CHAPTER-8: DISTRIBUTION DECISION

Learning objectives of this chapter are…… Ø  Meaning, objectives and importance of distribution Ø  Channel System Ø  Channel Structure for consumer and industrial goods Ø  Marketing Intermediaries and their roles in distribution system Ø  Strategic considerations in channel selection Ø  Channel dynamics: Role, Power, conflicts & conflicts resolution Ø  Meaning and components of physical Distribution Ø  Distribution practices in Nepal

Chapter Preview: Let’s now look at the third important element of marketing mix- Place/distribution. A company’s success depends not only on how it performs but also on how well its entire marketing channels work together in engaging customers, creating customers value and building profitable relationships. This chapter attempts to explore the nature of marketing channels/intermediaries, physical distribution/logistics, and the marketers’ channel design and management decisions.

8.1   Meaning, objectives and importance of distribution

Meaning and Concept of Distribution: Distribution is the movement of product from the place of production to the place of consumption through distribution channels. It plays an important role in marketing as it transfers the ownership of products from one party to others. It creates time, place and ownership utilities through warehousing, transportation and exchange functions respectively. Distribution is greatly influenced by the market structure, the company’s objectives, its resources, and its overall marketing strategy.

Distribution is the supply of goods and services to the marketplace through direct and indirect channels. Direct channels include direct mail, e-mail, direct response, telemarketing, personal selling, online sales, etc. whereas indirect channels consist of various marketing intermediaries such as agent, wholesaler, retailer and consumers.

                                     Fig: Types of Marketing Distribution

In conclusion, distribution is the movement of product from the production center to consumption place through distribution channels. It includes activities the company undertakes to make the product available and accessible to target customers. It is a combination of marketing channels and physical distribution.

Objectives/Importance of Distribution

The main objectives of distribution are briefly explained below.

1.      To create utility: The main objective of distribution is to make the flow of goods and services from the point of production to point of consumption through distribution channels such as agents, wholesalers, and retailers. It creates time, place, and ownership utilities through warehousing, transport, and exchange functions respectively.

2.      To make availability of products: Another objective of distribution is to make goods available to the mass customers living in different geographical reasons. It ensures the right goods at a reasonable price at the right place. With the help of marketing intermediaries, effective distribution system makes goods available in the marketplace regularly to fulfill the customers’ needs.

3.      To protect goods: Effective distribution system stores goods properly at the warehouse and handle them carefully while transporting the goods from one place to another. Distribution system protects the goods from being damaged, broken or quality decline.

4.      To reduce costs: The objective of effective distribution is to reduce the cost of a product by bringing effectiveness in the distribution process. Channels members are professional in distribution so that they can distribute goods at a minimum cost. Many marketers have started to distribute their goods through direct e-mail, telemarketing, mobile marketing, on-line, etc. to minimize the distribution costs.

5.      To satisfy customers: Another objective of the distribution function is to make consumers feel satisfied through the effective distribution system. Customers’ expectations are met by delivering the right product at the right place at the right time.

6.      To regular supply of goods: A regular supply of goods is also another objective of distribution. With the help of marketing distribution, firms make goods available regularly at the right place at a reasonable price. So, customers can get the products anytime and no product shortage occurs in the market.

7.      To transfer of ownership: Ownership transfer is another objective of distribution. It is a process in which ownership of goods is transferred from sellers to buyers through the exchange process. This function creates ownership utility so that buyers have full authority on goods after getting its ownership from sellers.

8.2 Channel System/Methods

There are several methods to product distribution. They can be categorized into two groups: direct and indirect. Before selecting the most cost-effective distribution method, it is necessary to consider the costs associated with direct and indirect methods.

1.      Direct Methods

If the producers themselves distribute their products directly to the ultimate consumers, this is called a direct channel. In this, no help of intermediaries or middlemen is taken. The main direct methods of distribution are as follows:

·        Direct mail: Direct mail is one of the most important methods of direct distribution. In this method, direct mail is sent to the address of prospective customers through the post office. It encompasses a wide variety of marketing materials such as envelope mailers, newsletters, sales letters, catalogues, brochures, postcard and so on.

·        Telemarketing: Telemarketing is another popular method of direct distribution in which a seller motivates prospective customers to buy products over the phone. It is using the telephone to sell the products directly to customers.

·        E-mail: Another method of direct distribution is e-mail. It is an efficient way to stay connected with customers through e-mail. You can easily and quickly reach the target market through e-mail. It helps to retain existing customers and make new customers so that it has become an essential tool for business ever since the introduction of the internet to the world.

·        On-line sales: An online sale (also known as e-marketing, web-marketing or e-commerce) is the method of distribution of products through the internet. It is a global computer that requires internet. A company can sell its products and receives its bill promptly through the Internet. It ties together creative and technical aspects of the internet, including design, development, advertising, promotion, and sales.

·        Direct responses: Another method of direct distribution is direct response in which the customer responds to the marketing message directly. For example, prospects view a television presentation or radio message or newspaper ad of a product offering and they can make a purchase with a credit card.

·        Personal selling: Personal selling is another popular and the oldest method of direct distribution in which direct and personal contact is formed between the seller and the potential buyer. It involves face to face communication or direct communication between the seller and the buyer. It increases the sales and profits for the seller and helps to satisfy the wants of consumers. 

