LU5 - MRKT5112 - Summary of LU5 PDF

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1 Luthando Zulu – 17599770 MRKT5112 – LU5: Distribution Management Decisions Introduction: Distribution channel: A distribution channel is a series of firms or individuals who participate in the flow of goods and services from the producer to the final user/consumer. A reverse/backward distribution channel may also exist to recycle waste, obsolete products or part-parts. It consists of producers, consumers and any intermediaries that are aligned to provide a means of transferring title or possession of a product or service from a producer to a consumer. The participants are selected on their ability to satisfy customers in terms of product availability, convenience, price, location and after sales service. Distribution channel participants: Before designing a distribution channel, it is wise to find out whether the necessary intermediaries exist and are willing to carry the product.  

Wholesaler: A business that is primarily engaged in selling merchandise to retailers; to industrial, commercial, institutional or professional users; or to other wholesalers Retailer: A business that sells goods and services to the consuming public for their own use and benefit

Evaluating intermediaries: intermediaries must be evaluated with respect to their track records based on past sales, profits and market segments served. Moreover, the marketing environment, such as competitors, the economy and laws and regulations pertaining to the distribution of products and services, must be examined before final distribution channels are selected. A company can eliminate intermediaries, but it cannot eliminate the functions they perform. Channels for consumer products: Channels may be distinguished by the number of intermediaries they include – the more intermediaries, the longer the channel. The major channels for consumer goods are:      

Producer to consumer Producer to retailer to consumer Service producer to consumer Service producer to agent to consumer Producer to wholesaler to retailer to consumer Producer to wholesaler-agent to wholesaler to retailer to consumer.

Channels for organizational products – The direct channel in business-to-business marketing s the most commonly used channel in the marketing of organizational goods. The names for the manufacturer to wholesaler to organizational user channel can vary and may include jobbers/distributors that may deliver tools and/or equipment on the job. Business-to-business marketers also use agents. Brokers are used on an occasional basis, as needed. Manufacturer’s agent operates on a commission within fixed geographic territories and tend to represent several small manufacturers who lack financial resources to hire a sales force. The major channels for organization products are:   

Producer to user Producer to wholesaler to user Producer to agent-wholesaler to user

Other participants: Wholesalers can also act as agents by buying merchandise on behalf of their customers. Wholesalers also add value to the distribution channel through storage and bulk breaking and by providing product ranges and assortments to retailers. Retailers carry inventory and do further bulk breaking and merchandising of the wide range of products supplied by manufacturers, suppliers and wholesalers to offer consumers a variety of products.  

Bulk breaking: Entails dividing larger quantities into smaller quantities as products get closer to the final market. Merchandising: Includes all activities to sell products at retail level, such as display and point-of-sale promotions.

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Importers Producers (farmers) Manufacturers (plants and factories) Suppliers Food processors

Food wholesalers Distributors Retailers

Restaurants Hotels Takeaway outlets Retail food chains (e.g. Woolworths)

Basic food distribution channels and intermediaries:

Direct marketing vs direct distribution: 

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Direct marketing: A type of advertising campaign that seeks to elicit an action (such as an order, a visit to store or website, or a request for further information) from a selected group of consumers in response to a communication from the marketer. The communication itself may be in any of a variety of formats including: postal mail, telemarketing, direct email marketing, and point-of-sale (POS) interactions. Customer response should be measurable. Direct distribution: When the producer of a product sells directly to the consumer without the help of intermediaries. A variety of distribution activities such as warehousing, storing, bulk breaking and merchandising takes place between the different participants. It is important note that retailers can also purchase products from other retailers e.g. Spaza shops buying bulk products from Makro.

3 Industrial distribution channels (B2B – Business to Business): There are two ways to analyze industrial distribution channels. The first focusses on the basic flow of industrial materials between manufacturers and endusers which is:     

Manufacturer to agent to user Manufacturer to agent to wholesaler to user Manufacturer to wholesaler to user Manufacturer to sales company to dealer to user Manufacturer to wholesaler to distributor to user

The second type of industrial distribution channel focusses on the network of intermediaries involved in processing of raw materials into eventual consumer goods which is: Farmers

Grocery wholesalers

Ingredient processors

Chemicals/packaging materials

Restaurants

Food and packaged goods processors

Eat food at home

Supermarkets

Eat food at restaurants

Food service distributors

Takeaway outlets

Channel design and planning – Distribution management consists of two major decision areas: Buy takeaways

1. 2.

The formation of a sequence of intermediaries who participate voluntarily or no channel The physical flow of products through a distribution system

bution

The various channel design alternatives available to a manufacturing firm can be identified in terms of:   

The number of levels in the channel The number of intermediaries operating at the various levels The types of intermediaries used at each level.

