Distribution

Distribution MANAGEMENT
MM 101
Distribution management
Effectively managing the entire distribution process is
critical to financial success and corporate longevity.
The larger a corporation or the greater the number of
supply points a company had, the more it will need to
rely on automation to effectively manage the
distribution process.
Marketing mix
Product Price Place Promotion

Learning objectives
At the end of these topics students will know:
1. What a marketing channel is;
2. Why manufacturers choose to use intermediaries between
themselves and end-users;
3. What marketing flows define the work of channel;
4. Who the members of marketing channels are and the flows
in which they can specialize; and
5. The elements of a framework for marketing channel design
and implementation
What is a channel
✓ Means employed to distribute goods or services
from producers to consumers.
MARKETING CHANNEL
The external contactual
organization that management
operates to achieve its distribution
objectives.
Importance of marketing channels
1. The channel is a gatekeeper between the
manufacturer and the end-user.
2. The channel is an important asset in the company’s
overall marketing and positioning strategy.
3. The channel experience strongly affects the end-user’s
overall perception of a brand’s image and hence, end-
user satisfaction.
4. Awareness of the channel as a key strategic
marketing asset is low in many firms and
industries.
5. It helps the company develop a framework (a set
of ideas or facts that provide support for
something) for thinking about the problem that
will help companies at every level of the channel
7Rs
Right product in
Right quantity in
Right condition at the
Right time and
Right place for the
Right customer at
Right cost
Why do marketing channels exist and change
DEMAND-SIDE FACTORS
1. Facilitation of Search
– The process of searching is characterized by
uncertainty on both end-users and sellers.
DEMAND-SIDE FACTORS
2. Adjustment of Assortment Discrepancy
– Intermediaries in a marketing channel perform
the function of sorting goods.
Intermediary – a person who acts as a link between
people in order to try to bring about an agreement
or reconciliation; or a mediator.
DEMAND-SIDE FACTORS
The sorting function performed by intermediaries includes the following activities:
A. B. C. D.
Sorting Accumulation Allocation Assorting

DEMAND-SIDE FACTORS
A. Involves breaking down a
heterogeneous (different in kind)
Sorting
supply into separate stocks that are
relatively homogeneous (similar
kind).
DEMAND-SIDE FACTORS
B. The intermediary brings together
similar stocks from a number of
Accumulation
sources into a larger homogenous
supply.
DEMAND-SIDE FACTORS
C. Refers to breaking down a homogenous
Allocation supply into smaller lots.
D.
Building up of assortment of products for
Assorting resale in association with each other.
SUPPLY-SIDE FACTORS
1. Routinization of Transactions
– Each purchase involves ordering of, valuation of,
and payment for goods and services.
SUPPLY-SIDE FACTORS
2. Reduction in Number of Contacts
– Decreasing the number of transactions on the
part of manufacturer and end-users.
Work of marketing channel
Who belongs to a marketing channel
A. Manufacturers
B. Intermediaries
C. End-users
A. Manufacturers
- The producer or originator of the product or service
being sold.
B. Intermediaries Intermediaries
Specialized
Wholesaler Retailers
Intermediaries
Merchant
wholesalers
Manufacturers*,
Representatives
Agents, Brokers
B. Intermediaries
Wholesaler
- Sells to other channel intermediaries, such as retailers,
or to business end-users but not to individual consumer end-
users.
B. Intermediaries
Wholesaler
• Merchant Wholesaler / Distributors
- Take both the title and physical possession of
inventory, store inventory, promote the products in their line,
and arrange for financing, ordering, and payment with the
customers.
B. Intermediaries
Wholesaler
• Representatives, Agents, Brokers
- They do not take title to of the goods they sell.
- The major flows in which they take part are promotion
and negotiation.
eg. Trading companies, Import-Export Agents
B. Intermediaries
Retailers
- Sell directly to individual consumer or end-user.
eg. Department stores, Convenience stores, Franchises
B. Intermediaries
Specialized Intermediaries
- Perform a specific flow and typically are not heavily
involved in core business represented by the product
sold.
eg. Insurance Companies
eg. Advertising Agencies
eg. Logistics and Shipping Firms
C. End-users
Either business customers or individual customers
The work of the channel includes the performance of several
marketing flows such as:
A. Physical Possession E. Financing
B. Ownership F. Risking
C. Promotion G. Ordering
D. Negotiation H. Payment
FIVE FLOWS IN THE MARKETING CHANNEL
PRODUCT Transportation
FLOW
Manufacturer Company Work of marketing
Wholesalers Retailers channel
Consumers
NEGOTIATION
FLOW
Manufacturer Wholesalers Retailers Consumers
OWNERSHIP Manufacturer Wholesalers Retailers Consumers

