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Distribution Channels

and

Logistics Management

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Distribution ChannelsDistribution Channels

• A set of interdependent organizations (intermediaries) involved in the process of making a product or service available for use or consumption.

• Channel decisions– affect other marketing decisions

– involve long-term commitments

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Role of IntermediariesRole of Intermediaries

• Greater efficiency in making goods available to target markets.

• Intermediaries provide–Contacts

–Experience

–Specialization

–Scale of operation

• Match supply and demand.

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Channel FunctionsChannel Functions

•Information: Gathering & distributing marketing research and intelligence information about actors and forces in the marketing environment needed for planning and aiding exchange

•Promotion: Developing and spreading persuasive communication about an offer

•Contact: Finding and communicating with prospective buyers

•Matching: Shaping & fitting the offer to the buyer’s needs, including activities such as manufacturing, grading, assembling & packaging

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• Negotiation: Reaching an agreement on price and other terms of the offer so that ownership or possession can be transferred.

• Physical Distribution: Transporting and storing goods.

• Financing: Acquiring and using funds to cover the costs of the channel work.

• Risk taking: Assuming the risks of carrying out the channel work.

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Basic Channels of Distribution

Basic Channels of Distribution

Manufacturers/products

Agents/brokers

Wholesalers/distributors

RetailersRetailers

Consumers and organizational end users

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Channel LevelsChannel Levels

•Manufacturer

•Wholesaler

•Retailer

•Consumer

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Channel Behavior and ConflictChannel Behavior and Conflict

• The channel will be most effective when:– each member is assigned tasks it can do best.– all members cooperate to attain overall channel goals

and satisfy the target market.

• Focus on individual goals leads to conflict– Horizontal Conflict Horizontal Conflict occurs among firms at the same level

of the channel.

– Vertical Conflict Vertical Conflict occurs between different levels of the same channel.

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Vertical Marketing SystemsVertical Marketing Systems

• Corporate– common ownership at different channel levels

• Contractual– contractual agreement among channel members

• Administered– leadership assumed by dominant membersleadership assumed by dominant members

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Innovations in Marketing SystemsInnovations in Marketing Systems

Horizontal MarketingHorizontal MarketingSystemSystem

Horizontal MarketingHorizontal MarketingSystemSystem

Hybrid MarketingHybrid MarketingSystemSystem

Hybrid MarketingHybrid MarketingSystemSystem

Two or more companies at one channel level join together to increase coverage

Example:Banks in Grocery Stores

A single firm sets up two or more marketing channels to increase coverage

Example:Retailers, Catalogs, and Sales Force

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Channel Design Decisions Channel Design Decisions

Analyzing Consumer Service NeedsAnalyzing Consumer Service Needs

Setting Channel Objectives & Constraints Setting Channel Objectives & Constraints

ExclusiveDistributionExclusive

DistributionSelective

DistributionSelective

DistributionIntensive

DistributionIntensive

Distribution

Identifying Major AlternativesIdentifying Major Alternatives

Evaluating the Major AlternativesEvaluating the Major Alternatives

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Distribution-Scope StrategiesDistribution-Scope Strategies

• Exclusive Distribution

–Limiting the distribution to only one intermediary in the territory

• Intensive distribution

–Distribute from as many outlets as possible to provide location convenience

• Selective distribution

–Appoint several but not all retailers

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Exclusive Distribution:AdvantagesExclusive Distribution:Advantages

• Maximize control over service level/output

• Enhance product’s image & allow higher markups

• Promotes dealers loyalty, better forecasting, better inventory and merchandising control

• Restricts resellers from carrying competing brands

• Ex: luxury cars & watches

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Exclusive Distribution: DisadvantagesExclusive Distribution: Disadvantages

•Betting on one dealer in each Betting on one dealer in each marketmarket•Only suitable for high price, Only suitable for high price, high margin, and low volume high margin, and low volume productsproducts

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Intensive DistributionIntensive Distribution

Advantages:Advantages:Increased sales, wider customer Increased sales, wider customer recognition, and impulse buyingrecognition, and impulse buying

Disadvantages:Disadvantages:Characteristically low price and low-Characteristically low price and low-margin products that require a fast margin products that require a fast turnover turnover Difficult to control large number of Difficult to control large number of retailersretailers

E.g. NewspapersE.g. NewspapersMost fast moving consumer goodsMost fast moving consumer goods

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Selective DistributionSelective Distribution

–Better market coverage than exclusive distribution

–More control and less cost than intensive distribution

–Concentrate effort on few productive outlets

–Selected firms capable of carrying full product line and provide the required service

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Selective Distribution (cont’dSelective Distribution (cont’d

Disadvantages:Disadvantages:May not cover the market May not cover the market adequatelyadequatelyDifficult to select dealers Difficult to select dealers (retailers) that can match (retailers) that can match your requirement and your requirement and goalsgoals

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Channel Management DecisionsChannel Management Decisions

SelectingSelecting

MotivatingMotivating

EvaluatingEvaluating

FE

ED

BA

CK

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LogisticsLogistics

• Involves entire supply chain

• Increasing importance of logistics–effective logistics is becoming a key to winning and

keeping customers.

– logistics is a major cost element for most companies.

–the explosion in product variety has created a need for improved logistics management.

– information technology has created opportunities for major gains in distribution efficiency.

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Goals of Logistics systemGoals of Logistics system

• Provide a Targeted Level of Customer Service at the Least Cost.

• Maximize Profits, Not Sales.

Higher Distribution Costs/ Higher Customer Service Levels

Lower Distribution Costs/ Lower Customer Service Levels

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Logistics FunctionsLogistics Functions

• Order Processing

• Warehousing

• Inventory Management

• Transportation

• Design system to minimize costs of attaining objectives

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Transportation ModesTransportation Modes

RailNation’s largest carrier, cost-effective for shipping bulk products, piggyback

RailNation’s largest carrier, cost-effective for shipping bulk products, piggyback

TruckFlexible in routing & time schedules, efficient

for short-hauls of high value goods

TruckFlexible in routing & time schedules, efficient

for short-hauls of high value goods

WaterLow cost for shipping bulky, low-value

goods, slowest form

WaterLow cost for shipping bulky, low-value

goods, slowest form

PipelineShip petroleum, natural gas, and chemicals

from sources to markets

PipelineShip petroleum, natural gas, and chemicals

from sources to markets

AirHigh cost, ideal when speed is needed or to

ship high-value, low-bulk items

AirHigh cost, ideal when speed is needed or to

ship high-value, low-bulk items

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Integrated Logistics ManagementIntegrated Logistics Management

Concept Recognizes that Providing Better Customer Service and Trimming Distribution Costs Requires

TeamworkTeamwork, Both Inside the Company and Among All the Marketing Channel Organizations.

Cross-Functional Teamwork inside the Company

Cross-Functional Teamwork inside the Company

Building Channel PartnershipsBuilding Channel Partnerships

Third-Party LogisticsThird-Party Logistics