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PROJECT REPORT

DISTRIBUTION CANNELS

Prepared for the Mumbai University in the partial fulfilment of the requirement for the award of the degree in

MASTERS OF COMMERCE PART 1

Submitted by

Name: Mrs. Nirmala A. Crasto

Year: 2013-2014

St. Joseph College, Satpala

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Certificate

This is to certify that the project on “Distribution Channels” has been carried out by Mrs. Nirmala A. Crasto, who is bonafied student of St. Joseph College of Arts & Commerce, in partial fulfilment of the requirement of M. Com Part I. It is also to certify that the work done is true and fair and is not meant to disturb the opinion of others who review this project.

Student

Internal examiner External Examiner

ST. JOSEPH COLLEGE OF ARTS AND COMMERCE

NAME: MRS. NIRMALA A. CRASTO

CLASS: M- COM I

SUB: MARKETING STRATEGIES & PLANS

YEAR: 2013-2014

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ACKNOWLEDGEMENT

I am pleased to present this project to my lecturer and to the examiner.

I hereby give thanks to all my lecturers who gave the challenging subjects on which we students of M-Com had to collect the correct information, arrange it and finally present it to you. Thanks for all your timely support and guidance, especially Prof. Gatting Koli.

My deep sense of gratitude for my friend Yugandhara and all my class friends and also to my hubby Mr. Allwyn Crasto (Master Mariner), for the support.

Thanks to Mr. Bill Gates for MS Word, Michel Dell for Laptop and Last but not least my children Anstyne & Niall for sometimes keeping me free to do some studies.

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Contents:

Introduction Types of Distribution Channels Distribution Channels Strategies The challenges of multi-distribution Channels Disadvantages of Multi-distribution Channels Multichannel Marketing Major functions of distribution Channels Advantages of Channels of distribution of small business How to target marketing needs in distribution Channels Case Study Distribution channels considerations Bibliography.

Channels of Distribution : Introduction

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A channel of distribution or trade channel is defined as the path or route along which goods move from producers or manufacturers to ultimate consumers or industrial users. In other words, it is a distribution network through which producer puts his products in the market and passes it to the actual users. This channel consists of :- producers, consumers or users and the various middlemen like wholesalers, selling agents and retailers(dealers) who intervene between the producers and consumers. Therefore, the channel serves to bridge the gap between the point of production and the point of consumption thereby creating time, place and possession utilities.

A channel of distribution consists of three types of flows:-

Downward flow of goods from producers to consumers

Upward flow of cash payments for goods from consumers to producers

Flow of marketing information in both downward and upward direction i.e. Flow of information on new products, new uses of existing products, etc from producers to consumers. And flow of information in the form of feedback on the wants, suggestions, complaints, etc from consumers/users to producers.

An entrepreneur has a number of alternative channels available to him for distributing

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his products. These channels vary in the number and types of middlemen involved. Some channels are short and directly link producers with customers. Whereas other channels are long and indirectly link the two through one or more middlemen. 

These channels of distribution are broadly divided into four types:-

Producer-Customer:- This is the simplest and shortest channel in which no middlemen is involved and producers directly sell their products to the consumers. It is fast and economical channel of distribution. Under it, the producer or entrepreneur performs all the marketing activities himself and has full control over distribution. A producer may sell directly to consumers through door-to-door salesmen, direct mail or through his own retail stores. Big firms adopt this channel to cut distribution costs and to sell industrial products of high value. Small producers and producers of perishable commodities also sell directly to local consumers.

Producer-Retailer-Customer:- This channel of distribution involves only one middlemen called 'retailer'. Under it, the producer sells his product to big retailers (or retailers who buy goods in large quantities) who in turn sell to the ultimate consumers.This channel relieves the manufacturer from burden of selling the goods himself and at the same time gives him control over the process of distribution. This is often suited for distribution of consumer durables and products of high value.

Producer-Wholesaler-Retailer-Customer:- This is the most common and traditional channel of distribution. Under it, two middlemen i.e. wholesalers and retailers are involved. Here, the producer sells his product to wholesalers, who in turn sell it to retailers. And retailers finally sell the product to the ultimate

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consumers. This channel is suitable for the producers having limited finance, narrow product line and who needed expert services and promotional support of wholesalers. This is mostly used for the products with widely scattered market.

Producer-Agent-Wholesaler-Retailer-Customer:- This is the longest channel of distribution in which three middlemen are involved. This is used when the producer wants to be fully relieved of the problem of distribution and thus hands over his entire output to the selling agents. The agents distribute the product among a few wholesalers. Each wholesaler distribute the product among a number of retailers who finally sell it to the ultimate consumers. This channel is suitable for wider distribution of various industrial products.

An entrepreneur has to choose a suitable channel of distribution for his product such that the channel chosen is flexible, effective and consistent with the declared marketing policies and programmes of the firm. While selecting a distribution channel, the entrepreneur should compare the costs, sales volume and profits expected from alternative channels of distribution and take into account the following factors:-

Product Consideration:- The type and the nature of products manufactured is one of the important elements in choosing the distribution channel. The major product related factors are:- 

Products of low unit value and of common use are generally sold through middlemen. Whereas, expensive consumer goods and industrial products are sold directly by the producer himself.

