Marketing Series: Place Strategy Is All About Distribution

 DISTRIBUTION AND SUPPLY CHAIN MANAGEMENT

When retailers and manufacturers work together within a channel of distribution, linkages can be made stronger and the profitability of all channel members can be improved. In this topic, students learn the definition and functions of a distribution channel. The length and intensity of the channels are explained. Continually emphasized is the need for developing channel objectives, careful selection of channel members, and the management of the channel. Through these systematic efforts, businesses can maintain a higher level of customer satisfaction and profitability.

After studying this topic, students should be able to:

1. Explain what a distribution channel is, identify types of wholesaling intermediaries, and describe the different types of distribution channels.
2. List and explain the steps to plan a distribution channel strategy.
3. Discuss the concepts of logistics and supply chain.

Introduction (Duration: 3.17 minutes)

TYPES OF DISTRIBUTION CHANNELS AND WHOLESALE INTERMEDIARIES

• The delivery of goods to customers involves physical distribution, which refers to the activities used to move finished goods from manufacturers to final customers. Physical distribution activities include order processing, warehousing, materials handling, transportation, and inventory control.
• The focus of logistics is on the customer. The customer’s goals become the logistics provider’s goals.
• A channel of distribution consists of, at a minimum, a producer—the individual or firm that manufactures or produces a good or service—and a customer. This is a direct channel. Channels often are indirect because they include one or more channel intermediaries—firms or individuals such as wholesalers, agents, brokers, and retailers who in some way help move the product to the consumer or business user.

 

Functions of Distribution Channels

• Channels provide time, place, and ownership utility. 
• Distribution channels provide a number of logistics or physical distribution functions that increase the efficiency of the flow of goods from producer to customer.
• Distribution channels create efficiencies because they reduce the number of transactions necessary for goods to flow from many different manufacturers to large numbers of customers. This occurs in two ways. The first is breaking bulk. Wholesalers and retailers purchase large quantities (usually cases) of goods from manufacturers but sell only one or a few at a time to many different customers. Second, channel intermediaries reduce the number of transactions when they create assortments—they provide a variety of products in one location—so that customers can conveniently buy many different items from one seller at one time. The transportation and storage of goods are other physical distribution functions.
• Channel intermediaries also perform a number of facilitating functions that make the purchase process easier for customers and manufacturers. Channel members perform risk-taking functions.
• Intermediaries perform a variety of communication and transaction functions, providing marketing information to the sales force and to customers with complaints or other inputs concerning the product.

Evolution of Distribution Functions

Roles of Channel Members (Duration: 12.02 minutes)

• In the future, channel intermediaries that physically handle the product may become obsolete. Already companies are eliminating many traditional intermediaries because they find that they do not add enough value in the distribution channel—a process we call disintermediation (of the channel of distribution). For marketers, disintermediation reduces costs.
• Some companies use the Internet to make coordination among members of a supply chain more effective in ways that end consumers never see. These firms develop better ways to implement knowledge management, which refers to a comprehensive approach that collects, organizes, stores, and retrieves a firm’s information assets. These assets include both databases and company documents and the practical knowledge of employees whose past experience may be relevant to solving a new problem.
• One of the more vexing problems with Internet distribution is the potential for online distribution piracy, which is the theft and unauthorized repurposing of intellectual property via the Internet. For example, unauthorized downloads of music continue to pose a major challenge to the “recording” industry.

1. Wholesaling Intermediaries

• Wholesaling intermediaries are firms that handle the flow of products from the manufacturer to the retailer or business user. 

2. Independent Intermediaries

• Independent intermediaries do business with many different manufacturers and many different customers. Because no manufacturer owns or controls them, they make it possible for many manufacturers to serve customers throughout the world while they keep prices low.
• Merchant wholesalers are independent intermediaries that buy goods from manufacturers and sell to retailers and other business-to-business customers. Because merchant wholesalers take title to the goods (that is, they legally own them), they assume certain risks and can suffer losses if products are damaged, become outdated or obsolete, are stolen, or just do not sell. On the other hand, because they own the products, they are free to develop their own marketing strategies including setting the prices they charge their customers. There are several different kinds of merchant wholesalers:
  • Full-service merchant wholesalers provide a wide range of services for their customers, including delivery, credit, product-use assistance, repairs, advertising, and other promotional support—even market research. 
  • In contrast, limited-service merchant wholesalers provide fewer services for their customers. Like full-service wholesalers, limited-service wholesalers take title to merchandise but are less likely to provide services such as delivery, credit, or marketing assistance to retailers. Specific types of limited-service wholesalers include the following:

1. 1. 1. Cash-and-carry wholesalers provide low-cost merchandise for retailers and industrial customers that are too small for other wholesalers’ sales representatives to call on.
      2. Truck jobbers carry their products to small business customer locations for their inspection and selection.
      3. Drop shippers are limited-function wholesalers that take title to the merchandise but never actually take possession of it.
      4. Mail-order wholesalers sell products to small retailers and other industrial customers, often located in remote areas, through catalogues rather than a sales force. Rack jobbers supply retailers with specialty items such as health and beauty products and magazines.

