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Channel Management / Distribution

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

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Channels of Distribution

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?

Objectives1. Nature and scope of channel management

2. Relationship between customer service and channel management

Physical distribution is…Organizing and moving products

through the channels

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

The 3rd largest expensefor most businesses

The Nature & Scope Of Channel Management

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

Channel Members Add Value To A Product By Performing Certain

Channel Activities ExpertlyMarketingPackagingFinancingStorageDeliveryMerchandisingPersonal selling

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.

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

CHANNEL FUNCTIONS

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

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

Negotiation

Promotion

Contact

Transporting and storing

Financing

Packaging

Money

Goods

Today’s system of exchangeProducers U

sers

Key Channel Tasks • Marketing• Packaging• Financing• Storage• Delivery• Merchandising• Personal selling

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

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 eg sales force, promotions

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

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

Tasks of 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)

• Coordinates the work of departments involved in the process, such as procurement, transportation, manufacturing, finance, legal, and marketing.

REVIEW Key Channel Tasks• Concentration/Equalization/Dispersion• Must consummate transactions between

buyers and sellers, i.e., fix the discrepancies in

• Quantity• Assortment• Time• Place

Channel EffectivenessThe channel must be properly

managedRecognize the importance of their task

and make informed decisionsEach member is assigned tasks it can

do best

Channel Effectiveness (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…..

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

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

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

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

Selecting Channel MembersDetermine the types of members which are

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

• Channelize 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

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

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

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

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

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

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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Motivating Channel Members (cont.)–Motivation can be positive or

negative• Sanctions may be imposed on

middlemen not performing well• Chargeback's – financial penalties

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

reaching performance goals

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.

Evaluating Channel Members (cont.)

Should constantly evaluate the channel:

• What is working?

• What is not working?

• What can be improved?

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.

Distribution Decisions - Major Considerations…

– Multiple channels

– Control vs. costs

– Intensity of distribution desired

– Involvement in e-commerce

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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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

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.

Distribution IntensityAchieve ideal market exposure

(make their product available without over exposing and losing money)

To achieve market exposure, marketers must determine distribution intensity

Distribution Intensity

– Exclusive Distribution

– Selective Distribution

– Intensive Distribution

– Integrated Distribution

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

Intensive Distribution

• 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, Fuel pumps, farm stores, auto parts retailers, supermarkets, drugstores, hardware stores, warehouse clubs, and other mass merchandisers.

Selective Distribution• 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 & Lucky 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.

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

Integrated DistributionManufacturer acts as wholesaler and retailer

for its own products.

• Sherwin-Williams Paint, Merle Norman

• 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

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-market places provide smaller businesses with the exposure that they could not get elsewhere

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

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

Dimensions of Channel Design

1.Length of the channel

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

3.Types of intermediaries involved

• 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

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.

Determinants of Channel Structure

1. The distribution tasks that need to be performed2. The economics of performing distribution tasks3. Management’s desire for control of distribution4. Transaction Efficiency (refers to the effort to

reduce the number of transactions between producers &consumers).

Steps of Channel Structure/Design1. Setting distribution objectives

Meeting customer needs is the ultimate goal

2. Specifying distribution tasksWho Does What Along The Supply Chain (Channel Of Distribution)

3. Considering alternative channel structuresThree dimensions: Length/Intensity/Types of intermediaries

4. Choosing optimal channel structuresEach 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.

Relationship Between The Product Being Distributed And

The Pattern Of Distribution• Consumer Good• Consumer Service• Industrial Good• Industrial Service

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

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

Use of Technology in Distribution (cont.)

Problems

Cost of technology

Changing technology = updating equipment

Need for compatible systems within and between businesses & countries