Perishable products; products subjected to frequent changes in fashion or style as well as heavy and bulky products follow relatively shorter routes and are generally distributed directly to minimise costs.

Industrial products requiring demonstration, installation and after sale service are often sold directly to the consumers. While the consumer products of technical nature are generally sold through retailers.

An entrepreneur producing a wide range of products may find it economical to set up his own retail outlets and sell directly to the consumers. On the other hand, firms producing a narrow range of products may their products distribute through wholesalers and retailers.

A new product needs greater promotional efforts in the initial stages and hence few middlemen may be required. 

Market Consideration:- Another important factor influencing the choice of distribution channel is the nature of the target market. Some of the important features in this respect are:- 

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If the market for the product is meant for industrial users, the channel of distribution will not need any middlemen because they buy the product in large quantities. short one and may as they buy in a large quantity. While in the case of the goods meant for domestic consumers, middlemen may have to be involved.

If the number of prospective customers is small or the market for the product is geographically located in a limited area, direct selling is more suitable. While in case of a large number of potential customers, use of middlemen becomes necessary.

If the customers place order for the product in big lots, direct selling is preferred. But,if the product is sold in small quantities, middlemen are used to distribute such products. 

Other Considerations:- There are several other factors that an entrepreneur must take into account while choosing a distribution channel. Some of these are as follows:- 

A new business firm may need to involve one or more middlemen in order to promote its product, while a well established firm with a good market standing may sell its product directly to the consumers.

A small firm which cannot invest in setting up its own distribution network has to depend on middlemen for selling its product. On the other hand, a large firm can establish its own retail outlets.

The distribution costs of each channel is also an important factor because it affects the price of the final product. Generally, a less expensive channel is preferred. But sometimes, a channel which is more convenient to the customers is preferred even if it is more expensive.

If the demand for the product is high, more number of channels may be used to profitably distribute the product to maximum number of customers. But, if the demand is low only a few channels would be sufficient.

The nature and the type of the middlemen required by the firm and its availability also affects the choice of the distribution channel. A company prefers a middlemen who can maximise the volume of sales of their product and also offers other services like storage, promotion as well as aftersale services. When the desired type of middlemen are not available, the manufacturer will have to establish his own distribution network.

All these factors or considerations affecting the choice of a distribution channel are inter-related and interdependent. Hence, an entrepreneur must choose the most efficient and cost effective channel of distribution by taking into account all these factors as a whole in the light of the prevailing economic conditions. Such a decision is very important for a business to sustain long term profitability.

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Distribution Channels

Each layer of marketing intermediaries that performs some work in bringing the product to its final buyer is a "channel level". The figure below shows some examples of channel levels for consumer marketing channels:

In the figure above, the first two channels are "indirect-marketing channels". 

Channel 1 contains two intermediary levels - a wholesaler and a retailer. A wholesaler typically buys and stores large quantities of several producers’ goods and then breaks into the bulk deliveries to supply retailers with smaller quantities. For small retailers with limited order quantities, the use of wholesalers makes economic sense. This arrangement tends to work best where the retail channel is fragmented - i.e. not dominated by a small number of large, powerful retailers who have an incentive to cut out the wholesaler. A good example of this channel arrangement in the UK is the distribution of drugs.

Channel 2 contains one intermediary. In consumer markets, this is typically a retailer. The consumer electrical goods market in the UK is typical of this arrangement whereby producers such as Sony, Panasonic, Canon etc. sell their goods directly to large retailers and e-tailers such as Comet, Tesco and Amazon which then sell onto the final consumers.

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Channel 3 is called a "direct-marketing" channel, since it has no intermediary levels. In this case the manufacturer sells directly to customers. An example of a direct marketing channel would be a factory outlet store. Many holiday companies also market direct to consumers, bypassing a traditional retail intermediary - the travel agent.

Distribution Channel Strategies:

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Companies that manufacture products have to ensure they eventually reach their final customers. These customers may be difficult to identify, hard to reach, or there may be so many with small transactions that the manufacturing company can't handle them. On the other hand, the products may be complicated, require extensive support, or require special, informed promotion. Depending on these factors, a company

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may decide to use different distribution channels to funnel the products to their markets and serve their customers efficiently.Sponsored Link

Distribution

Companies either market directly to their final customers or use intermediaries to handle specific marketing tasks. Car manufacturers don't sell directly to consumers but instead use dealers as their retail outlets. Candy bar makers sell to wholesalers who in turn sell to retail stores. Foreign companies deal with customs, shipping and currencies, and hire agents to bring their products into the country and sell to wholesalers. The number of intermediaries depends on the market and the products.

Market Influence

The goal of the manufacturer is to deliver maximum value to customers. Often the market structure makes it difficult for the manufacturer to service consumers directly. Instead, specialized intermediaries take over specific tasks. If there are few, large customers concentrated in one area, it makes sense for the manufacturer to serve them directly. If thousands of customers are spread around the country and order small quantities, the manufacturer may be better off focusing on production and leaving distribution to others.

Product Influence

A manufacturer that produces small quantities of high-value products can easily find the few customers required. A mass-market producer of millions of low-cost items requires a major effort to service customers and usually uses intermediaries. Products that require special expertise or quick delivery force manufacturers to sell directly or limit the number of intermediaries, while manufacturers can effectively sell standardized products and those with a long shelf life through wholesale channels. Manufacturers have to balance costs and customer convenience with ensuring the product marketing is accurate and customer support is adequate.