Each intermediary that performs a function which is required to convey the market offering closer to the final user, represents a channel level. The number of intermediary levels determines the channel length. The company must also determine the types of intermediaries that are available at each channel level. The following distribution alternatives are generally available:   

Manufacturer’s sales force Manufacturer’s representatives Industrial suppliers

The best channel structure is reflected in the design that offers the desired performance effectiveness, at the lowest possible cost, along each marketing function to be executed. This isn’t the case in reality, as a result, managers should strive for the best possible design alternative by evaluating the various design options along the basis of service output levels desired by customers, channel objectives and product objectives, and market behaviors and segments. Good channel design leads to market leadership, profits by adding value, closing gaps, offering services that build customer loyalty and ultimately business success. Planning the channel of distribution: Distribution strategy requires two major decisions concerning the structure and number of intermediaries that will be used. The first is determining the structure of the channel . Selection criteria are influenced by marketing mix elements, resources and by environmental factors. The second decision relates to the extent of distribution e.g. determining the number of outlets (wholesalers and/or retailers) where potential customers can expect to find the product. Intensive distribution seeks to obtain maximum exposure for a product on wholesale or retail levels. Selective distribution restricts the sale of a product e.g. Jeep clothing. Exclusive distribution carries with it

4 the expectation of a maximum sales effort from the retailer of to benefit from association with the prestige or efficiency of the retail outlet. Distribution structure decisions: The best channel system should achieve ideal market exposure. This is when a product is available widely enough to satisfy target customers’ needs but not exceed them. Ideal exposure may be intensive, selective, or exclusive. 

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Intensive: The selling of a product (usually a convenience product) through as many suitable wholesalers or retailers that will stock and/or sell the product – ‘sell it where they buy it’. It involves the placement of products in as many locations as possible. It is generally an appropriate objective when a cost leadership strategy is employed as the firm’s basic competitive position and the emphasis of the target market segment is on purchasing convenience and low price e.g. Coca-Cola. Selective: Selling through only those middlemen who will give the product special attention – ‘sell it where it sells best’. Selective distribution involves the placement of products (usually shopping products) in a more limited number of locations. It may be an appropriate objective when a differentiation strategy is employed by the organization e.g. the Golf Pro Shop. Exclusive: Selling through only one middleman in a particular geographic area. An exclusive distribution objective limits availability of a product to a small number of locations. It’s an appropriate objective when a firm employs a focus strategy. It is frequently employed when a firm’s desire is to enhance a product’s image or when considerable reseller support is desired.

Innovative channel design structure: Innovative distribution structure are the result of changes in demand in the marketplace. The manufacturer must adapt to these changes and develop new channels to cater for consumers’ changing needs. Using more than one distribution channel solves this problem – known as multi-channel distribution. Channel activities or functions: Channel intermediaries perform a variety of functions, including bulk breaking, accumulating bulk, sorting, creating assortments, reducing transactions, transporting, storing, communicating, financing, providing management services and more. Members of the marketing channel perform the following key functions:         

Gather information about potential and current customers, competitors and other actors and forces in the marketing environment Develop and distribute persuasive communications to stimulate purchasing Reach agreement on price and other terms so that transfer of ownership/possession can be done Place orders with manufacturers Acquire the funds to finance inventories at different levels in the marketing channel Assume the risks connected with carrying out channel work Provide for the successive storage and movement of physical products Enable buyers to pay their bill through banks and other financial institutions Oversee the actual transfer of ownership from one organization or person to another.

The functions performed by channel intermediaries include resolving discrepancies, closing gaps and providing utility. Specialization also takes place in the channel, which improves the efficiency of exchange. Intermediaries close gaps and provide utility (time, place and possession): Form utility Quantity gap  Bulk breaking  Storage  Packing  Recycling

Assortment gap  Accumulation or aggregation of an assortment

Time and temporal utility Time gap  Storage and warehousing  Inventories  Financing  Order taking  Expediting

Place utility Spatial gap  Transportation  Materials handling  Delivery

Intermediaries close gaps between manufacturers and consumers. Consumers receive value, utility and closure.

Possession utility Information/knowledge gap  Sales promotion  Advertising  Personal selling  Direct selling  Direct marketing Ownership gap  Buying and selling  Credit and

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Grading

financing Collection and delivery  Servicing product adjustments, technical service, warrantee service. Product(s) received by consumer 

Smaller assortment graded and re-packaged

In storage, paid for – waiting to be collected or delivered Temporal closure Supply = demand when the occur at different times (most frequently the case e.g. agricultural mass production).

Delivered to consumer

Spatial closure Transporting goods from production location to consumer location – provides ‘place’ convenience or utility.

