Channels of distribution and

Logistics
A distribution channel is
a chain of businesses or
intermediaries through
which a good or service
passes until it reaches
the final buyer or the end
consumer. Distribution
channels can include
wholesalers, retailers,
distributors, and even
the Internet.
• Logistics is generally the detailed organization and
implementation of a complex operation. In a general business
sense, logistics is the management of the flow of things
between the point of origin and the point of consumption to
meet requirements of customers or corporations.
 12-4
12-4

Logistics
Logistics

•• Involves
Involves entire
entire supply
supply chain
chain
•• Increasing
Increasing importance
importance of
of logistics
logistics
––effective
effective logistics
logistics isis becoming
becoming aa key
key to
to winning
winning and
and
keeping
keeping customers.
customers.
––logistics
logistics is
is aa major
major cost
cost element
element for
for most
most
companies.
companies.
––the
the explosion
explosion inin product
product variety
variety has
has created
created aa need
need
for
for improved
improved logistics
logistics management.
management.
––information
informationtechnology
technology hashas created
created opportunities
opportunities
for
for major
major gains
gains inin distribution
distribution efficiency.
efficiency.
 12-5
12-5

• The process of planning, implementing and efficiently control the

flow of materials, storage, in-process inventory, finished products
and relevant information from the point of origin to point of
consumption, at the lowest possible cost.
Goals
Goals of
of Logistics
Logistics system
system
12-6
12-6

• Provide a Targeted Level of Customer Service at

the Least Cost.
• Maximize Profits, Not Sales.

Higher Distribution Costs/

Higher Customer Service Levels

Lower Distribution Costs/

Lower Customer Service Levels
 12-7
12-7

Logistics
Logistics Functions
Functions

• Order Processing
• Warehousing
• Inventory Management
• Transportation

• Design system to minimize costs of attaining

objectives
 12-8
12-8
Transportation
Transportation Modes
Modes
Rail
Rail
Nation’s
Nation’slargest
largestcarrier,
carrier,cost-effective
cost-effective
for
for shipping bulk products,piggyback
shipping bulk products, piggyback
Truck
Truck
Flexible
Flexiblein
inrouting
routing&&time
timeschedules,
schedules,efficient
efficient
for
forshort-hauls
short-haulsof
ofhigh
highvalue
valuegoods
goods
Water
Water
Low
Lowcost
costfor
forshipping
shippingbulky,
bulky,low-value
low-value
goods,
goods,slowest
slowestform
form
Pipeline
Pipeline
Ship
Shippetroleum,
petroleum,natural
naturalgas,
gas,and
andchemicals
chemicals
from
fromsources
sourcesto
tomarkets
markets

Air
Air
High
Highcost,
cost,ideal
idealwhen
whenspeed
speedis
isneeded
neededor
orto
to
ship
shiphigh-value,
high-value,low-bulk
low-bulkitems
items
Choosing
Choosing Transportation
Transportation
12-9
12-9

Modes
Modes
Checklist for Choosing
Transportation Modes
1. Speed.
2. Dependability.
3. Capability.
4. Availability.
5. Cost.
 12-10
12-10

• Established by E. Grosvenor Plowman.

Right
product

Right
place

Right
time

Right
conditio
n

Righ
t
cost
 12-11
12-11

Customer Comunication Transpo Inventor

Inventor
service rt yy
control
control

Shoppin Handlin
g Storag Plant and
g
returns e warehouse location
 12-12
12-12

Warranties & service. Packin Revers Waste &

g e scrap
logistics

Purchase Material handling. Demand forecasting

orders.
Distribution
Distribution Channel
Channel Functions
Functions
12-13
12-13

• All Use Up Scarce Resources

• All May Often Be Performed Better Through Specialization
• All Can Often Be Shifted Among Channel Members

Risk Taking
Risk Taking Information
Information

Financing
Financing Promotion
Promotion

Distribution
Distribution Contact
Contact
Physical
Physical

Negotiation
Negotiation Matching
Matching
 12-14
12-14

• People or organizations that get products from manufacturers

to the consumer. Own the product at the time and facilitating
the transfer of ownership of the product.
 12-15
12-15

Consum Storag
er e
search

Provider
search

Price
Financi
equilibrium
Laura
LauraBaranda
Baranda ng
González
González
 12-16
12-16

Product
Services. approach

Obsolescence &
deterioration risk

Packaging of Promotion
 12-17
12-17

Wholesalers
Wholesalers
.. •• Purchase products for resale.
Purchase products for resale.