Manufacturer Influence

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The manufacturer controls the distribution strategy but the decision on the most effective way to service customers is often determined by the company's size, resources or capabilities. A small producer doesn't have the resources to set up a huge distribution network and relies on wholesalers instead. Companies focused on product design and manufacturing often don't have marketing expertise and leave that to retailers. If the manufacturer feels the existing distribution channels serve his purpose, there is no reason to set up a parallel organization.

Potential Strategies

Distribution strategy characteristics include the structure of the channel and the nature of the partners. Companies can gain a competitive advantage by creating shorter, low-cost channels or by selecting partners who fulfill their role more effectively than those used by competitors. On the other hand, manufacturers can concentrate on reducing production costs and feeding low-cost products into an existing channel network. The optimal distribution channel strategy uses only intermediaries that add value for the final customer, either by reducing costs or by delivering additional convenience, service or functions.

The Challenges of Multiple Distribution Channels

Selling in different locations or using different distribution methods can take your business to the next level by significantly increasing your sales and profits. Depending on which distribution channels you use, however, the increase in sales might not be worth the administrative time and added costs. Understanding how to evaluate your distribution channel choices will help you make the right decisions for expanding your business.

Managing Shipping

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When you use only one distribution channel, you have lower costs to sell and deliver your product than if you use multiple channels. For example, if you use a wholesaler, you deliver your products to him, and he ships them to the various retailers who sell your products. When you add online selling, a wholesaler, retailers you service directly, catalogs and distributors, you might need multiple trucks or expanded shipping services, paying shipping fees on multiple, smaller shipments, rather than on one large shipment.

Increased Administration

Selling in only one place or using only one method requires much less paperwork and administrative oversight than using multiple distribution channels. Not only do you have additional invoicing and receivables collection but also logistics coordination, from production to warehousing to shipping. If you have an opportunity to add a new distribution channel, review the staff resources you will need to service the channel to make sure you can effectively take advantage of the opportunity.

Evaluating Costs of Sales

The added costs of some distribution channels sometimes outweigh the additional revenues you receive. For example, adding online sales might require a website program, leasing a shopping cart, credit card processing fees, inbound telephone calls from shoppers and shipping and handling fees, such as staff time, packaging, insurance and postage or delivery charges. Catalogs require graphic design, copy writing, postage, inbound phone calls and order fulfilment. Create a budget for each new distribution channel you add, and review multiple sales volume scenarios to determine at what point you will break even and if the drain on your administrative resources is worth it. If you use distributors, retailers, distributors and sales reps, you must also factor in discounts and commissions.

Providing Customer Service

When you use multiple distribution channels, you increase your customer service issues, with customers now including your distributors. When you negotiate contracts with wholesalers and distributors, determine who will handle retailer complaints. If retailers sell your product, consider your cost to visit stores to help them properly display and promote your products, your time to handle returns and questions and your cost to provide them with in-store promotional materials. If you use sales reps,

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you will need to train them, field questions they are getting from their customers, supply them with sales materials and administer their contracts, invoices and returns.

Brand Management

If you’re a high-end product, you might not want it sold in big boxes or mom-and-pop stores. If you sell online using a third-party Internet sales company, it might advertise your product on all of its partner websites, which might include sites totally inappropriate for maintaining your brand image. Take into account the effects each potential distribution channel will have on your brand, and discuss brand management with any wholesaler, retailer, distributor or sales rep you use.

Disadvantages of Multiple Marketing Channels

The use of multiple marketing channels is a method used by many small businesses and large corporations. Marketers use multiple marketing channels as a way to reach a broader audience and maximize the impact of the overall strategy. Although there are benefits to such an approach, the disadvantages are significant and should be considered.

Loss of Focus

The more different types of marketing channels your small business uses to get the word out, the less focused each of your individual marketing campaigns may become. Small businesses in particular tend to have a harder time creating, distributing and monitoring more than one marketing campaign distributed through more than one marketing channel at a time. This is in part due to the lack of a dedicated marketing department in most cases, and the need to maintain relationships with a diverse array of marketing partners. A laser-like focus on the performance and return on investment of each campaign is a necessary part of successful marketing and the use of multiple channels may not allow for that focus.

Mixed Messages

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It is often difficult for businesses who engage in campaigns that utilize multiple marketing channels to maintain a constant and consistent marketing message throughout. When you have more than one advertising campaign running at any one time, the messages being sent may intentionally not be the same for different segments of the market. Consistency is the key to establishing brand and product recognition and prestige, and to developing loyalty among the consumer base. When the messages you are producing are confused or inconsistent, the result may be a lack of trust and a generally negative response to your advertising.

Increased Expense

The more variation there is in your marketing channels, the more staff you will need to run them. In addition to staffing concerns, varied marketing channels often cost more to develop, launch and run. For many small businesses, this is a primary concern since marketing funds are limited and any expense directly impacts the rest of the business. Marketing commitments and costs tend to grow organically as the business succeeds and the number and types of campaign increases. Keeping a tab on what is spent, how and why is often the No. 1 concern for small-business owners. If sales numbers are going up, the extra costs are often overlooked. If not, the money spent on multiple marketing channels can become a burden very quickly.