                                                   Fig: Methods of distribution

2.      Indirect methods

If the producers take help of agents/dealers, wholesalers, retailers, etc. to supply their products to ultimate consumers, this is called an indirect channel. In this method, the help of intermediaries or middlemen such as agents, wholesalers, retailers can be taken. The main indirect methods of distribution are as follows:

·  Agents: The company can distribute its products through agents. An agent is a company’s direct representative in a market and is paid commission. He/she is a distributor who represents buyers or sellers on a relatively permanent basis, performs only a few functions and does not take title to goods. There are several types of agents such as manufacturers’ agents, selling agents, purchasing agents, and commission houses. Most companies hire agents to promote or advertise their products and services with a view of increasing sales.

·   Wholesalers: Company can distribute its products through wholesalers. A wholesaler is a person who performs wholesale trade. He/she works as a bridge between producers and retailers because he/she neither does produce goods nor sell to ultimate consumers. Wholesaling refers to the trade in which merchant buys large quantity of goods from the producer and sells them to the retailers or industrial users but not to ultimate consumers.

·      Retailers:  Company can distribute its products through retailers or retail outlets. A retail outlet is a store that sells smaller quantities of products to the ultimate consumers. Retailers work as a bridge to link wholesalers and ultimate consumers.

8.3 Marketing Channels

Ø  Meaning and concept of Marketing Channels

A marketing channel (also known as distribution channel) is a set of practices to transfer the ownership of goods and services from the point of production to the place of consumption. Producers can use different channels of distribution in the process of supplying their products to the final consumers. They supply their products to the ultimate consumers either by using direct method-Internet or by using indirect method-marketing intermediaries such as agents, wholesalers, and retailers. In the process of ownership transfer of products, different levels of marketing channels are involved which are illustrated as follows:

Above the figure illustrates the different alternatives for marketers to select the right type and number of channels. The legal right and ownership of goods goes on transferring from one to another channel member before reaching the hands of final consumers. The levels and numbers of distribution channels should be selected and used carefully considering the nature of products, market the situation, firm's capacity etc.

If a producer sells his products directly to consumers, then it is 'zero level channel' since it does not involve any marketing intermediaries. If he sells products to retailers and retailers sell to consumers, this is 'one level channel' because it involves one marketing intermediary such as retailers in distribution system.  Similarly, if a producer sells his products to wholesalers or agents and they also sell to retailers who then again sell to ultimate consumers then it is known as two levels channel as it involves two marketing intermediaries such as wholesalers and retailers. Lastly, if the channel includes the three intermediaries such as agents, wholesalers, and retailers while supplying goods and services from producer to ultimate consumers then it is known as ‘three levels channel’.

Ø  Channel Structure for consumer goods

The goods that the consumers buy for the purpose of consumption or use are called consumer goods. There are different nature and types of products so only one type or same distribution channel may not be suitable for distribution of all types of consumer goods. Anyone or more distribution channel can be used; they may be various levels of distribution channels used for supplying consumer goods. The channel structures for consumer goods are discussed briefly below:

 

                                                        Fig: Channel Structure for consumer goods

1.       Zero-level Channel (Producer           Ultimate Consumers)

This channel is also called a direct channel. In this, the producers sell their goods or services directly to the consumers. There is an absence of intermediary or middlemen between the producers and consumers. This channel of distribution is called zero-level. This is the most common, easy and short channel for sales or distribution of goods. Mostly, if the goods are costly or the consumers' number is low, the producers themselves sell their products directly to the consumers. The small producers of perishable products also sell their products directly to local consumers. Big firms, which want to minimize distribution cost and eliminate middlemen, use direct level distribution channel to sell their products.

2.       One Level Channel (Producer         Retailer         Ultimate Consumers)

In one level channel of distribution, only retailers remain as middlemen between producers and consumers. In this channel, producers sell their products to retailers and the retailers sell them to final consumers. The producers do not seek the help of wholesalers or agents to sell their products. Nowadays, this channel has become very popular. The producers themselves supply their products to the final consumers through retailers. Big retailing shops such as departmental stores, supermarkets, discount houses, etc. have begun to appear in markets. They have made easy to sell any goods or services without the presence of wholesalers in the distribution channel. This channel is suitable to sell perishable goods and other goods that need a prompt sale.

3.       Two-level Channel (Producer       Wholesaler or agent       Retailer     Ultimate Consumers)

In this channel of distribution, the producers sell their products to final consumers through wholesalers and retailers. In other words, the producers sell their products to wholesalers, then wholesalers sell them to retailers and the retailers sell to final consumers. This is also called 'Traditional channel of distribution'. The producers sell their products to wholesalers in large quantity. Then wholesalers sell them to retailers in small quantity. then the retailers sell them to final consumers. This channel is long in the distribution system. This channel is used to sell or distribute foodstuffs, medicines, including many other consumer goods. This channel is suitable for the products, which need to be supplied to scattered markets and consumers.

In the same way, in the place of wholesaler, there can be an agent who represents the company’s goods and services and sell them to retailers on the basis of commission and then retailers again sell goods to ultimate consumers. Two middlemen such as agent and retailer are involved in this channel so it is also called ‘two-level channel’. Food, groceries, medicines, hardware, etc. are distributed through this channel. It is economically similar with producer to wholesaler, wholesaler to retailer and retailer to consumer channel.

4.      Third Level Channel (Producer      Agent     Wholesaler     Retailer       Ultimate Consumers)

This is the longest channel of distribution of consumer goods. In this channel three middlemen are used to supply goods to the final consumers. In other words, the producers sell their products to final consumers through agents, then agents sell them to wholesalers and wholesalers sell them to retailers and finally, the retailers sell the goods to consumers. Generally, this channel is needed for selling agro-products, clothes, industrial materials, etc. The producers can take the help of agents to sell their goods. This channel is useful to those producers who cannot contact many wholesalers, cannot pay attention to international markets and want to avoid several distribution problems. Mostly, this channel is not used for distribution of most of the goods since it is costly, takes a long time and invites several problems.

