs marketing functions

Services towards Retailers

• Quick delivery • Credit facility• Convenience in buying• Return of goods • Help of advertising • Provide information • Creates utilities• Transport facilities• Consultancy services• Stability in prices

Services towards Consumers• Better selection• Cheap goods• Increase in standard of living• Knowledge of the new products• Reasonable priceServices towards Society• Price stability • Increase in employment• Market research• Marketing functions• Business relations

Types of Wholesalersŏ Full function Wholesalers: is a middlemen who buys and sells the

products on his own account, assembles products from different sources in bulk quantities, carries stocks, sells in small lots, grant credit and renders many other valuable services towards the manufacturers and the retailers.

ŏ Converters: they operate as manufacturers and wholesalers. They buy the products and sell them to the subsequent channel members after processing them. Eg: they may convert wheat into wheat flour or pallets.

ŏ Drop Shipper: is a wholesaler who neither stores the products nor delivers them to the buyers from his own stock. He books the orders and inform the manufacturers/ supplier. When goods are ordered, the manufacturer dispatches them directly to the wholesalers/ large retailers, but the bills are made in the name of these wholesalers which they ultimately recover from the retailers.

Types of Wholesalers

On the basis of area covered• Local Wholesalers: they purchase the product

from the manufacturers and deliver them to the local retailers. They deal in variety of products.

• Provincial Wholesalers: they purchase the products and sell it to the retailers in a particular district or state.

• National Wholesalers: they are located at strategic places and from there distribute the products all over the country.

On the basis of operations• Industrial Wholesalers: also known as ‘Industrial

Distributions’. They deal only in the industrial products, sells directly to the industrial users rather than to retailers.

• Agricultural Wholesalers: they purchase the agriculture produce direct from the cultivators/ farmers. They deal in fruits, grains, vegetables, spices, tobacco.

• Mail order Wholesalers: they carry their business through mail by conveying to retail, industrial and institutional customers about the main features of the product.

On the basis of specialty• General line wholesalers: they carry a broad assortment

of products within a single merchandise line. They are distributors of consumer products or industrial products.

• Specialty wholesalers: they carry only one or two products. Such a tea, coffee, dairy products, soft drinks, etc.

• Rack Jobber: they deal in specialized lines of products such as toiletries and house wares to grocery retailers and supermarkets and also provide certain special services.

• Producer’s co-operatives: farmers are the members. They assemble farm produce to sell in local markets. At the end of the year the profits are distributed among members. They improve their produce quality and promote a co-operative brand name.

Retailers

“A retailer is merchant or occasionally an agent whose main business is selling directly to the ultimate consumers.”

- Cundiff and Still

“Retailing is selling final consumer products to house holders.”

- Mc Carthy

Characteristics of Retailers• He is regarded as the last link in the chain of

distribution.• He purchases goods in large quantities from the

wholesaler and sell in small quantity to the consumer.

• He deals in general products or a variety of merchandise.

• He develops personal contact with the consumer.• He aims at providing maximum satisfaction to the

consumer.• He has a limited sphere in the market.

Functions of Retailers

• Buying and Assembling• Selling• Warehousing• Transportation • Grading and Packing• Financing• Advertising• Risk taking• Personal services• Information

Services Rendered by Retailers

I. Service towards Manufacturer and Wholesalers.

• Offer opportunities• Selling of new product• Provide information• Making sales• Provide storage facility

Services Rendered by Retailers

II. Service towards Consumers• Wider choice• Easy shopping• Credit facilities• Home delivery• Special facility• Customer advice• Storage facility• Connecting link

Types of Retailers

Small Scale Retailers• Unit stores: unit stores are the retail stores run on

proprietary basis dealing in general stores or single line stores such as drugs, clothes, grocery, etc. They are also called specialty stores.

• Street traders: are retailers who display their stock on footpaths or at the sidewalks of busy spots of the cities and towns. They deal in light goods like toys, plastic goods, hosiery products, etc.

• Market Traders: these retailers open their shops on fixed days or dates in specified areas. They do join fairs and festivals. They deal in general or special line stores. They keep on moving from one place to another place.