Scheduling

The scheduling involved with campaigns that are distributed through multiple marketing channels is always a challenge. Each type of campaign and each form of promotion typically has its own development, completion and distribution schedule. Keeping track of what runs when is a challenge for any small business, especially those operating without a specific marketing department. Payment of external contracts that result from multiple marketing channels is another part of the scheduling process that can prove challenging and at time overwhelming. With some forms of marketing paid in full up front and others due after the ads have run, the potential for confusion and overlooked debts is real.

What Is Multichannel Marketing?

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Multichannel marketing synchronizes marketing strategy across traditional channels such as print, direct mail, advertising and retail, and internet channels such as web, email, mobile and social networking. Multichannel marketing lets customers choose how and when they access information about your products and services. According to research firm Forrester, customers using multiple channels spend three to 10 times as much as single-channel customers and have higher incomes.

Channels

Traditional marketing channels represent a one-way form of communication controlled by the advertiser. Increasingly, consumers take control and obtain their product information by reviewing the opinions of other consumers on comparison websites or social networks. They are also accessing internet channels via mobile devices such as smartphones or wireless tablet computers. To reach these consumers, marketers must develop an effective presence in all channels.

Personalization

Multichannel marketing gives customers greater choice in how they obtain information and buy products. Offering products for sale on a website gives you the opportunity to sell to customers who might find it inconvenient to visit a store. Marketers can build on that element of choice by monitoring customers’ behaviour and adapting their communications to customers’ individual preferences. Customers who communicate through online channels, for example, provide a great deal of information about their behaviour. Marketers can track the websites customers visit and the products they view. They can also monitor social networking sites. By analyzing behaviour, marketers can develop relevant marketing offers and personalize communications through customers’ preferred channels, helping to strengthen relationships.

Consistency

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To make multichannel marketing work effectively, it’s essential to present information consistently in each channel. An email campaign must communicate the same messages as an advertising campaign. Customers must find the same information on a website and in product literature. Consistency is important when customers use multiple channels in a single transaction. A customer may respond to a print advertisement by visiting a website and then calling a contact center to discuss requirements in more detail. The customer must receive consistent information at each stage.

Sales

A multichannel strategy gives you more options for building sales. You can sell to key customers via a direct sales force, reach smaller customers in other regions or other countries through a distributor network, or give customers the option of ordering from a website or a call centre. Moving the order process online can reduce your sales costs, as well as increasing convenience for customers.

The Major Functions of a Distribution Channel

It’s not enough to produce or make goods or services because it isn't a given that they will get to the end user. Products and services don’t usually get to the end user directly, especially when the end user is a consumer. Distribution channels are usually the vehicle that transfers goods from producers to consumers.

Breaking Bulk

In the pursuit of efficiency, manufacturers often produce large quantities at a time, but consumers usually buy only a few or even one product. Distribution channels, such as retail store chains, can sell smaller quantities, even though the producer made thousands. Something similar occurs higher up the distribution chain. Relative to the amount produced, retailers can only buy small amounts of the various products they sell. So, wholesalers act as agents between manufacturers and retailers.

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Consolidation and Distribution

Consumers often prefer to buy a wide variety of consumer goods at one time and place. Retail stores enable consumers to do just that because they stock and display a great number of different products. Up the distribution channel chain, wholesalers can accumulate large amounts of many different products from different manufacturers and efficiently deliver many products to many retailers. This lowers carrying and transportation costs.

Facilitating Functions

Distribution channels offer a variety of services that ease and enhance selling and buying goods. They offer credit to customers and accept returned merchandise. They also advertise and promote products through special displays, sales prices and inclusion in ads and fliers. Depending on the product, distribution channels service the products they sell. This includes maintenance and repair services, and they often are trained and supported by the manufacturer. Distribution channels may even add value to products before distributing the customers.

Customer Relationships

Consumers often trust distribution channels more than they do manufacturers. They expect these channels to provide objective information about products and originating companies. Distribution channels communicate with customers and perform transaction functions. They also provide marketing and sales support assistance. Because they are closer to customers and end users, they can provide manufacturers with a wealth of information on customer preferences. This can include consumer likes and dislikes and price sensibility.

The Advantages of Channel of Distribution to a Small Business

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Using a channel of distribution to market your products gives you different options for reaching and serving national or international customers and prospects outside your region. Channels of distribution include wholesalers, retailers, distributors and the Internet. Just selecting a different channel of distribution does not guarantee success. You must motivate, manage and support your channel partners to grow your business.

Reach

A channel of distribution makes it possible to deal with customers that you could not economically reach with your own sales force or store. A network of distributors or retailers, for example, provides you with ready-made coverage of other regions or the whole country without investing in your own resources. If you are planning to export products, you can deal with established local distributors in different territories, rather than trying to establish a presence from scratch.

Cost

Using independent distributors rather than setting up your network or direct sales operation also reduces the cost of dealing with customers. Distributors take responsibility for local marketing taking orders, holding stock, arranging delivery, invoicing customers and provide customer service and support. In return for providing the service, they receive a discount on the purchase price of your products as well as any marketing support you provide. This reduces your customer administration costs and enables you to deal efficiently with larger numbers of customers.

