9 - Marketing Channels and Distribution Decisions PDF

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How to develop an effective distribution network for the fast-moving consumer-goods and B2B products to improve the distribution efficiency to achieve the goals of reaching the target markets effectively which enable the achievement of the the organisational goals....

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9. Marketing Channels and Distribution Decisions

9.1 Marketing Channels Marketing channel (channel of distribution) A set of interdependent organisations that facilitate the transfer of ownership as products move from producer to business user or consumer. Many different types of organisations participate in marketing channels and they are called Channel members (also called intermediaries, resellers and middlemen) negotiate with one another, buy and sell products, and help the change of ownership between buyer and seller in the course of moving the product from the producer into the hands of the final consumer. Channel members provide three types of economies to the distribution process in the form of; I.

II.

III.

Specialisation and division of labour - The first economy provided to the distribution channel is from the specialisation and the division of labour among the channel members. The concepts of specialisation and division of labour will create greater efficiency in time and costs incurred than if they were to develop the project individually. Overcoming discrepancies - The second economy is provided by addressing discrepancies in the distribution channel. Marketing channels aid in overcoming discrepancies of quantity, assortment, time and space created by economies of scale in production. a. discrepancy of quantity The difference between the amount of product produced and the amount a customer wants to buy. b. discrepancy of assortment The lack of all the items a customer needs to receive full satisfaction from a product or products. c. temporal (time) discrepancy The difference between when a product is produced and when a customer is ready to buy it. d. spatial (place) discrepancy The difference between the location of the producer and the location of widely scattered markets. Contact efficiency - The third economy provided to the distribution channel is through contact efficiency. Manufacturers sell to millions of individuals and families around the world. Using channel intermediaries greatly reduces the number of required contacts. As a result, producers are able to offer their products costeffectively and efficiently to consumers all over the world.

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9.2 Types of Channel Intermediaries and Their Functions Traditionally, intermediaries in a channel negotiate with one another, facilitate the change of ownership between buyers and sellers, and physically move products from the manufacturer to the final consumer. The most prominent difference separating intermediaries is whether they take title to the product. Taking title means they own the merchandise and control the terms of the sale. There are mainly 3 types of intermediaries; a. retailer A channel intermediary that sells mainly to consumers. b. Merchant wholesalers are organisations that facilitate the movement of products and services from the manufacturer to producers, resellers, governments, institutions and retailers that take title to the goods. c. Agents and brokers simply facilitate the sale of a product from producer to end user by representing retailers, wholesalers or manufacturers. Agents and brokers, unlike wholesalers, only facilitate sales, and generally have little input into the terms of the sale. The following three aspects determine which type of intermediary the manufacturer should use: I.

II. III.

Product characteristics that may dictate a certain type of wholesaling intermediary include whether the product is standardised or customised, the complexity of the product and the gross margin of the product. Buyer considerations affecting wholesaler choice include how often the product is purchased, and how long the buyer is willing to wait to receive the product. Market characteristics determining wholesaler type include how many buyers are in the market, and whether they are concentrated in a general location or are widely dispersed

The three basic functions that intermediaries perform are;

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9.3 Channel Structures of Consumer Products There are four ways in which manufacturers can route products to consumers.

a. Direct channel - Producers use the direct channel to sell directly to consumers. There are no intermediaries. Eg. Producer-owned stores and factory-outlet stores or telemarketing, mail-order and catalogue shopping, and forms of electronic retailing such as online shopping and shop-at-home television networks. b. The retailer channel and the wholesaler channel - Most consumer products are sold through the retailer channel and the wholesaler channel. A retailer channel is most common when the retailer is large and can buy in large quantities directly from the manufacturer. A wholesaler channel is often used for low-cost items that are purchased frequently, such as confectionery and magazines. c. Agents and brokers - agent/broker channels involve a complicated process, and are typically used in markets with many small manufacturers and many retailers that lack the resources to find each other. Agents or brokers bring together manufacturers and wholesalers for negotiations, but don’t take title to merchandise. Ownership instead passes directly to one or more wholesalers, and then to retailers.

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9.4 Channels for Business and Industrial Products

a. Direct channels are typical in these markets. Manufacturers buy large quantities of raw materials, major equipment, processed materials and supplies directly from other manufacturers. Manufacturers that require suppliers to meet detailed technical specifications often prefer direct channels. b. Industrial distributors and agents & brokers - companies selling standardised items of moderate or low value often rely on industrial distributors. In many ways, an industrial distributor is like a supermarket for organisations. Industrial distributors are wholesalers and channel members that buy and take title to products. Moreover, they usually keep stocks of their products, and sell and service them. Often, small manufacturers cannot afford to employ their own sales teams. Instead, they rely on manufacturers’ representatives or selling agents to sell to either industrial distributors or users.