•• Commercial.
Commercial.
•• Products
Productspurchase
purchasefor
forresale.
resale.

•• Retail
Retailor
or retailer.
retailer.
•• ** Purchase
Purchaseproducts
productsffor
orresale.
resale.

•• Agents
Agents&& brokers
brokers
•• Never
Neverown
ownproducts,
products,but
butthe
thetransfer
transferof
ofrights.
rights.
 NEED of channels
•Most businesses use third parties or intermediaries to bring their
products to market.

•They try to forge a "distribution channel" which can be defined as

“All the organizations through which a product must pass
between its point of production and consumption“

Why does a business give the job of selling its products to

intermediaries?

•The answer lies in efficiency of distribution costs. Intermediaries are

specialists in selling. They have the contacts, experience and scale of
operation which means that greater sales can be achieved than if the
producing business tried to run a sales operation itself.
For example,

A Toyota dealer depends on the Motor company to design

cars that meet consumer needs.

In turn, Toyota depends on the dealer to attract consumers,

persuade them to buy Toyota cars, and service cars after the
sale.

The Toyota company also depends on other dealers to

provide good sales and service that will uphold the
reputation of Toyota and its dealer body.

In fact, the success of individual Toyota dealers depends

on how well the entire Toyota distribution channel
compete with the channels of other automobile
manufacturers.
 Channel design decisions
 Analyzing customer needs

(a) Lot size (b) Waiting and delivery time (c) Spatial convenience
(d) Product variety (e) Service backup

 Establishing channel objectives

Channel objectives should be stated in terms of targeted service output levels.

Channel design must take into account the strengths and weaknesses of
different types of intermediaries.

 Identifying major channel alternatives

A channel alternative is described by three elements : (a)the types of available

business intermediaries, (b) the number of intermediaries needed, (c) and the
terms and responsibilities of each channel member.

 Evaluating major channel alternatives

 Analyzing customer needs
(a) Lot size :

 In buying cars for its fleet, Hertz prefers a channel from which it can
buy a large lot size.
 A Household wants a channel that permits buying a lot size of one.
 (b) Waiting and delivery
time :

The average time customers of that channel wait for receipt of the
goods.
Customers increasingly prefer faster and faster delivery channels.
 (c) Spatial
convenience :
The degree to which the marketing channel makes it easy for customers to
purchase the product.

Example : Maruti offers greater spatial convenience than Chevrolet, because there
are more Maruti dealers.

Maruti’s greater market decentralization helps customers save on transportation

and search costs in buying and repairing an automobile.
 (d) Product
variety :
The assortment breadth provided by the marketing channel.

Normally, customers prefer a greater assortment because more choices

increase the chance of finding what they need.

 United Spirits Limited (USL) is the largest spirits company in the

world by volume, selling 114 million cases for the fiscal ending
March
 (e) Service
backup :
•The add-on services are the credit, delivery, installation, repairs and
others provided by the channel. The greater the service backup, the
greater the work provided by the channel.
Establishing channel objectives
Channel objectives are a part of and result from the company‘s
marketing objectives that need to be stated in terms of targeted service
output levels.

 Profit considerations and asset utilization must be reflected in channel

objectives
and the resultant design.

It should be the Endeavour of the channel members to minimize the total
channel costs and still provide with the desired level of service outputs.

 For example,
1. Perishable products require more direct marketing because of the
dangers associated with delays and repeated handling.
2. Products requiring installation and/or maintenance services are usually
sold and
maintained by the company or exclusively branches dealers.
3. Custom-built machinery and specialized business forms are sold directly
 Evaluating major channel
alternatives
 Economic criteria :- Each channel alternative will produce a different level of sales and cost.
Example : Company sales representatives are better trained to sell the company’s products..
A Sales agency could comically sell more than a company sales force due to more sales
guys and better knowledge of the geographical area..