Customer Base

Working with a network of distributors gives you access to the distributor’s own customers, increasing the size of your potential customer base without incurring additional sales and marketing costs. If possible, choose a distributor that does not market products that are competitive to yours. If you do not have an exclusive arrangement, you will have to offer incentives to encourage the distributor to give preference to your products.

Market Knowledge

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Distributors provide your company with local market knowledge, enabling you to enter new markets quickly and effectively without the cost of market research or marketing programs to establish your company. In export markets, distributors also provide knowledge of local regulations and other issues that could prove a barrier to entry.

Internet

Marketing your products on the Internet provides another important channel to market. The Internet offers existing and potential customers anywhere in the world the convenience of making inquiries or placing orders around the clock without trying to find a local outlet. Using the Internet as a channel to market also reflects the changing way customers carry out research on websites and take account of opinions on product review sites, forums and social networking sites.

How to Target Marketing Needs in Distribution Channels

An effective distribution channel provides your business with a strong competitive advantage, enabling you to sell to customers or offer service in regions that your own sales and service teams cannot cover. To ensure that your distributors operate effectively on your behalf, you need to provide targeted marketing support that keeps your channel partners informed, motivated and committed to your business.

1

Appoint a channel marketing manager to work with distributors and identify their marketing needs. Allocate budgets that the manager can use to develop marketing campaigns with different distributors. Set up a tiered structure for the distributor network offering different levels of marketing support to each tier. A tiered structure based on sales volume allocates most marketing resources to the top-performing distributors. Motivate distributors to improve sales and move to a higher tier.

2

Assess distributors’ product and market knowledge. Provide training to improve knowledge so that distributors recognize sales opportunities and have the product knowledge to recommend the right solution to customers. Specify successful completion of product training as an additional requirement for promotion to a higher tier. Publish updates when you release new products or change product specifications.

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3

Provide all distributors with basic branding material, such as signage, posters, logos and templates for email, direct mail and advertisements. Publish guidelines on using branding material to ensure a consistent identity throughout the distribution network. Reinforce the value of the branding program by running advertisements that promote the quality of service available from your authorized distributor network.

4

Develop a range of marketing support programs to target the needs of different distributors. Provide top-tier distributors with funding and creative content to run targeted advertising or direct marketing campaigns designed to develop business in specific, high-growth market sectors. Offer other distributors templates for low-cost email or direct mail campaigns.

5

Drive business to the network by running advertising or marketing campaigns promoting products or services only available from authorized distributors. Include a response mechanism to capture prospects’ contact details and forward names to distributors for follow up. Set up a website page where customers can locate their nearest distributor.

6

Strengthen relationships with distributors by communicating regularly through newsletters, product updates and personal visits by the channel marketing manager. Hold regular meetings to brief distributors on business and marketing issues. Arrange quarterly meetings in different regions to minimize travelling time. Hold an annual meeting for the entire network to review performance, present strategy for the next year and make major announcements.

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Case study: Dell—Distribution and supply chain innovation

In 1983, 18-year-old Michael Dell left college to work full-time for the company he founded as a freshman, providing hard-drive upgrades to corporate customers. In a year’s time, Dell’s venture had $6 million in annual sales. In 1985, Dell changed his strategy to begin offering built-to-order computers. That year, the company generated $70 million in sales. Five years later, revenues had climbed to $500 million, and by the end of 2000, Dell’s revenues had topped an astounding $25 billion. The meteoric rise of Dell Computers was largely due to innovations in supply chain and manufacturing, but also due to the implementation of a novel distribution strategy. By carefully analyzing and making strategic changes in the personal computer value chain, and by seizing on emerging market trends, Dell Inc. grew to dominate the PC market in less time than it takes many companies to launch their first product.

No more middleman: Dell started out as a direct seller, first using a mail-order system, and then taking advantage of the internet to develop an online sales platform. Well before use of the internet went mainstream, Dell had begun integrating online order status updates and technical support into their customer-facing operations. By 1997, Dell’s internet sales had reached an average of $4 million per day. While most other PCs were sold preconfigured and pre-assembled in retail stores, Dell offered superior customer choice in system configuration at a deeply discounted price, due to the cost-savings associated with cutting out the retail middleman. This move away from the traditional distribution model for PC sales played a large role in Dell’s formidable early growth. Additionally, an important side-benefit of the internet-based direct sales model was that it generated a wealth of market data the company used to efficiently forecast demand trends and carry out effective segmentation strategies. This data drove the company’s product-development efforts and allowed Dell to profit from information on the value drivers in each of its key customer segments.

Virtual integration: On the manufacturing side, the company pursued an aggressive strategy of “virtual integration.” Dell required a highly reliable supply of top-quality PC components, but management did not want to integrate backward to become its own parts manufacturer. Instead, the company sought to develop long-term relationships with select, name-brand PC component manufacturers. Dell also required its key suppliers to establish inventory hubs near its own assembly plants. This allowed the company to communicate with supplier inventory hubs in real time for the delivery of a precise number of required components on short notice. This “just-in-time,” low-inventory strategy reduced the time it took for Dell to bring new PC models to market and resulted in significant cost advantages over the traditional stored-inventory method. This was particularly powerful in a market where old inventory quickly fell into obsolescence. Dell openly shared its production schedules, sales forecasts and plans for new products with its suppliers. This strategic closeness with supplier partners allowed Dell to reap the benefits of vertical integration, without requiring the company to invest billions setting up its own manufacturing operations in-house.