Intermediaries resolve discrepancies:   

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Spatial discrepancy: A channel that delivers inventory nearer to the customer can close the spatial distance between manufacturer and consumer, adding value to the product and resolving this issue. Timing discrepancy: The product must be delivered on time, and is resolved though production scheduling, just-in-time ordering systems and inventory control procedures. Temporal discrepancy: Certain products are produced at different times to when consumers demand them (farming), and the consumer will demand it immediately. Intermediaries then store these products to eliminate this issue. Discrepancy of quantity and assortment: It exists because manufacturers make large quantities of products whereas consumers purchase in single units a part of an assortment. Intermediaries who categorize product offerings through sorting resolve this problem. Sorting is the ability of channel partners to create unique and need-satisfying product assortments trough the following processes: o Standardization – collecting uniform products from alternative suppliers and manufacturers. These products are subsequently graded according to aspects such as size, quality and weight o Accumulation – assembling standard products according to aspects such as size, quality and weight into large quantities for transport to other intermediaries o Allocation – the general wholesale stage of providing adequate supplies to numerous customers such as tools, hardware and building materials. o Assortment – assembling of specific goods into a customized order for specific customer groups such as department stores that offer merchandise assortments consisting of clothing, appliances, hardware and furniture e.g. Makro.

Intermediaries reduce transactions: The theory of efficiency-of-exchange suggests that intermediaries prefer to make exchanges because it is more efficient to have intermediaries involved in the distribution of products than having a direct producer to consumer contacts for exchanging products and services. Intermediaries synchronize needs, bulk break and re-assort product offerings: Because channels provide time, place and ownership utility, they make products available when, where and in the sizes and quantities that customers want i.e. they synchronize needs. Distribution channels create efficiencies by reducing the number of transactions necessary for goods to flow from many different manufacturers to large numbers of customer. Mass production Manufacturers

Storage/bulk breaking

Smaller quantities

Intermediaries Seasonal Large quantities Distribution channel specialization:

Re-assortment Synchronize needs

Consumer Continuous needs Convenient shopping

6 Specialized activities – In order for products to move from manufacturers to users, the products must be handled, packaged, assembled, stored, shipped, displayed, sold and serviced. Each of these activities involves costs and is performed by firms operating in the channel based upon their skills and efficiencies. The 3 main types of specialized activities are: 1. 2. 3.

Transactional activities: Buying, selling, pricing, and promoting the products, and risk taking, are involved in moving the goods through the channel Physical activities: Warehousing, order-processing, storing, sorting, transporting or repairing products Facilitating activities: Ease the sale of the good to end-users by means of product grading, marketing research, providing advice on the product’s use and assisting customers with financing for the purchase.

Transactional activities Buy products from sellers Promote products to customers in various ways (point-of-sale, advertising)  Absorb risk of product ownership (inventory risks, obsolescence risk)  Price products for resale  

    

Physical activities Store products Transport product from producers to consumers Sort and package products Bulk breaking of products Service and repair product

Facilitating activities Assist with customer financing  Grade product quality and label accordingly  Provide market information (marketing research/marketing information system)  Advise customers on product use and maintenance 

Types of specialists: 1.

2.

Functional service provider: Actively engaged in the day-to-day performance of the channel – moving, modifying or otherwise physical handling a product during the distribution process, or through direct involvement in the selling process e.g. warehousing Support specialists: Firms that facilitate overall channel performance by providing essential ingredients or services. Unlike functional specialists, a support firm doesn’t engage in actual selling or in the logistics process of the channel. Many support services are transparent to the physical path a product follows to market. They are essential in the satisfactory completion of the overall distribution process e.g. banks and finance companies who provide funding for inventory – financial support specialist

Reasons for specialization:     

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Economic justification – lower costs at a more effective and efficient rate Risk involvement – risk is spread among distribution partners, which provides an incentive to perform at a higher standard Concentration and alliances – many supplementary services are forming alliances giving them greater power, resources and more of a one-stop approach. Service specialist leadership – access to state-of-the-art IT and excellent logistical operations can lead to specialization opportunities Changing attitudes towards outsourcing – business outsource external companies to specialize in their noncore business activities to remove vertical integration. This occurs when a manufacturer assumes control over several production/distribution steps involved in the creation of its product or product range The availability of resources The ability to exercise control over outsourced services

Functional services specialist: 

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Assembly: The providers of assembly services modify products while they are being processed in the distribution channel. The economic justification for conducting final product assembly within the distribution channel is based on the potential benefits of form postponement. Commonly performed tasks are labelling, painting, mixing and any activity that anticipates future product requirements such as variants in size and shape Fulfilment: A specialized for of handling and arranging for the shipment of promotional or point-of-sale advertising materials. The fulfilment firm is contracted to process and ship particular types of merchandise or

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supplies on behalf of the manufacturer, wholesaler or retailer. The arrangement is for the fulfilment company to maintain physically but not own the associated inventory. Sequencing: Entails sorting merchandise into a unique configuration to satisfy a particular customer’s requirements. Since most customers have unique requirements, sequencing is customized. A vital aspect of just-in-time (JIT) support i...