Ø  Channel Structure for industrial goods

The goods, which are used by industrial firms to produce other finished goods, are called industrial goods. Raw materials, machines, equipment, management materials and production supplies etc. are included in industrial products. The channel structure used for consumer goods cannot be used for industrial goods. The channel for sale and distribution of such goods depends on type and nature of industrial goods, necessity, number of users, geographical distance etc. Marketing channels for industrial goods are as follows:

 

Fig: Channel Structure for Industrial goods

1.       Zero Level Channel (Producer        Industrial User)

The channel from Producer to industrial users is a direct channel for industrial goods. In this channel, the producers directly sell their products to industrial users without the help of intermediaries. A large number of industrial goods, big installations machines, costly equipment, raw materials, and important machine parts are directly sold to the industrial users. As the number of customers of such goods remains low and such goods are used in certain geographical areas and are costly, their sales become easy and possible through zero level channel. Manufacturers of planes, big generators, ships, buses, etc. produce the goods according to the order of the customers and contact directly to them. It is the shortest and cheapest channel for industrial goods but the producer should be skilled, experienced, and efficient in the distribution function.

2.       One Level Channel (Producer      Industrial distributor or Agent       Industrial user)

Less costly office materials, equipment, operational supplies, construction materials, spares, and parts, etc. are sold through industrial distributors. In this channel, only one level intermediary remains between producers and users. The producers sell their products to industrial distributors and the industrial distributors sell them to industrial users.

The another channel to sell industrial goods is one level channel in which goods are sold to users through agents and not by industrial distributors. The producers who need to remain busy in production cannot contact customers living in different places. So, they appoint agents for selling their goods. The agent brings goods from producer and sells them to industrial users. But the agents do not take titles and ownership of the goods. They get a commission on the basis of the quantity they sell. The service of agents becomes very important to bring new goods in the market. They can identify potential customers and establish contact with them.

3.      Two Level Channel (Producer     Industrial Distributor     Retailer      Industrial user or

Producer         Agent           Industrial Distributor       Industrial user)

This is the longest channel for distribution of industrial goods. It involves two intermediaries for both type of structure. First type of two channel distribution includes two middlemen such as industrial distributor and retailer between producer and industrial users. This channel is popular and common for computer and other technical products.

Second type of two channel distribution includes two middlemen such as agent and industrial distributor between producer and industrial users. Producer's agent contacts industrial distributors and industrial distributors sell the goods to industrial users. This two-level channel becomes useful to sell operating supplies, small spares and parts and other industrial goods that need massive distribution. This channel is an expensive channel as compared to other channels but it is much more effective channel.

8.4 Marketing Intermediaries and their roles in distribution system

Agents, wholesalers and retailers are important marketing intermediaries who generally facilitate the flow of goods and services from the producers (Place of production) to the consumers (place of consumption). Let’s study in details about them.

1.      Agents

Manufacturers may use brokers and agents, who do not take title possession of the goods, in marketing their products. Brokers and agents typically perform only a few of the marketing flows, and their main function is to ease buying and selling—that is, to bring buyers and sellers together and negotiate between them. Brokers, most commonly found in the food, real estate, and insurance industries, may represent either a buyer or a seller and are paid by the party who hires them. Brokers often can represent several manufacturers of noncompeting products on a commission basis. They do not carry inventory or assume risk. Unlike merchant wholesalers, agent middlemen do not take legal ownership of the goods they sell; nor do they generally take physical possession of them. There are several types of agents such as manufacturers’ agents, selling agents, purchasing agents, and commission houses.

Ø  Functions or roles of agents

Following are the functions or roles an agent usually performs:

a)      Manufacturers’ agents work as a market representative of manufacturers. They represent two or more manufacturers’ related lines with an agreement with each manufacturer on price, delivery, commission, working territories, discount and so on.

b)      Selling agents work or serve as a sales department of the organization. They deal with entire products of a producer in distributing the goods and services.

c)      Purchasing agents work on behalf of buyers and build long-term relationship with buyers. They purchase for buyers and often receive, inspect, warehouse, and send products to the buyers.

d)      Commission houses (also known as commission merchants) keep physical control over products to be sold and sign a contract for the goods on behalf of the producer.

2.      Wholesalers

A wholesaler is a firm or person who buys the goods in large quantity from the producers and resale them relatively in smaller quantities to the retailers and industrial users. He/she provides valuable information to the producers regarding the needs and requirement of the consumers. As the wholesaler takes the responsibility of collecting order from retailers, he/she relieves the producers from this task and thereby encourages producers to concentrate on production. The wholesaler acts as a bridge between the producers and retailers and provides finance to the producers and retailers at the time of need. Wholesaling (also known as wholesale trade) is an act or job of wholesaler. It is an intermediary business which deals with buying the bulk quantity of goods and selling them in relatively smaller quantities.

“Wholesaling includes all activities involved in selling goods or services to those who are buying for purpose of resale or business use.” – Philip Kotler

“Wholesalers are the merchants who buy products from producers or other wholesalers and resale them to retailers, organizational buyers or to other wholesalers.” – Peter D. Bennet

In conclusion, a person who performs wholesale trade is a wholesaler. He/she works as bridge between producers and retailers. Wholesalers neither produce the goods nor sell to ultimate consumers. Wholesalers have their own warehouse, means of transport, and modern communication devices. Therefore, wholesaling refers to the trade in which a merchant buys large quantity of goods from the producer and sells them to the retailers or industrial users but not to ultimate consumers.