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Innovation on the assembly floor: In 1997, Dell reorganized its assembly processes. Rather than having long assembly lines with each worker repeatedly performing a single task, Dell instituted “manufacturing cells.” These “cells” grouped workers together around a workstation where they assembled entire PCs according to customer specifications. Cell manufacturing doubled the company’s manufacturing productivity per square foot of assembly space, and reduced assembly times by 75%.

Dell combined operational and process innovation with a revolutionary distribution model to generate tremendous cost-savings and unprecedented customer value in the PC market.

The following are some key lessons from the story of Dell’s incredible rise:

1. Disintermediation (cutting out the middleman): Deleting a player in the distribution chain is a risky move, but can result in a substantial reduction in operating costs and dramatically improved margins. Some companies that have surged ahead after they eliminated an element in the traditional industry distribution chain include:

Expedia (the online travel site that can beat the rates of almost any travel agency, while giving customers more choice and more detailed information on their vacation destination)

ModCloth (a trendy virtual boutique with no bricks-and-mortar retail outlets to drive up costs)

PropertyGuys.com (offers a DIY kit for homeowners who want to sell their houses themselves)

iTunes (an online music purchasing platform that won’t have you sifting through a jumble of jewel cases at your local HMV)

Amazon.com (an online sales platform that allows small-scale buyers and sellers to access a broad audience without the need for an expensive storefront or a custom website)

Netflix (the no-late-fees online video rental company that will ship your chosen video rentals right to your door)

2. Enhancing customer value: Foregoing the retail route allowed Dell to simultaneously improve margins while offering consumers a better price on their PCs. This move also gave customers a chance to configure PCs according to their specific computing needs. The dramatic improvement in customer value that resulted from Dell’s unique distribution strategy propelled the company to a leading market position.

3. Process and operations innovation: Michael Dell recognized that “the way things had always been done” wasn’t the best or most efficient way to run things at his company. There are countless examples where someone took a new look at a company process and realized that there was a much better way to get things done. It is always

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worth re-examining process-based work to see if a change could improve efficiency. This is equally true whether you’re a company of five or 500.

4. Let data do the driving: Harnessing the easily accessible sales and customer feedback data that resulted from online sales allowed Dell to stay ahead of the demand curve in the rapidly evolving PC market. Similarly, sales and feedback data was helpful in discovering new ways to enhance customer value in each of Dell’s key customer segments. Whether your company is large or small, it is essential to keep tabs on metrics that could reveal emerging trends, changing attitudes, and other important opportunities for your company.

Let us also consider it in case of Tourism

Understanding the various ways your product can be sold to potential customers — both in Australia and overseas — is vital to ensuring the sustained viability of your business.   Whilst a significant proportion of your customers will find you by themselves, (either online or through your other marketing and promotional channels), it’s important to know about the different distribution channels and how they are likely to impact both on your product and your costs.

National Distribution

Retail travel agents

Retailers provide customers with an accessible place — either online or as a shopfront — to book or enquire about travel products.  They sell your product to customers.  Examples of retailers commonly used by tourism businesses in Canberra and the region include the CRVC managed by Australian Capital Tourism (see www.visitcanberra.com.au), as well as motoring organisations such as the NRMA (seewww.mynrma.com.au).  Expect to pay a commission (around 10 per cent) because the retailer is performing a service on your behalf by selling your product.

Wholesalers

Wholesalers are businesses that will sell your product through established retail distribution channels — both shopfront and online — on your behalf.  They also sell individual product elements and link them to form packages.  An example of a major wholesaler is Qantas Holidays.  Qantas Holidays provides ground-only

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content and packages that can be purchased as is or combined with airfares.  They negotiate their product rates directly with suppliers and produce packages that are distributed to retail travel agents or sold directly to consumers via their website (see www.qantas.com.au). Like retail travel agents, wholesalers are paid commissions (approximately 20 per cent), and some may charge additional fees for marketing and other services.

International Distribution

Inbound tour operators (ITOs)

Inbound tour operators (ITOs) devise and coordinate travel arrangements in Australia on behalf of overseas travel agents and overseas wholesalers.  This usually involves planning the Australian itinerary, negotiating prices, costing the various components in the itinerary such as transfers, accommodation and tours, as well as arranging payment for the products.   ITOs are paid commissions of between 25 and 30 per cent.

AOT Inbound is the leading Australian Inbound Tour Operator, handling over 120,000 visitors per annum in Australia and New Zealand from North America, the UK, Europe and South Africa. They also operate one of the most sophisticated travel trade booking search engines in the world http://www.aot.com.au/content.php?id=8

Wholesalers

Whilst Qantas Holidays is an example of an Australian-based wholesaler, there are also overseas wholesalers who use the services of an Australian-based ITO to negotiate rates for and coordinate their Australian wholesale program.  An example of a wholesaler specialising in worldwide bookings is Saltours International.  With a comprehensive online system, Saltours provides a range of services including airport transfers, car rentals accommodation, tours and special packages.www.saltoursweb.com

International retailers

Retail travel agents based overseas sell packages from wholesale companies (like Qantas Holidays) direct to their customers, either through their

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shopfronts or online.  Some retail agents also produce their own packages in-market using the product and pricing provided to them by ITOs (like AOT Inbound).