• Hawkers and Peddlers: they do not have any fixed place of business. They carry the products in hand cart selling the goods door to door. They lack capital and cannot store goods in bulk. They are unable to attract the permanent customers as they do not have a permanent establishment.

• Cheap-Jacks: is a retailer who has fixed place of business in a locality but goes on changing his place to exploit the market opportunities. They deal in cheap varieties of ready-made garments, plastic goods, shoes, etc. However, the speed of change of locality is not fast like hawkers.

• Syndicate Stores: they are known for widest varieties of goods in product line but unknown brands. These retailers buy most of the unbranded goods and try to sell under their own names. Like garments, toys, groceries, etc.

Large Scale Retailers• Departmental Stores: This type of retailer is often the

most complex offering a wide range of products and can appear as a collection of smaller retail stores managed by one company. The department store retailers offer products at various pricing levels. This type of retailer adds high levels of customer service by adding convenience enabling a large variety of products to be purchased from one retailer.

• Chain Stores: Chain stores are retail outlets that share a brand and central management, and usually have standardized business methods and practices. It is a system of branch shops operating under a centralised management and dealing in similar lines of goods.

• Mail Order House: in this, the seller contacts the buyer through some form of advertising. That is the customer do not visit the seller’s premises nor there is a personal inspection of goods before the purchase. The transaction is settled through postage medium like Registered post.

• Fair- price shops: these are the retail outlets started by the manufacturer in different cities to sell at price which are quite fair. This practice is used in public distribution system by the government. These are designed to meet the needs of the weaker sections of societies.

• Consumer Co-operatives: these are the stores owned by a group of consumers themselves on co-operative principles. It is an association of consumers to obtain their requirements by purchasing in bulk and selling through the stores to the members and non-members.it believes in wholesale buying and retail selling at reasonable prices.

• Supermarkets: Generally this type of retailer concentrates in supplying a range of food and beverage products. However many have now diversified and supply products from the home, fashion and electrical products markets too. Supermarkets have significant buying power and therefore often retail goods at low prices.

Physical Distribution System

Physical distribution involves the actual movement and storage of goods after they are produced and before they are consumed.

- Cundiff & Still

Objectives of Physical Distribution

• To provide better customer service• To reduce cost• To increase sales • To create utilities• To establish differential advantage over rivals• To develop communication system• To attain price stability• To increase the reputation

Importance of Physical Distribution

• Creation of utilities• Reduction in distribution cost• Increase in sales volume• Broader marketing scope• Larger market share• Stability in prices• Improvements in customer services• Effects on product planning• Coordination b/w demand and supply• Facing rising competition

Components of Physical Distribution (Decision Areas)

It is that part of general management which is responsible for the design, administration and operation of the system to control the movement of raw materials and finished products.

The structure of physical distribution is made up of following broad components namely:

• Transportation

• Warehousing

• Inventory Control

• Material Handling

• Order Processing

CUSTOMER

Material Handling

Order Processing

WarehousingTransportation

Inventory Control

Types of Physical DistributionTransportation• Rail Transport• Road Transport• Water Transport• Air Transport• PipelinesWarehousing• Private Warehouses• Public Warehouses• Household Warehouses• Bonded Warehouses• Co-operative Warehouses• Institutional Warehouses

• Inventory Control: Inventory Control is the supervision of supply, storage and accessibility of items in order to ensure an adequate supply without excessive oversupply.It can also be referred as internal control - an accounting procedure or system designed to promote efficiency or assure the implementation of a policy or safeguard assets or avoid fraud and error etc. Thus, material control involve the following activities:

• Purchase of materials• Receiving of materials• Inspection of materials• Storage of materials• Issuing of materials

Material Handling: Material Handling is the movement, storage, control and protection of materials, goods and products throughout the process of manufacturing, distribution, consumption and disposal.

Material Handling methods are :• Manual material handling method• Mechanical material handling method• Automatic material handling method

• Order Processing: Order processing is a key element of Order fulfillment. Order processing operations or facilities are commonly called "distribution centers". "Order processing" is the term generally used to describe the process or the work flow associated with the picking, packing and delivery of the packed item(s) to a shipping carrier.

QUERIES ?