The followings are the features or characteristics of wholesalers:

·        Wholesalers buy goods directly from producers in large quantities and sell them to retailers in relatively smaller quantities.

·        They sell different varieties of a particular line of product. For example, a wholesaler who deals with books is expected to keep all varieties of books.

·        They may employ a number of agents or workers for distribution of products.

·        Wholesalers need a large amount of capital to be invested in his business.

·        They provide credit facility to retailers and financial assistance to the producers.

Ø  Functions or roles of wholesalers

Following are the functions or roles, which a wholesaler usually performs.

a)      Warehousing/Storage of goods: A wholesaler collects the goods and stores them safely in warehouses until they are sold out to retailers. It also creates time utility by keeping the goods in the warehouse. Perishable goods like fruits, vegetables, etc. are stored in cold storage.

b)      Collection of goods/Order collection: A wholesaler collects goods from manufacturers or producers in large quantities. They are also known as order collectors as they collect orders of goods from retailers and delivery them as per the orders.

c)      Quick delivery: Wholesalers quickly deliver products after they have received orders from retailers or other organizations. As they have an optimal level of goods in their warehouse, they can fulfill the order of buyers immediately.

d)      Financing: Wholesalers are capable of channel members in terms of financial resources. They provide financial support to producers by purchasing products in a large quantity and paying bills promptly. They also provide goods to their regular retailers on credit. Thus, wholesalers act a financier at both ends.

e)      Risk-taking/bearing: Wholesalers purchase and take ownership of goods. Until the products are sold out, they keep the goods in the warehouse safely. Therefore, they take the risks arising out of changes in demand, rise in price, spoilage or damages of goods.

f)       Sales promotion: Wholesalers are expert in sales promotion. They provide technical and financial support to the producer or retailers for sales promotion. They also act as a sales promoter of goods in delivering the goods from producers to various retailers.

g)      Market information: As wholesalers are middlemen between retailers and producers, they have to interact with many market players which allow them to collect about market information such as competitors’ activities, price of products, new products, customer demand, environmental change, etc. 

h)      Efficiency in distribution: A wholesaler becomes expert in distribution management. He/she can perform distributing function more effectively and efficiently than the producers. Delivering the right products at the right time at the right place is only possible with expert wholesalers.

3. Retailers

A retailer is a person or an institution who buys goods from wholesalers or producer and sells them to ultimate consumers for their personal use. The word ‘retailer’ has been derived from the French word ‘Retail’ which means to sell in small quantities, rather than in gross. Retailers have occupied an important place in the field of business. The retailers remain as very useful and as the last link in the channel of distribution. They provide goods and services to the final consumers. Retailers purchase goods from producers or wholesalers in large quantity and sell to the consumers in small quantity. As the retailers in the distribution channel closest to the consumers, they perform various useful services in marketing.

“Retailing includes all the activities involved in selling goods or services directly to the ultimate consumers for their personal, non-business use.”- Philip Kotler

“A retailer is a merchant or occasionally an agent whose main business is selling directly to the ultimate consumers.”- Condiff and Still

Therefore, those who purchase large quantity of goods from producers or wholesalers and resell them to consumers dividing in small quantity or cutting in small pieces are called retailers. This business is called retail trade or retailing. In other words, the job or act of a retailer is retailing or retail trade. It consists of the sales of goods and services to ultimate consumers for personal or non-business use.

The main characteristics or features of retailing can be highlighted as follows:

1.      Small quantities: Retailers buy and sell goods in small quantities at a profit margin.

2.      Sell to ultimate consumers: Retailers sell goods not for resale but for ultimate use by final consumers. For instance, buying fruits, vegetables, and clothes for personal use, not for sale.

3.      Varieties of goods: Retailers can sell various necessary goods to final consumers.

4.      Personal contact: Retailers have direct and personal contact with its final consumers. Thus, retailers can know the actual needs and requirements of consumers.

5.      Shop display: Retailers decorate and display goods to attract customers.

6.      Last link: Retailers work as the last link of the distribution channel.

Ø  Functions or roles of retailers

Following are the functions or roles, which a retailer usually performs.

a)      Home delivery: Retailers provide quick home delivery service to the customers as per their necessity. They may take some charges for this or may keep it free of costs. 

b)      Efficiency in distribution: Retailers bring efficiency in distribution function of marketing. They reduce distribution cost and reach to the doors of customers by providing goods and services.

c)       Market information: Retailers establish cordial relationships with customers and remain very close to them. So, they can provide market information to producers and wholesalers about the needs, wants and requirements of the consumers. 

d)      Direct contact with consumers: The producers and wholesalers do not directly sell their products to consumers. However, as retailers sell goods to consumers, they build direct contact with them.

e)      Product selection facility: Retailers deal with several kinds of goods from their showroom. Retailers buy several products from different producers or wholesalers and keep them all in their outlets which can provide a greater selection facility to its ultimate consumers.

f)       Risk taking/bearing: Retailers purchase and take ownership of goods. Until the products are sold out, they keep the goods in their outlets safely. Therefore, they take the risks arising out of changes in demand, rise in price, spoilage or damages of goods.

g)      Sales promotion: Retailers also play an important role in promoting goods and services as they remain very close to ultimate consumers.

h)      Others: Retailers perform other several functions such as after sales service, sales of new products, customer satisfaction, the offering of seasonable products, and storage of goods and services.