Again, as with the national distribution channels, commissions are payable on the transactions with these kinds of intermediaries.

Distribution Channel Commission

International or domestic retailer who sell directly to a customer 10 per cent

International or domestic wholesaler who sell to retailers, who then sell to a customer 20 per cent

ITOs who sell to wholesalers, who sell to retailers, who then sell to a customer 25-30 per cent

*Table courtesy of Tourism NSW

The choice of a suitable channel of distribution is one of the most important decisions in the marketing of products because channel affects the time and costs of distribution as well as the volume of sales.

It also influences pricing and promoting efforts and dealer relations. Choice of a channel of distribution involves the selection of the best possible combination of middlemen or intermediaries.

The objective is to secure the largest possible distribution at minimum cost. The channel must be flexible and efficient. It should be consistent with the declared marketing poli-cies and programmes of the firm.

Such a channel can be selected by evaluating alternative channels in terms of their costs, sales potential and suitability. The factors affecting the choice of distribution channels may be classified as follows:

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1. Product Considerations:

The nature and type of the product have an important bearing on the choice of distribution channels. The main characteristics of the product in this respect are given below:

(a) Unit Value:

Products of low unit value and common use are generally sold through middlemen as they cannot bear the cost of direct selling. Low-priced and high turnover articles like cosmetics, hosiery goods, stationery and small accessory equipment usually flow through a long channel.

On the other hand, expensive consumer goods and industrial products are sold directly by the producers.

(b) Perish ability:

Perishable products like vegetables, fruits, milk and eggs have relatively short channels as they cannot withstand repeated handling. Same is true about articles of seasonal nature.

Goods which are subject to frequent changes in fashion and style are generally distributed through short channels as the producer has to maintain close and continuous touch with the market. Durable and non-fashion articles are sold through agents and merchants.

(c) Bulk and weight:

Heavy and bulky products are distributed through shorter channels to minimise handling costs. Coal, bricks, stones, etc., are some examples.

(d) Standardisation:

Custom-made and non-standardised products usually pass through short channels due to the need for direct contact between the producer and the consumers. Standardised and mass-made goods can be distributed through middlemen.

(e) Technical nature:

Products requiring demonstration, installation and after sale services are often sold directly the producer appoints sales engineers to sell and service industrial equipment and other products of technical nature.

(f) Product line:

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A firm producing a wide range of products may find it economical to set up its own retail outlets. On the other hand, firms with one or two products find it profitable to distribute through wholesalers and retailers.

(g) Age of the product:

A new product needs greater promotional effort and few middlemen may like to handle it. As the product gains acceptance in the market, more middlemen may be employed for its distribution. Channels used for competitive products may also influence the choice of distribution channels.

2. Market considerations:

The nature and type of customers is an important consideration in the choice of a channel of distribution. Following factors relating to the market are particularly significant.

(a) Consumer or industrial market:

The purpose of buying has an important influence on channel. Goods purchased for industrial or commercial use are usually sold directly or through agents.

This is because industrial users buy in a large quantity and the producer can easily establish a direct contact with them. To ultimate consumers, goods are sold normally through middlemen.

(b) Number and location of buyers:

When the number of potential customers is small or the market is geographically located in a limited area, direct selling is easy and economical. In case of large number of customers and widely scattered markets, use of wholesalers and retailers becomes necessary.

(c) Size and frequency of order:

Direct selling is convenient and economical in case of large and infrequent orders. When articles are purchased very frequently and each purchase order is small, middlemen may have to be used.

A manufacturer may use different channels for different types of buyers. He may sell directly to departmental and chain stores and may depend upon wholesalers to sell to small retail stores.

(d) Customer's buying habits:

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The amount of time and effort which customers are willing to spend in shopping is an important consideration. Customer expectations like desire for one-stop shopping, need for personal attention, preference for self-service and desire for credit also influence the choice of trade channel.

3. Company considerations:

The nature, size and objectives of the firm play an important role in channel decisions.

(a) Market standing:

Well-established companies with good reputation in the market are in a better position to eliminate middlemen than new and less known firms.

(b) Financial resources:

A large firm with sufficient funds can establish its own retail shops to sell directly to consumers. But a small or weak enterprise which cannot invest money in distribution has to depend on middlemen for the marketing of its products.

(c) Management:

The competence and experience of management exercises influence on channel decision. If the management of a firm has sufficient knowledge and experience of distribution it may prefer direct selling. Firms whose managements lack marketing know-how have to depend on middlemen.

(d) Volume of production:

A big firm with large, output may find it profitable to set up its own retail outlets throughout the country. But a manufacturer producing a small quantity can distribute his output more economically through middlemen.

(e) Desire for control of channel:

Firms that want to have close control over the distribution of their products use a short channel. Such firms can have more aggressive promotion and a thorough understanding of customers' requirements. A firm not desirous of control over channel can freely employ middlemen.