 Control criteria :- Channel evolution has to include control issues. Using a sales agency
poses
a control problem.
Example : The agent might not master the technical details of the company’s product or
handle its promotion materials effectively.

Adaptive Criteria :- Each channel involves some duration of commitment and loss of
flexibility.
Example : A manufactures seeking a sales agency might have to offer a five year contact.
During this period, other means of selling such as direct mail might become more effective, but
the manufactures is not free to drop the sales agency
 Channel Management decisions
Channel management warrants :

 Selecting channel members :

characteristics of intermediaries  channel member’s length of
business, other lines carried, growth and profit record, cooperativeness
and reputation.

 Motivating individual channel members :

Positive motivators  higher margins, special deals, premium, cooperative
advertising allowances, display allowances and sales contests.
Negative motivators  threatening to reduce margins, to slow
down delivery, or to end the relationship altogether.

 Evaluating their performance over time :

Evaluating standards  sales quotas, average inventory levels, customer
delivery time, treatment of damaged and lost goods, cooperation in
company promotion and training programs and customer service.
For example,

when IBM first introduced its PS/2 personal computers, it re-evaluated

its
dealers and allowed only the best ones to carry the new models .

Each IBM dealer had to submit a business plan, send a sales and
service employee to IBM training classes and meet new sales quotas.

Only about two-thirds of IBM’s 2,200 dealers qualified to carry the

PS/2 models.
 Indirect Marketing Channel

Level- 4
Level- 3
Consumers
Level- 2 Consumers Retailer
Level-
Consumers Retailer Wholesalers
1
Consumers Retailer Wholesalers Distributor

Retailer Wholesalers Distributor Agen

t

Producers
Common marketing channels for consumer marketing
Common marketing channels for business marketing
Representative electronic marketing channels
Identify factors that affect the choice of channel of distribution

•
1. Nature of market- there are many aspects of market which
determine the choice of channel of distribution The most important
consideration in choosing a distribution channel is that market
segment the producer wants to reach. Changes in consumer buying
behavior may influence a channel decision.
• 2. Nature of product -considerably affects the choice of channel of
distribution.
• 3. Nature of the company – a firm having enough financial resources
can afford to its own a distribution force and retail outlet, or both.
• 4. Middlemen consideration -if the right kind of middlemen having
the necessary experience, contacts, financial strength and integrity are
available, their use is preferred as they can ensure success of newly
introduced products.
Describe how the following factors affect selection of distribution channels

• Nature of product -
• 1. industrial/consumer production – when the product being manufactured and sold is
industrial in nature, direct channel is useful because of the relatively small number of
customers need for personalized attention, customer training requirements and after sale
servicing
• 2. perishable nature – when products are perishable nature, like milk, dairy products
bread and meat, etc., it is useful to opt for direct channel
• 3. seasonality – when product sale is subject to seasonal variations like woolen textile
in India. In such cases intermediaries are seldom prepared undertake the function of
inventory carrying and as consequence manufacturer build up indirect distribution
channels
• 4. technicality – when product is very technical and complex like computers business
machines etc. the direct channel is relatively more useful
 Describe how the following factors affect selection of
distribution channels

• Market size and location

• 1. consumer-the number of consumers, their
geographic location and purchase pattern considerable
affect the choice of a channel
• 2. intermediaries -the relative strengths & weaknesses
of intermediaries and the differences in the types o
unctions performed and facilities and privileges
desired by them often determine the choice o channel
• 3. competitors – the distribution channel used by
competitors also influence the channel choice because
it may be the customary channel used by all those
operating in the field
Describe how the following factors affect selection of
distribution channels

• Access to channel members

• 1. middlemen/agents-engaged in the process of
transfer of title of goods
• 2. marketing intermediaries, operating between the
producer and the consumer or industrial purchaser
• 3. wholesaling intermediaries, selling primarily to
retailers, other wholesalers, r industrial users
• 4. retailers, selling goods and services to
individuals for their own use rather than the resale
 Explain procedures for selecting channels of distribution

• Steps for selecting distribution include:

• 1. Identify how competitors' products are sold.
• 2. Analyze strengths, weaknesses, opportunities, and
threats for your business.
• 3. Examine costs of channels and sales force options.
• 4. Determine which distribution options match your
overall marketing strategy.
• 5. Prioritize your distribution choices.
• This planning sequence is valuable regardless of the size
of your business.
 Demonstrate procedures for selecting channels of
distribution.