8.5 Strategic considerations in channel selection

The marketer has to select a suitable channel of distribution for his/her products. The selected channel should be flexible, effective and consistent with the marketing policies and programs of the company. While selecting a suitable channel of distribution, the marketer has to consider the following important factors.

1.      Product Considerations: The unit value, nature of the product, and product types are important product considerations in choosing the channel of distribution.

·        Unit value: The products of low unit value (less expensive) are generally sold through middlemen such as agents, wholesalers, retailers whereas products of high unit value (expensive) are sold directly by the producers themselves. e.g. garments, food products, and other less expensive products are sold through middlemen whereas aircraft and expensive machinery are sold directly by producers.

·        Nature of product: The selection of channel is affected by the nature of products. For example, the direct channel is suitable for perishable, light, technical products whereas indirect channel is used for durable, heavy and non-technical products.

·        Types of product: Channel of distribution can be different according to types of products. Generally, the direct or short channel is used for industrial products whereas indirect or long channel is suitable for consumer products.

2.      Market Considerations: The market-related considerations such as types of market, target customers, market concentration and order size have to be analyzed before selecting the the channel of distribution.

·        Types of market: The type of market can be industrial product markets and consumer product markets.  Direct or short channel is suitable for industrial product markets whereas indirect or long channel is suitable for consumer product markets.

·        Target customers: Target customers can be small or large. Direct or short channel is suitable for small number of target customers whereas indirect or long channel is suitable for large number of target customers.

·        Market concentration: Geographical concentration of market can be limited or very wide/dispersed. When customers are concentrated in a limited geographical area, direct or short channel should be selected. Conversely, if customers are geographically dispersed then indirect or long channel is suitable.

·        Order size: Customer order size can be big or small. If customer order size is big, then the direct or short channel is suitable whereas if the customer order size is small then indirect or long channel is suitable.

3.      The middlemen Considerations: Several factors have to be considered while choosing the appropriate middlemen. They are:

·        Availability of middlemen: The channels preferred by the producer may or may not be available. If there is no desired middlemen, the producer must sell its products directly or alternatively.

·        Capacity of middlemen: The middlemen must be capable to deal effectively and efficiently. Thus, producers should consider the capacity of middlemen in terms of financial, physical and technical resources. If middlemen are capable, producers must sell their products through middlemen and if not then they might sell its products directly.

·        Attitudes of middlemen towards producers’ policies: The attitudes of middlemen towards producers’ policies also affect in selecting the channel of distribution. Thus, producers should make favorable policies to create a positive attitude of their middlemen.

·        Service provided by middlemen: The producers should select such channel partners who are able to provide marketing services to their customers. If there is available of such middlemen, the marketing channel should be indirect or long and vice versa.

4.      Company Considerations: The company should consider many factors about the company such as financial resources, ability, desired to control, goodwill and policies of the company.

·        Financial resources: Those companies who have sufficient financial resources can establish their own salesforce or channel of distribution whereas those who are financially weak cannot sell themselves and must sell through other middlemen. Thus, financial resource has a great impact in the selection of marketing channel.

·        Company’s ability: If the companies have sufficient knowledge, skills and abilities in setting their own channels then they may directly sell by themselves whereas if they have no knowledge, skills, and abilities then they have to sell products through other middlemen.

·        Desire to control: Companies may or may not wish to control the channel of distribution. Thus, if companies want to have control over their channels they must establish their own channels and if they do not want to take control of channel then they can use middlemen in order to sell their products.

·        Company’s goodwill: Goodwill is the reputation in the eyes of customers. Companies who are reputed sell their products directly without middlemen and companies who are unknown or new in the market should use the middlemen to sell their goods and services.

·        Company’s policy: Another important consideration is the company’s own policy, whether to go with intermediaries or not. If the company’s policy is not to go with intermediaries, then it may use direct channel and otherwise, use the indirect channel of distribution.

5.      Environmental Considerations: Environmental considerations are those factors or forces which have no control but still can affect in selecting the channel of distribution.

·        Political-legal environment: Political-legal factors include political ideologies, parties, governmental laws, rules and regulations. These factors should be taken into account while selecting the channel of distribution. So, every company should pay attention to these factors and must obey the legal provisions made by the government and other agencies.

·        Economic environment: Economic environment are those forces or factors which affect the selection of channel distribution. These factors such economic conditions, inflation, income, can affect in choosing the appropriate channel of distributions. For example, if the economic condition is strong, the company can use long distribution channels. But, if the economic condition is weak then the shortest and cheapest channel of distribution must be selected.

·        Socio-cultural environment: Socio-cultural factors such as social norms, values, local practices, people lifestyle, middlemen’s preferences are to be considered for choosing a suitable channel of distribution.

·        Technological environment: Technological factors such as technology transfer, the pace of technology, R&D budget, availability of new and modern technologies have to be considered before selecting an appropriate channel of distribution.

8.6 Channel dynamics: Role, Power, conflicts & conflicts resolution

Channel conflict occurs when one member's actions prevent another channel from achieving its goal. Channel conflict is defined by (Coughlan, et al. 2006) as the behavior by a channel member that opposes its counterpart. The Channel Conflict arises when the channel partners such as manufacturer, wholesaler, distributor, retailer, etc. compete against each other for the common sale with the same brand. In other words, there is a conflict among the channel partners when one prevents the other from achieving its objective. It results in a huge loss for all the partners in the channel.