9.5 Alternative Channel Arrangements Manufacturers usually employs several different or alternative channels, which include multiple channels, non-traditional channels, adaptive channels and strategic channel alliances. I. II.

Dual distribution (multiple distribution) The use of two or more channels to distribute the same product to target markets. Non-traditional channels - Non-traditional channel arrangements often help to differentiate an organisation’s product from the competition. Manufacturers may decide to use non-traditional channels such as the Internet, mail-order or 69 | P a g e

III. IV.

infomercials to sell their products instead of going through traditional retailer channels. Although non-traditional channels may limit a brand’s coverage,they can give a producer that is serving a niche market a way to gain market access and customer attention without having to establish channel intermediaries. Adaptive channel - An alternative channel initiated when an organisation identifies critical but rare customer requirements that they don’t have the capability to fulfil. Strategic channel alliance - A cooperative agreement between business organisations to use the other’s already established distribution channel.

9.6 Factors Affecting Channel Choice Marketers must answer many questions before choosing a marketing channel. The final choice depends on analysis of several factors, which often interact with one another. These factors can be grouped as; Market factors - the choice of distribution channel are influenced by target-customer considerations such as Who are the potential customers, what/ where/ when and What do they buy? Additionally, the choice of channel depends on whether the producer is selling to consumers or to industrial customers.  Product factors - Products that are more complex, customised and expensive tend to benefit from shorter, more direct marketing channels. These types of products sell better through a direct sales team. On the other hand, the more standardised a product is, the longer its distribution channel can be, and the greater the number of intermediaries that can be involved. The product’s life cycle is also an important factor in choosing a marketing channel.

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Producer factors - Several factors pertaining to the producer are important to the selection of a marketing channel. In general, producers with large financial, managerial and marketing resources are better able to use channels that are more direct. Those producers have the ability to hire and train their own sales forces, to warehouse their own goods and to extend credit to their customers. Smaller or weaker organisations, on the other hand, must rely on intermediaries to provide these services for them.

9.7 Levels of Distribution Intensity Organisations have three options for intensity of distribution: intensive distribution, selective distribution or exclusive distribution.

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9.8 Social Influences in Channels and Channel Conflicts Social relationships also play an important role in building unity among channel members. The basic social dimensions of channels are power, control, leadership, conflict and partnering. Channel power is a channel member’s capacity to control or influence the behaviour of other channel members.  Channel control occurs when one channel member affects another member’s behaviour.

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Channel leader (channel captain) One member of a marketing channel who exercises authority and power over the activities of other channel members.

Inequitable channel relationships often lead to channel conflict, which is a clash of goals and methods among the members of a distribution channel. There are two types of channel conflicts; I.

Horizontal conflict - Channel conflict that occurs among channel members on the same level. Vertical conflict - Channel conflict that occurs between different levels in a marketing channel, most typically between manufacturer and wholesaler or between manufacturer and retailer.

II.

9.9 Supply Chains and Supply Chain Management Many modern companies are turning to supply chain management for competitive advantage. 

Supply chain - The connected chain of all of the business entities, both internal and external to the company, that perform or support the logistics function.

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Supply chain management - A management system that coordinates and integrates all of the activities performed by supply chain members into a seamless process, 71 | P a g e

from the source to the point of consumption, resulting in enhanced customer and economic value. The main benefits of SCM are ; Supply chain management is a key means of differentiation for an organisation, and a critical component in marketing and corporate strategy.  Companies that focus on supply chain management commonly report lower inventory, transportation, warehousing and packaging costs, greater supply chain flexibility, improved customer service and higher revenues.  Research has shown a clear relationship between supply chain performance and profitability. Additionally, because well-managed supply chains are able to provide better value to customers with only marginal incremental expenditure on company assets, best-in-class supply chain companies are becoming significantly more valuable investments

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9.10 Supply Chain Integration Supply chain integration occurs when multiple organisations or their functional areas in a supply chain coordinate business processes so that they are seamlessly linked to one another. In a world-class supply chain, the customer may not know where the business activities of one organisation or business unit end and those of another begin; all the participating organisations and business units appear to be working as one. The main 5 types of SCM integrations are; I.

II.

III.

IV.

Relationship integration refers to the ability of two or more companies to develop social connections that serve to guide their interactions when working together. More specifically, relationship integration is the capability to develop and maintain a shared mental framework across companies that describes how they will depend on one another when working together. Measurement integration reflects the idea that performance assessments should be transparent and measurable across the borders of different organisations and should also assess the performance of the supply chain as a whole while holding each individual organisation or business unit accountable for meeting its own goals. Technology and planning integration refers to the creation and maintenance of information technology systems that connect managers across the organisations in the supply chain. Material and service supplier integration requires organisations to link seamlessly to those outsiders that provide goods and services to them, so that they can streamline work processes and thereby provide smooth, high-quality customer experiences.

