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

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?

Objectives
1. 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 expense
for most
businesses

The Nature & Scope Of Channel

Management

How Channel Members Add Value

Right PLACE
Right TIME

Place UTILITY
Location having the product where customers can buy it

Time UTILITY
Having the product available when the customer
wants/needs it

Channel Members Add Value To A

Product By Performing Certain
Channel Activities Expertly
Marketing
Packaging
Financing
Storage
Delivery
Merchandising
Personal 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.

CHANNEL FUNCTIONS

Information
Promotion
Contact
Matching
Negotiation
Physical distribution
Financing
Risk taking

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

Todays system of exchange

Promotion
Contact

Transporting and storing

Financing
Packaging
Money
Goods

Users

Producers

Negotiation

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 Effectiveness
The channel must be properly
managed
Recognize the importance of their task
and make informed decisions
Each member is assigned tasks it can
do best

Channel Effectiveness (Cont.)

Channel members share a common

goal
Commitment to quality of the product
Satisfying the target markets needs and
wants
All 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 products 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 Members

Determine 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 products needs
Offer customer service compatible with the
products needs
Be willing and able to work cooperatively with
other members within the products 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
Stores 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 partners customers their needs, wants,
and demands
Understand the partners business operationally and
financially and whats really important to them
Look at the partners needs in terms of customer support,
technical support, and training
Establish clear and agreed upon expectations and goals
Develop recognition programs focusing on the partners
contributions
Build internal support systems and dedicate resources to
the partner

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

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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

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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Managements 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 Intensity
Achieve 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.

Intensive

All Possible
Intermediaries

Selective

Relatively Few
Intermediaries

Exclusive

Just One
Intermediary

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 franchisors products

Integrated Distribution
Manufacturer 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.

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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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
Manufacturers 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

Length of Channel

Channel length = number of levels in a distribution

channel.
2 level
Manufacturer

3 level
Manufacturer

4 level

5 level

Manufacturer

Manufacturer
Agent

Consumer

Wholesaler

Wholesaler

Retailer

Retailer

Retailer

Consumer

Consumer

Consumer

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 performed
2. The economics of performing distribution tasks
3. Managements desire for control of distribution
4. Transaction Efficiency (refers to the effort to
reduce the number of transactions between
producers &consumers).

Steps of Channel Structure/Design

1.

Setting distribution objectives

Meeting customer needs is the ultimate goal

2.

3.

Specifying distribution tasks

Who Does What Along The Supply Chain (Channel Of Distribution)

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.

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 internet
e-commerce: Products are sold to customers
and industrial buyers through the Internet.
e-marketplace

Satellite tracking = a dispatcher has

current knowledge of a delivery trucks
location and destination

Use of Technology in Distribution

(cont.)
Tracking of package
Bar coding on package
Package scanned at transition points in
distribution chain
Customer uses internet to follow package along
distribution chain; e-mail may be used
Global 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