(f) Services provided by manufacturers:

A company that sells directly has itself to provide installation, credit, home delivery, after sale services and other facilities to customers. Firms which do not or cannot provide such services have to depend upon middlemen.

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4. Middlemen considerations:

The cost and efficiency of distribution depend largely upon the nature and type of middlemen as reflected in the following factors:

(a) Availability:

When desired type of middlemen is not available, a manufacturer may have to establish his own distribution network. Non-availability of middlemen may arise when they are handling competitive products as they do not like to handle more brands.

(b) Attitudes:

Middlemen who do not like a firm's marketing policies may refuse to handle its products. For instance, some wholesalers and retailers demand sole selling rights or a guarantee against fall in prices.

(c) Services:

Use of middlemen is profitable who provide financing, storage, promotion and after sale services.

(d) Sales potential:

A manufacturer generally prefers a dealer who offers the greatest potential volume of sales.

(e) Costs:

Choice of a channel should be made after comparing the costs of distribution through alternative channels.

(f) Customs and competition:

The channels traditionally used for a product are likely to influence the choice. For instance, locks are sold usually through hardware stores and their distribution through general stores may not be preferred. Channels used by competitors are also important.

(g) Legal constraints:

Government regulations regarding certain products may influence channel decision. For instance, liquor and drugs can be distributed only through licensed shops.

As stated above, a. channel of distribution consists of some middlemen in addition to the manufacturer and the consumer. Middlemen or intermediaries are persons and institutions which serve as connecting links between the producer and ultimate consumers.

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They direct the flow of goods from producers to consumers and perform several marketing functions. They are known by different names. Middlemen may be classified into two broad categories.

1. Agent Middlemen 2. Merchant middlemen

Agent Middlemen

Agent middlemen or functional middlemen or merchantable agents do not take ownership and delivery of goods. They simply assist in buying and selling of goods. They help in the transfer of ownership and delivery of goods and charge commission for their services. Agent middlemen are of the following kinds.

1. Factor:

A factor is an agent employed to sell goods consigned or delivered to him by his principal. He keeps the goods of others in his possession and exercises general lien on them for his charges. A factor enjoys wide powers.

He can sell goods in his own name, receive payment and give valid receipts of discharge. He can pledge the goods and can sell goods on credit. He receives commission at fixed percentage on sales from his principal.

2. Broker:

A broker is an agent who makes bargains for others and receives brokerage for his services. He makes transactions on behalf of and in the name of his principal. He obtains neither the possession nor the ownership of goods.

He brings buyers and sellers together and negotiates terms and conditions of sales. He receives brokerage at a fixed percentage of the volume of transaction.

3. Commission Agent:

He is an agent employed to sell goods on behalf of and at the risk of his principal. He not only negotiates the transaction but also makes arrangement for transfer of ownership. He gets commission on sales at a fixed rate.

4. Del credere agent:

He is an agent employed to sell goods on credit on behalf of his principal. But he undertakes to bear the risk of loss on account of bad debts. He is paid extra commission called Del credere commission for bearing this risk.

5. Auctioneer:

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He is an agent employed to sell goods on behalf of the principal and at a public auction. He makes publicity, displays goods to the intending buyers, invites bids and sells goods to the highest bidder.

He is usually paid a commission on the sale proceeds. Sometimes a minimum price (Known as reserve price) is fixed and bids below this price are not accepted.

6. Common carrier:

He is an agent employed to carry goods, on behalf of the owner, from one place to another. He provides public transport in the form of trucks, railways, airways or shipping. He is paid freight for his service.

7. Public warehouse:

He is an agent employed to keep the goods of his principal in his godowns in return for storage charges. He is expected to deliver the goods as per the instruction of the principal.

Difference between Factor and Brokeri. Nature:

A factor is a general merchantile agent, whereas a broker is a special merchantable agent.

ii. Dealings:

A factor deals in his own name, whereas a broker deals in the name of his principal. A factor can also sue and enforce contracts in his own name. A broker cannot do so.

iii. Possession:

A factor is in possession of the goods to be sold. But a broker is not given possession of the goods to be sold.

iv. Regularity:

A factor carries on the business of his principal regularly. But a broker is employed for a particular transaction or special deal only.

v. Liability:

A factor is personally liable for his contracts. On the other hand, a broker is not personally liable for the contracts made on behalf of the principal.

vi. Authority:

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A factor has the authority to receive payments and to issue receipts for them. A broker has no such authority to receive payments and issue receipts.

vii. Remuneration:

Remuneration of a factor is called commission whereas a broker's remuneration is known as brokerage.

viii. Lien:

A factor enjoys a general lien on the goods in his possession for his unpaid charges. But a broker has no such lien on goods.

ix. Discretion:

A factor has discretion as to the terms of sale negotiated by him. A broker has no such discretion.

x. Insurable interest:

A factor has invaluable interest in the goods in which he deals. A broker has no insurable interest in goods he deals in.

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Bibliography/ References

Western Michigan University: Marketing Channel Strategy and Management

Georgetown University: Distribution (Place) Overview Tutor2U: Distribution Channels Marketing MO: Find New Marketing Channels of Distribution Encyclopaedia

Business.Gov.In: Channels of Distribution