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V.

Customer integration is a competency that enables organisations to provide longlasting, distinctive, value-added offerings to those customers who represent the greatest value to the organisation or supply chain.

9.11 The Key Processes of Supply Chain Management There are eight critical business processes on which supply chain managers must focus: I.

II.

III.

IV.

V.

VI. VII.

VIII.

Customer Relationship Management (CRM) process - A process that allows companies to prioritise their marketing focus on different customer groups according to each group’s long-term value to the company or supply chain. Customer service management process - A process that presents a multi-company, unified response system to the customer whenever complaints, concerns, questions, or comments are voiced. Demand management process - A process that seeks to align supply and demand throughout the supply chain by anticipating customer requirements at each level and creating demandrelated plans of action prior to actual customer purchasing behaviour. Order fulfilment process - A highly integrated process, often requiring persons from multiple companies and multiple functions to come together and coordinate to create customer satisfaction at a given place and time. Manufacturing flow management process -The process of ensuring that organisations in the supply chain have the needed resources to manufacture with flexibility and to move products through a multi-stage production process. Supplier relationship management process -A process that supports manufacturing flow by identifying and maintaining relationships with highly valued suppliers. Product development and commercialisation process - A process that includes the group of activities that facilitates the joint development and marketing of new offerings among a group of supply chain partner organisations. Returns management process - A process that enables organisations to manage volumes of returned product efficiently while minimising returns-related costs and maximising the value of the returned assets to the organisations in the supply chain.

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9.12 Supply Chain Functions There are few main functions that affect the company’s success. Those are;

9.12.1 Inventory Control - An organisation’s inventory control system develops and maintains an adequate assortment of materials or products to meet a manufacturer’s or a customer’s demands. Inventory decisions, for both raw materials and finished goods, have a big impact on supply chain costs and the level of service provided. If too many products are kept in inventory, costs increase – as do risks of obsolescence, theft and damage. If too few products are kept on hand, the company risks product shortages, angry customers and, ultimately, lost sales. The goal of inventory management, therefore, is to keep inventory levels as low as possible while maintaining an adequate supply of goods to meet customer demand.

9.12.2 Order Processing - An order processing system processes the requirements of the customer and sends the information into the supply chain via the logistics information system. The order goes to the manufacturer’s warehouse. If the product is in stock, the order is filled and arrangements are made to ship it. If the product is not in stock, the order triggers a replenishment request that finds its way to the factory floor. Proper order processing is critical to good service. As an order enters the system, management must monitor two flows: the flow of goods and the flow of information. Good communication among sales representatives, office personnel, and warehouse and shipping personnel is essential to correct order processing. Shipping incorrect merchandise or partially filled orders can create just as much dissatisfaction as stockouts or slow deliveries.

9.12.3 Production – There are mainly two strategies could be adopted for production based on the operation. a. build-to-stock - A production method whereby products are made in advance of demand based on forecasts and are stored until customer orders arrive. b. mass customisation (build-to-order) - A production method whereby products are not made until an order is placed by the customer and products are made according to customer specifications. A hybrid strategy that minimises the risks and maximises the benefits of both the build-tostock and buildto- order strategies is postponement. With postponement, the product is partially produced based on generic forecasts of aggregate demand and is shipped to 74 | P a g e

distribution locations near where demand is forecast to occur. Then, once customers place an order, the production process is completed to the customers’ specifications.

9.12.4 Warehousing and Materials Handling – Companies need the warehouses for storing the raw materials and/ or finished goods depending on their operation. Within the warehouse, a materials-handling system is required, a method of moving inventory into, within and out of a warehouse.

9.12.5 Transportation – Traditionally there are five transportation modes and with the internet now there are 6 modes; 

Air

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Sea (Water) Truck (Road)

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Rail Pipe Online

Each mode has its own pros and corns. Therefore the management has to take a decision based on few factors;

9.13 Retailing All of the activities directly related to the sale of goods and services to the ultimate consumer for personal, nonbusiness use are considered as retailing. Retailers can be broadly classified by form of ownership – namely, independent, part of a chain, or franchise outlet. Retailers that are owned by a single person or partnership and not operated as part of a larger retail institution are independent retailers.

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Chain stores are owned and operated as a group by a single organisation. Under this form of ownership, the head office handles many of the administrative tasks for the entire chain. Head office also buys most of the merchandise sold in the stores. Franchises are owned and operated by individuals but licensed by a larger supporting organisation. Franchising combines the advantages of independent ownership with those of the chain store organisation.

TEST YOUR KNOWLEDGE 37. What is a channel of distribution? What are channel intermediaries? 38. Explain the functions of distribution channels 39. Explain intensive, exclusive, and selective forms of dis-tribution. 40. What are the advantages and dis...