Types of Channel conflicts

1.       Horizontal conflict: The first type of channel conflict is horizontal conflict and it occurs among marketing channel members on the same level of distribution such as conflicting among two or more retailers or conflicting among two or more wholesalers. In other words, it refers to a disagreement among two or more channel members at the same level. For example, suppose a toy manufacturer has deals with two wholesalers, each contracted to sell products to retailers in different regions.

2.      Vertical Conflict: The second type of channel conflict is called vertical conflict and it occurs when problems develop between different levels of marketing channel members such as conflicting between producers and wholesalers or conflicting between producers and retailers.  Examples would be if a problem occurred between a manufacturer and retailer, or a manufacturer and wholesaler.

3.      Multichannel conflict: The third type of channel conflict is multichannel conflict and it occurs when the middleman comes in conflict with the manufacturer using both direct and indirect channels of distribution. For example, if a company has a retail store and an e-store selling the same products at different prices in the same market.

Causes of Channel Conflict

Though some causes of channel conflict are easy to resolve, others are not. Conflict may arise from various reasons. The main causes of channel conflicts are:

1. Goal incompatibility: Different partners in the channel of distribution have different goals that may or may not coincide with each other and thus result in conflict.

E.g. The manufacturer wants to achieve the larger market share by adopting the market penetration strategy i.e. offering a product at a low price and making the profits in the long run, whereas the dealer wants to sell the product at a high cost i.e. market skimming strategy and earn huge profits in the short run.

2. Unclear/Ambiguous Roles: The channel partners may not have a clear picture of their role i.e. what they are supposed to do, which market to cater, what pricing strategy is to be adopted, etc.

E.g. The manufacturer may sell its products through its direct sales force in the same area where the authorized dealer is supposed to sell; this may result in the conflict.

3. Different Perceptions: The channel partners may have different perceptions about the market conditions that hampers the business as a whole thereby leading to the conflict.

E.g. The manufacturer is optimistic about the change in the price of the product whereas the dealer feels the negative impact of the price change on the customers.

4. Manufacturer dominating the Intermediaries: The intermediaries such as the wholesaler, distributor, retailer, etc. carry the process of distribution of goods and services for the manufacturer. And if the manufacturer makes any change in the price, product, marketing activity the same has to be implemented with an immediate effect thereby reflecting the huge dependence of intermediaries on the manufacturer.

E.g. If the manufacturer changes the promotional scheme of a product with the intention to cut the cost, the retailer may find it difficult to sell the product without any promotional scheme and hence the conflict arises.

5. Lack of Communication: This is one of the major reasons that lead to conflict among the channel partners. If any partner is not communicated about any changes on time will hamper the distribution process and will result in disparity.

E.g. If retailer urgently requires the stock and the wholesaler didn’t inform him about the availability of time may lead to the conflict between the two.  

Managing Channel Conflict/Conflict resolutions

Some channel conflicts are constructive and they lead to a better marketing distribution whereas too much conflicts can be dysfunctional which ultimately lead to reduce the company’s overall performance. It is also true that all channel conflicts cannot be eliminated so they must be managed to improve channel productivity and efficiency. There are some major mechanisms for effective channel conflict management:

1.      Subordinate Goals: The channel partners must decide a single goal in terms of either increased market share, survival, profit maximization, high quality, customer satisfaction, etc. with the intention to avoid conflicts.

2.      Exchanging employees: one of the best ways to escape channel conflict is to swap employees between different levels i.e. two or more persons can shift to a dealer level from the manufacturer level and from wholesale level to the retailer level on a temporary basis. By doing so, everyone understands the role and operations of each other thereby reducing the role ambiguities.

3.      Trade associations/Joint membership: Another way to overcome the channel conflict is to form the association between the channel partners. This can be done through joint membership among the intermediaries. Every channel partner works as one entity and works unanimously.

4.      Co-optation: Co-optation is an effort by one organization to win the support of the leaders of another by including them in advisory councils, boards of directors, and the like. If the organization treats invited leaders seriously and listens to their opinions, co-optation can reduce conflict, but the initiator may need to compromise its policies and plans to win outsiders’ support.

5.      Strategic Justification: In some cases, a convincing strategic justification that they serve distinctive segments and do not compete for as much as they might think can reduce the potential for conflict among channel members. Developing special versions of products for different channel members—branded variants as is a clear way to demonstrate that distinctiveness.

6.      Dual Compensation: Dual compensation pays existing channels for sales made through new channels. When Allstate started selling insurance online, it agreed to pay agents a 2 percent commission for face-to-face service to customers who got their quotes on the Web. Although lower than the agents’ typical 10 percent commission for offline transactions, it did reduce tensions.

7.      Diplomacy, Mediation and Arbitration: when the conflict becomes critical then partners have to resort to one of these methods. In Diplomacy, the partners in the conflict send one person from each side to resolve the conflict. In Mediation, the third person is involved who tries to resolve the conflict through his skills of conciliation. In Arbitration, when both the parties agree to present their arguments to the arbitrator and agree to his decision.

8.      Legal resource: When the conflict becomes crucial and cannot be resolved through any above-mentioned ways, the channel partners may decide to file a lawsuit.

Thus, it is a fundamental responsibility of every organization to maintain harmonious relations with its channel partners as the the conflict between these may result in huge losses for each involved in the channel including the manufacturing company.

Ø  Channel Power and its sources

The Channel Power refers to the ability of anyone channel member to alter or modify the behavior of other members in the distribution channel, due to its relatively strong position in the market. Generally, the manufacturers dominate the behavior of other channel partners and influence their actions according to its requirements.