• Merchandise agents or brokers are the second major type of independent intermediary. Agents and brokers provide services in exchange for commissions. They may or may not take possession of the product, but they never take title; that is, they do not accept legal ownership of the product. Agents normally represent buyers or sellers on an ongoing basis, whereas clients employ brokers for a short period.
  • Manufacturers’ agents, or manufacturers’ reps, are independent salespeople who carry several lines of non-competing products. 
  • Selling agents, including export/import agents, market a whole product line or one manufacturer’s total output. 
  • Commission merchants are sales agents who receive goods, primarily agricultural products such as grain or livestock, on consignment—that is, they take possession of products without taking title. 
  • Merchandise brokers, including export/import brokers, are intermediaries that facilitate transactions in markets such as real estate, food, and used equipment, in which there are lots of small buyers and sellers.

3. Manufacturer-Owned Intermediaries

• Sometimes manufacturers set up their own channel intermediaries. In this way, they can operate separate business units that perform all the functions of independent intermediaries while at the same time they can still maintain complete control over the channel.
  1. Sales branches are manufacturer-owned facilities that, like independent wholesalers, carry inventory and provide sales and service to customers in a specific geographic area.
  2. Sales offices are manufacturer-owned facilities that, like agents, do not carry inventory but provide selling functions for the manufacturer in a specific geographic area.
  3. Manufacturers’ showrooms are manufacturer owned or leased facilities. These showrooms contain products that are permanently displayed.

 

Types of Distribution Channels

When they develop distribution (place) strategies, marketers first consider different channel levels. This refers to the number of distinct categories of intermediaries that make up a channel of distribution.

1. Consumer Channels

• The simplest channel is a direct channel. A direct channel is used for a number of reasons. It may allow the producer to serve its customers better and at a lower price than is possible using a retailer. Using a direct channel gives control to the producer. When the producer handles distribution, it maintains control of pricing, service, and delivery—all elements of the transaction.
• The producer–retailer consumer channel is the shortest indirect channel. 
• The producer–wholesaler–retailer–consumer channel is a common distribution channel, giving retailers a large selection of products.

2. B2B Channels

• Business-to-business distribution channels facilitate the flow of goods from a producer to an organizational or business customer. They can be direct or indirect. The simplest indirect channel in industrial markets occurs when the single intermediary—a merchant wholesaler we refer to as an industrial distributor rather than a retailer—buys products from a manufacturer and sells them to business customers. Because business-to-business marketing often means selling high-dollar, high-profit items to a market made up of only a few customers, direct channels are common.

3. Dual and Hybrid Distribution Systems

• A dual or multiple distribution system occurs when producers, dealers, wholesalers, retailers, and customers interact with more than one type of channel. This is common in the pharmaceutical industry. Instead of serving a target market with a single channel, some companies combine channels—direct sales, distributors, retail sales, and direct mail to create a hybrid marketing system.

4. Distribution Channels and the Marketing Mix

• How do decisions regarding place relate to the other three Ps?  Place decisions affect pricing. Marketers that distribute products through low-priced retailers such as Walmart, T.J. Maxx, and Marshalls will have different pricing objectives and strategies than will those that sell to specialty stores or traditional department stores.
• Distribution decisions can sometimes give a product a distinct position in its market. For example, Enterprise Rent-a-Car avoids being overly dependent on the cutthroat rental car market as it opens retail outlets in primary locations in residential areas and local business centers.
• Subscription boxes represent a new business model for distribution that supplies surprises by sending out a box each month filled with items you never knew you wanted but you just have to have.

 

Ethics in the Distribution Channel

• Many large retail chains force manufacturers to pay a slotting allowance—a fee paid in exchange for agreeing to place a
• manufacturer’s products on a retailer’s valuable shelf space.
• Product diversion is the distribution of a product through one or more channels not authorized for use by the manufacturer of the product. A diverter is an entity that facilitates the distribution of a product through one or more channels not authorized for use by the manufacturer of the product.
• Another ethical issue involves the sheer size of a particular channel intermediary—be it manufacturer, wholesaler, retailer, or other intermediaries. Giant retailer Walmart, increasingly criticized for forcing scores of independent competitors (i.e., “mom-and-pop stores”) to go out of business, has begun a very visible program to help its smaller rivals.
• It is important for all channel intermediaries to behave and treat each other in a professional, ethical manner—and, to do no harm to consumers (financially or otherwise) through their channel activities.

 

SELF-CHECK: REFLECTION Computer manufacturers frequently use a hybrid marketing system to distribute their products. Where can you buy a computer? Specify the location. What factors are important in determining whether a manufacturer should choose a direct or indirect channel? >POST YOUR ANSWER HERE<

 

DEVELOP A CHANNEL STRATEGY

Firms that operate within a channel of distribution—manufacturers, wholesalers, and retailers—do distribution planning, which is a process of developing distribution objectives, evaluating internal and external environmental influences on distribution, and choosing a distribution strategy The following is a discussion of distribution planning from the perspective of manufacturers, wholesalers, and retailers.