• The selection of a distribution channel depends on several factors:

the market, the product, the producer, and the competition.

• 1. “Market factor -The most important consideration in choosing a

distribution channel is that market segment the producer wants to
reach. Changes in consumer buying behavior may influence a channel
decision.
• 2. Product factors - Products that are complex, expensive, custom-
made, and perishable move through shorter distribution channels.
Inexpensive and standardized products are typically sold through
longer channels.
• 3. Producer factors - Producers that offer a broad product line and
have the financial and marketing resources to distribute and promote
their products are more likely to use a shorter channel of distribution.”
Types of channels for consumer goods and services

Channel A
• There are five ways in which direct distribution is used for
consumer goods:
• 1. selling products at the production site
• 2. having a sales force call on consumers at home
• 3. using catalogs or ads to generate sales
• 4. having a sales representative call a consume on the
• telephone (telemarketing)
• 5. using the internet to make online sales

Channel B
•  most commonly used for merchandise that dates quickly or
needs servicing – distribution of goods and services goes from
manufacturers/producers to retailers to consumer
 Types of channels for consumer goods and services

Channel C
• the most common distribution method for staple goods, which
are items that are always carried in stock and whose styles do
not change frequently – distribution of goods and services goes
from manufacturers/producers to wholesalers to retailers to
consumers

Channel D
• this channel is for manufacturers who wish to concentrate on
production and leave sales and distribution to others –
distribution of goods and services goes from
manufacturers/producers to agents to wholesalers to retailers to
consumers
 Types of channels for consumer goods and services

• Channel E
•  This channel is chosen by manufacturers
who do not want to handle their own sales to
retailers – distribution of goods and services
goes from manufacturers/producers to agents
to retailers to consumers
 Types of channels for industrial products goods and services

Channel A
• most common method of distribution for major
equipment used in manufacturing and other businesses
– goods/services goes directly from
manufacturer/producer to industrial user

Channel B
• used most often from small standardized parts and
operational supplies needed to run a business –
goods/services goes from manufacturer/producer to
industrial distributors to industrial users
Types of channels for industrial products goods and services

Channel C
•  small manufacturers who do not have the time or
money to invest in a direct sales – goods/services
goes from manufacturer/producer to agents to
industrial distributors to industrial users

Channel D
•  used when a manufacturer does not want to hire
its own sales once – goods/services goes from
manufacturer/producer to agents to industrial users
 Demonstrate procedures for selecting channels of distribution

• 4. “Competitive factors - Producers consider

how well an intermediary performs marketing
functions. A producer may become less
competitive when an intermediary fails to
adequately promote the firm's products.”

http://faculty.piercecollege.edu/rskidmore/Ghost/library/Chapters/CHPT15-04.pdf
 Distributions
• Selective distribution means that you only distribute
to a small number of customers based on
• 1. Type of store, e.g., boutique or specialty
• 2. Geographic location
• 3. Minimum order, and
• 4. The image of the store

• Exclusive distribution strategies are developed to

create and enhance a certain image for the products.
 Distributions
• Limited distribution can create exclusivity. Exclusivity
can also be created by limiting the quantity of goods
available, such as limited editions. For example, some
private label or store brands, such as Nordstrom's and
Saks Fifth Avenue, are available only at those stores

• Mass distribution is an alternative distribution strategy.

You will use this strategy if you want to sell to as
many customers in the market as you can. Examples of
mass merchants: JC Penney and Wal-Mart
http://www.scribd.com/doc/22784449/307/FACTORS-AFFECTING-THE-CHOICE-OF-DISTRIBUTION-CHANNEL