FLOW
INFORMATION Transportation
FLOW
Manufacturer Company
Wholesalers Retailers Consumers
PROMOTION Advertising
FLOW Manufacturer Wholesalers Retailers Consumers
Agency
Five flows in the marketing channel
PRODUCT FLOW
• The actual physical movement of the product from the manufacturer through all
the parties who take physical possession of the product, from its point of
production to final consumers.
Transportation
Company
NEGOTIATION FLOW
• The interplay of the buying and selling functions associated with the transfer of
title (right of ownership)

OWNERSHIP FLOW
• The movement of the title to the product as it is passed along from the
manufacturer to final consumers.

INFORMATION FLOW
• Transportation company reappeared in the flow and all arrows showing the flow
of information from the manufacturer to consumers are two-directional.
Eg. When and what quantity, shipping schedule
Transportation
Company
PROMOTION FLOW
• The flow of persuasive communication in the form of ad., personal selling, sales
promotion, and publicity.
Advertising
Agency
FIVE FLOWS IN THE MARKETING CHANNEL
PRODUCT Transportation
FLOW
Manufacturer Company Work of marketing
Wholesalers Retailers channel
Consumers
NEGOTIATION
FLOW
OWNERSHIP Manufacturer Wholesalers Retailers Consumers

FLOW
INFORMATION Transportation
FLOW
Manufacturer Company
Wholesalers Retailers Consumers
PROMOTION Advertising
FLOW Manufacturer Wholesalers Retailers Consumers
Agency
Framework for channel design and implementation
Segmentation for marketing channel design
How to do it?
✓ Knowing how end-users want to buy and use the products
and services being purchased.
✓ Understanding the idea on how to sell a particular product.
✓ Grouping end-users in the market by demands for service
outputs.
Segmentation for marketing channel design
Service Outputs
- Are the productive outputs of the marketing channel, over which
end-users have demand and preference.
- A framework for codifying and generalizing how the end-user
wants to buy a particular product as a basis for determining
channel structure.
Bucklin argues that channel systems exist and remain viable
through time by performing duties that reduce end-users’ search,
waiting time, storage, and other costs.
Service outputs
1. Bulk-breaking
- refers to the end-users’ ability to
buy their desired number of units
of a product or service even
though they may be originally
produced in large, batch-
production lot sizes.
Service outputs
2. Spatial Convenience
- provided by market
decentralization of wholesale
and/or retail outlets increases
consumers’ satisfaction by reducing
transportation requirements and
search costs.
Service outputs
3. Waiting time
- Waiting time is the time period
that the end-user must wait
between ordering and receiving
goods or post sale service.
Service outputs
4. Product Assortment
- Breadth of variety and depth of
product assortment.
- the wider the breadth of variety or
the greater the depth of product
assortment available to the end-
user, the higher the output of the
marketing channel system and the
higher the overall distribution costs
Service outputs
5. Customer Service
- refers to all aspects of easing the
shopping and purchase
- process for end-users as they
interact with commercial
suppliers or retailers.
Service outputs
6. Information Provision
- Refers to education of end-users
about product attributes or
usage capabilities, or pre-
purchase and post-purchase
services.
MEETING Service outputs
The key factors determining whether and how quickly to
respond to knowledge about unmet service output demands
include:
Competitive Ease of
Cost
Advantage Entry
1. Cost
- Sometimes it is expensive to meet and expressed service
output demands.
- Channel members must then decide whether or not to
provide the service.
POSSIBLE SCENARIOS
- Cover the cost of the customer
- Charge the customer for high service
2. Competitive Advantage
- The question here is whether existing competitors can beat
