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DistributionMgt - Lecture 6 (Channels of Distribution) Revised
DistributionMgt - Lecture 6 (Channels of Distribution) Revised
DistributionMgt - Lecture 6 (Channels of Distribution) Revised
6.0 Introduction
Physical distribution channel is the term used to describe the method and means by which a
product or a group of products are physically transferred, or distributed, from their point of
production to the point at which they are made available to the final customer. In general, this
end point is a retail outlet, shop or factory, but it may also be the customer’s house, because
some channels bypass the shop and go direct to the consumer.
In addition to the physical distribution channel, another type of channel exists. This is known as
the trading or transaction channel. The trading channel is also concerned with the product, and
with the fact that it is being transferred from the point of production to the point of consumption.
The trading channel, however, is concerned with the non-physical aspect of this transfer. These
aspects concern the sequence of negotiation, the buying and selling of the product and the
ownership of the good as they are transferred through the various distribution systems.
One of the more fundamental issues of distribution planning is regarding the choice and
selection of these channels. The question that arises, for both physical and trading channels is
whether the producer should transfer the product directly to the consumer, or whether
intermediaries should be used. These intermediaries are, at the final stage, very likely to be
retailers, but for some of the other links in the supply chain it is now very usual to consider a
third-party operator to undertake the operation.
There are several alternative channels of distribution that can be used, and a combination of
these may be incorporated within a channel structure. The diagram in Figure 1 indicates the
main alternative channels for a single consumer product being transferred from a manufacture’s
production point to a retail store or shop. Channels from industrial suppliers to industrial
retail retail
retail
Wholesale
warehouse Third-party Manufacturer’s
service warehouse
retail
retail
retail
Consumer
To achieve a given level of service: Once again, form both the supplier’s and the
customer’s viewpoints, a specified level of service should be established, through a
formal service level agreement which is then mentioned, measured and maintained. The
customer normally sees this as crucial. Relative performance in achieving service level
requirements is often used to compare suppliers and may be the basis for subsequent
buying decisions.
Market Characteristics
Product Characteristics
Channel Characteristics
Competitive Characteristics
Company Resources
A simple example of what are known as ‘long’ and ‘short’ channels is illustrated in figure 3 below.
Short channel
High-value items are more likely to be sold direct via a short channel, because the high
gross profit margins can more easily cover the higher sales and distribution costs that are
usual from short channels. In addition, the security aspects of highly priced items (e.g.
jewelry, watches, CDs, etc.) makes a short channel much more attractive because there
is less opportunity for loss and theft than with a long channel. Short channels also reduce
the requirement for carrying large inventories of high value good and thus help to avoid
the associated issues of poor use of working capital and the cost of obsolesce.
Complex products often require direct selling because any intermediary may not be able
to explain how the product works to potential customers.
New products may have to be distributed via third-party channel because final demand is
unknown and supply channels need to be flexible to respond to both high and low
demand levels. Exiting own-account operations may find it difficult to deal effectively with
the vagaries of new product demand.
Products with a handling constraint may require a specialist physical distribution channel,
e.g. frozen food, china and glass, hanging garments and hazardous chemicals.
Also of very real significance is the service level being offered by the competition; it is essential
that channel selection is undertaken with a view to ensuring that the level of service that can be
offered is as good as, or better than, that which is being provided by key competitors. This may
well be the main area of competitive advantage, especially for those products where it is very
difficult to differentiate quality and price.