There are several types or sources of channel power that can be used to control and influence the behaviors of other channel partners. They are discussed briefly here.

1.      Coercive Power: The manufacturer threatens to terminate the relationship with other channel partners or withdraw the resources deployed with them. With this power, the manufacturer can dominate the others and keep them under his control. But the negative side is, the channel partners may lose their faith in the manufacturer and may enter into inter-conflicts.

2.      Reward Power: The manufacturer provides several additional benefits to the intermediaries, with the intention to motivate them to perform certain activities as required. This power is very useful since it brings in the maximum efforts from each channel partner, but this may sometimes be negative as the channel partners may always seek for the benefits in case, they are required to do some other activity.

3.      Legitimate Power: Here the manufacturer reminds the channel partner to carry out their activities in accordance with the contract they have entered into at the time they became the channel partners. The manufacturer may find it convenient to keep a check on the channel partners in terms of their signed agreement, but the partners may feel humiliated for the continuous reminder for their code of conduct.

4.      Expert power: The manufacturer has the expertise that he transfers to the channel partners, and once they acquire it, the power of expertise reduces. Thus, the manufacturer should focus on creating the new expertise, thereby keeping the channel partners updated with the day to day operations. The manufacturer uses this power to retain the interest among the channel partners to work, but the intermediaries may not feel to learn any new things apart from what they have learned.

5.      Referent Power: The manufacturer should develop its image in such a way, that the intermediaries must feel proud to be associated with it. The manufacturer with the influential image can get varied options with regard to the channel partners. But if the manufacturer is weak then intermediaries may not like to get associated with it because that might spoil their market image.

Thus, the manufacturer is the one who provides the goods and services to be sold via intermediaries and, therefore, the channel partners are dependent on the manufacturer for their individual businesses.

8.7 Meaning and components of physical Distribution

It is very important to understand the physical distribution in the marketing because it helps you to know how goods are actually delivered effectively from the place of production to the place of consumptions. It involves all the activities of planning, implementing and controlling the physical flow of goods and services which ensures the right products are delivered to the right place at the right time.

Ø  Meaning and concept of Physical Distribution/Market Logistics

Physical distribution starts at the factory. Managers choose a set of warehouses (stocking points) and transportation carriers that will deliver the goods to final destinations in the desired time or at the lowest total cost. Physical distribution has now been expanded into the broader concept of supply chain management (SCM). Supply chain management starts before physical distribution and means strategically procuring the right inputs (raw materials, components, and capital equipment), converting them efficiently into finished products, and dispatching them to the final destinations.

Physical distribution refers to the actual flow of products from production point to consumption place. In other words, it is the set of activities concerned with efficient movement of finished goods from the production place to consumption place. It makes product available at the right place and at the right time, thereby maximizing the company’s chance to sell the products and strengthen its competitive position. The firm has to make five major decisions about its physical distribution.

·        How should we handle orders (order processing)?

·        Where should we locate our stock (warehousing)?

·        How should we handle materials (material handling)?

·        How much stock should we hold (inventory)?

·        How should we ship goods (transportation)?

Some of the important definitions given by different authors and experts are given below:

Physical distribution consists of all activities concerned with moving the right amount of right products to the right place at the right time. – William J. Stanton

Physical distribution or marketing logistics involves planning, implementing, and controlling the physical flow of materials, final goods and related information from the point of origin to points of consumptions to meet customer requirement at a profit. – Philip Kotler

In conclusion, physical distribution is an important marketing function describing the marketing activities relating to the flow of raw materials from the suppliers to the factory and the movement of finished goods from the end of production line to ultimate consumers or users.

Ø  Components of Physical Distribution

Order processing, warehousing, material handling, inventory management, and transportation are the main components of physical distribution.

1.      Order Processing: Physical distribution begins with a customer order and its processing. Order processing is the tasks related to fulfilling an order for goods. It starts with the acceptance of the order from the customer and is not considered complete until the customer has received the products accurately and completely. It consists of the following tasks:

·        Order entry: Order entry is a process of recording an order received from customers into the company’s entry system. It can be received through e-mail, telephone, post, telegram, fax, internet, etc. At the time of order entry, quantity, quality type, received date, delivery date, etc. are clearly recorded in order entry of computer system.

·        Order handling: Order handling is the second step of order processing. It is the act or process of accepting and issuing orders. For this, stock inspection, checking of due balance, and notification of order delivery are done and sent to customers.

·        Order delivery: If the goods as demanded are stock in store, they should be packed; if not, an alternative arrangement should be done. After the goods are ready for shipment, transport section should be contacted. While delivering goods in this way, bills/invoice and shipment documents should be prepared and one copy should be kept in the account section, one copy should be given to transport company and one should be sent to customers.

2.      Warehousing: Warehousing is the act or process of storing goods in a warehouse. Manufacturers, agents, wholesalers, and retailers use warehouses. It keeps goods safe from theft, damages, broken, and moistures. It works as a distribution center. It collects goods, divides them, stores them, packs and ships-out them. It creates time utility of goods. Before taking decisions for warehousing, the following things are to be considered:

·        Private and public warehouses: Warehouse can be private and public. A private warehouse is a storage facility where storage and operations are run by a firm or a completely single manufacturer whereas a public warehouse is a storage facility where storage and operations are run by third party or government. The store manager should decide whether to store goods in a private warehouse or public warehouse.