Step 1: Develop Distribution Objectives

• The first step to decide on a distribution plan is to develop objectives that support the organization’s overall marketing goals. In general, the overall objective of any distribution plan is to make a firm’s product available when, where, and in the quantities, customers want at the minimum cost. More specific distribution objectives, however, depend on the characteristics of the product and the market.

Step 2: Evaluate Internal and External Environmental Influences

• After they set their distribution objectives, marketers must consider their internal and external environments to develop the best channel structure. The organization must also examine issues such as its own ability to handle distribution functions, what channel intermediaries are available, the ability of customers to access these intermediaries, and how the competition distributes its products. Finally, when they study competitors’ distribution strategies, marketers learn from their successes and failures.

Step 3: Choose a Distribution Strategy

Managing Channels (Duration: 39.39 minutes)

• Distribution intensity means the number of intermediaries at each level of the channel. Planning a distribution strategy means making at least three decisions.

Decision 1: Conventional, Vertical, or Horizontal Marketing System? A conventional marketing system is a multilevel distribution channel in which members work independently of one another. Their relationships are limited to simply buying and selling from one another.  A vertical marketing system (VMS) is a channel in which there is formal cooperation among channel members at two or more different levels: manufacturing, wholesaling, and retailing. Often, a vertical marketing system can provide a level of cooperation and efficiency not possible with a conventional channel. There are three types of vertical marketing systems: In an administered VMS, channel members remain independent but voluntarily work together to become the power of a single channel member. In a corporate VMS, a single firm owns manufacturing, wholesaling, and retailing operations, giving the firm total control over all channel operations. In a contractual VMS, cooperation is enforced by a contract that spells out each member’s rights and responsibilities and how they will cooperate. The channel members can have more impact as a group than they could alone. A discussion of three types of contractual VMS follows: In a wholesaler-sponsored VMS, wholesalers get retailers to work together under their leadership in a voluntary chain. A retailer cooperative is a group of retailers that has established a wholesaling operation to help them compete more effectively with the large chains. Franchise organizations are a third type of contractual VMS. Franchise organizations include a franchiser (a manufacturer or a service provider) who allows an entrepreneur (the franchisee) to use the franchise name and marketing plan for a fee. In these organizations, contractual arrangements explicitly define and strictly enforce channel cooperation. In a horizontal marketing system, two or more firms at the same channel level agree to work together to get their product to the customer. Sometimes these agreements are between unrelated businesses. Decision 2: Intensive, Exclusive, or Selective Distribution? The three basic choices for deciding how many wholesalers and retailers to carry a product are intensive, exclusive, and selective distribution. Intensive distribution aims at maximizing market coverage by selling a product through all wholesalers or retailers that will stock and sell the product. Availability is more important than any other consideration in customers’ purchase decisions. Products such as gum, milk, and soft drinks are intensively distributed. Exclusive distribution means limiting distribution to a single outlet in a particular region. Some cars, pianos, and products with high price tags are sold this way. The gray market is a distribution channel in which a product’s sale to a customer is technically legal, but is viewed as inappropriate by the manufacturer of the related product. Grey markets often emerge around high-end luxury goods sold through exclusive distribution. Selective distribution fits when demand is so large that exclusive distribution is inadequate, but selling costs, service requirements, or other factors make intensive distribution a poor fit. Selective distribution is suitable for shopping products such as household appliances and electronic equipment.

 

Step 4: Develop Distribution Tactics

These decisions are usually about the type of distribution system to use, such as a direct or indirect channel, or a conventional or integrated channel. These decisions have a direct impact on customer satisfaction.

Channel Levels (Duration: 8.38 minutes)

Decision 1: Select Channel Partners Selecting channel partners usually results in a long-term commitment. Questions to be considered include: Will the member contribute to profitability? Can the member provide services the customer wants? What impact will this have on channel control? Who are the channel members’ competitors channel partners? What is the firm’s dedication to social responsibility? Decision 2: Manage the Channel  The channel leader, sometimes called a channel captain, is the dominant firm that controls the channel. The captain has power relative to other channel members. The power comes from a variety of sources: A firm has economic power when it has the ability to control resources. A firm such as a franchiser has legitimate power if it has the legal authority to be in charge. A producer firm has a reward or coercive power if it engages in the exclusive distribution and has the ability to give profitable products and to take them away from the channel intermediaries. Channel cooperation is to the benefit of everyone. It occurs when producers, wholesalers, and retailers depend on one another for success. Channel conflict refers to incompatible goals, poor communication, and disagreement over roles, responsibilities, and functions among firms at different levels of the same distribution channel that may threaten a manufacturer’s distribution strategy.

 

Disintermediaries (Duration: 3.02 minutes)