·        Number of warehouses: The number of warehouses directly affects in distribution cost and customer services. Thus, the store manager should take a rational decision about the required number of the warehouse, warehouse facilities, speed of product movements, etc.

·        Location of warehouses: Location of warehouses is the prime aspect of the warehousing. Warehouses should be in an appropriate place. For example, the warehouse of raw materials, equipment, operating supplies, fabricating, etc. should be nearer to the factory whereas warehouse of consumer goods should be nearer to the market.

3.      Material Handling: Material handling is the movement, protection, storage, and control of materials throughout manufacturing, warehousing, distribution, consumption, and disposal. While handling materials, various factors such as the nature of goods, package size, weight, costs, type of manual or automation should be taken into account. It can be done in two ways:

·        Mechanical handling: Mechanical handling uses lorry, truck, crane, fork-lift, conveyer, etc. to move the materials from one place to another.

·        Non-mechanical handling: Non-mechanical handling uses animals, and human labor instead of machines. Porters can be employed in handling carton or boxes, for example.

4.      Inventory Management: Inventory or stock refers to the units of materials or goods that a business holds for the purpose of business use or resale. In order to keep an optimal level of inventory in the organization, inventory management should be used. The main objective of inventory management is to provide uninterrupted production, sales and customer service levels at the minimum cost. Both over inventory and under inventory are dangerous in the organization. So following techniques and tools are used to manage the level of inventory in an organization.

·        Economic Order Quantity (EOQ): The EOQ is a company's optimal order the quantity that minimizes its total costs related to ordering, receiving and holding the inventory. The formula for calculating economic order quantity is shown below:

EOQ= 

Where A=Annual requirement, O=Ordering cost per order, C=Carrying cost per unit

·        Re-order Point (ROP): It is a technique to determine when to order. In other words, the re-order point is the level of inventory which triggers an action to replenish that particular inventory stock. It is calculated by lead time multiplied by daily requirement or consumption, and formula for this is shown below:

Re-order point = Lead Time X Daily Consumption

·        Safety Stock (SS): Safety stock is the stock held by a company in excess of its requirements for the lead time. A company holds safety stock to guard against stock out. Safety stock can be calculated by using following formula:

Safety Stock (SS)= (Max. Daily Usage- Average Daily Usage) X Lead Time

·        Activity-based Costing (ABC) Analysis: ABC analysis is a costing method and analysis that identifies activities in an organization and assigns the cost for each activity. For example, A class includes costly goods, In B average price goods and In C cheap price goods.

·        Just-In-Time (JIT): Just in Time also known as the Toyato Production System, is an inventory management technique and type of lean methodology designed to increase efficiency, cut costs and decrease waste by receiving goods only as they are needed.

5.      Transportation

Transportation is the movement of products from one place to another which links production point with consumption place. It creates place utility. Transport involves 50% costs of total physical distribution costs. Thus, marketers should take rational decisions on types of carriers and mode of transportation.

·        Types of carrier: Means of transport should be suitable. It can be different on the basis of nature of goods, destination, and condition of goods.

a)      Private carrier: Private carrier is a company that transports only their own goods. Its primary business is not transportation but to facilitate the company as per need. It has sole authority on its carriers, it may be flexible but it is very costly.

b)      Contract carrier: It is a transportation company which carries the goods of only certain customers and not the public in general as in the case of a common carrier. Its costs are lower than private ones.

c)      Common carrier: It is a company undertaking to transport goods on regular routes at agreed rates? A common carrier company provides scheduled services.

·        Mode of transportation:  Mode of transport is a term used to distinguished substantially different ways to perform transport. The most dominant modes of transport are aviation, land transport, and water transport. Thus, aircraft, rails, trucks, ships, pipelines, etc. are the major means of transportation. Different factors such as cost, speed, consistency, safety, availability, etc. are considered at the time of selection of appropriate mode or means of transport.

a)      Cost: Cost is an amount that has to be paid in order to get something or transportation facility. Marketers should as far as possible select least costly means of transport.

b)      Speed: It is pace of carriers such as human, animals, ships, rails, trucks, aircrafts etc. Marketers should, as far as possible, select least cost and fast speed carrier or means of transport. Time and nature of goods also affects the decision what means should be selected.

c)      Consistency: It means regularity in meeting schedules. Marketers should select the most consistent mode of transport.

d)      Safety: Marketers should select safe means of transport so that there would not be any loses from theft, robbery, damage or breaks.

e)      Availability: All the means of transport cannot be available whenever they are needed. Thus, the marketers should consider available means of transport when needed.

Important Questions

Brief Answer Questions

1.      Point out any two differences between marketing channels and physical distribution.

2.      Outline direct and indirect methods of distribution

3.      Point out any four reasons of channel conflict.

4.      What is a channel conflict? State any one method of resolving it.

5.      Differentiate between wholesaler and retailer.

6.      Who is a wholesaler? Mention any two roles of wholesaler in distribution system.

Short Answer Questions

7.      What is physical distribution in marketing? Explain the importance of physical distribution decision for a marketing firm.

8.      What is channel power? What are the sources of channel power? Explain.

9.      Write Short Notes on:

a)      Channel structure for industrial goods

b)      Roles of a retailer in channel distribution

c)      Channel conflict

Comprehensive Answer Questions

10.   Define the term ‘physical distribution management’. Also explain the components of physical distribution management.

11.   What is channel conflict? How does channel conflict arise? Describe the process of resolving the channel conflicts.

12.   What is distribution? Discuss the strategic considerations in the selection of suitable channel of distribution.