the channel’s current service output provision level.
3. Ease of Entry
- A channel that fails to meet end-user segment’s demands
for service outputs may find itself surprised by the incursion
of new competitors with better technologies for meeting
those demands.
1. example
A business buying laptop computers wants to buy more units
than does a home or a student buyer. Since breaking bulk (i.e.,
providing a smaller lot size) requires an effort, we would say
that the business segment has a low demand for the bulk-
breaking service output, while the home buyer and the student
have a high demand for the bulkbreaking service output
(because they typically want to buy only one computer at a
time).
2. example
At the postsale service stage, home buyers may also have a
low demand for the delivery/waiting time service output
because they may be willing to put up with a delay in getting
technical service or
repairs—their use of the computer may not be a life-or-death
matter. Students, however, have a very high demand for the
delivery/waiting time service output on the postsale service
side because their cost of downtime is very high (cannot get
homework done without the unit)
conclusion
The ultimate purpose of service output
demand analysis is to assess segment
attractiveness, target a subset of the segments
identified, and customize the marketing
channel system solution used to sell to each
targeted segment.
Sod template
Supply side channel analysis ` Channel
flows and efficiency analysis
Supply-Side Channel Analysis Considerations
✓ Detailed knowledge of the flow of performance in the
channel helps the channel manager diagnose and remedy
shortcomings in the provision of service outputs.
✓ The concept of channel flows can be used to design a new
channel or revise an existing channel to minimize the cost of
providing desired service outputs.
REVISITED
Supply side channel analysis ` Channel flows
and efficiency analysis
The work of the channel includes the performance of several
marketing flows such as:
A. Physical Possession E. Financing
B. Ownership F. Risking
C. Promotion G. Ordering
D. Negotiation H. Payment
REVISITED
A. Physical Possession – Refers to all channel activities concerned
with the storage of goods, including its transportation between
two channel members.
B. Ownership – This flow refers to the situation of when channel
members takes title to the goods.
C. Promotion – activities undertaken by a channel member to
promote the products within the channel.
D. Negotiation – occurs to discuss and agree on terms of sales,
maintenance of relations and issues are discussed between
channel members.
REVISITED
E. Financing – refers to all those activities that is undertaken to
support a channel member with finance (credit, loan etc) to
ensure the channel member remains active in the marketing
channels.
F. Risking – The function that suggests every channel member
has to bear a minimum amount of risk or loss or failure when
engaging into a channel management.
REVISITED
G. Ordering and Payment – The last two flows refers to the
actions whereby channel members have to order the products
from the prior channel member and make payment
accordingly.
REVISITED
Physical Possession and Ownership - Why do Inventories Exist?
- Demand surges and outstrips production capacity
- Economies of scale exist in the production or in
transportation
- Transportation takes time because of the distances between
points of production and points of consumption
- Supply and demand are uncertain
CUSTOMIZING THE LIST OF FLOWS FOR A PARTICULAR
CHANNEL: THE CONCEPT OF COST-REDUCTION
✓ Every flow performed in channel operation has cost that
needs to be accounted in channel operation cost.
✓ The goal of a channel manager is to ensure elimination of
unnecessary flows from a channel and cost reduction.
8 GENERIC FLOWS COSTS
Physical Possession Storage, Delivery
Ownership Inventory, Shipping, Loss
Promotion Selling, ads, promos, public relations, publicity…
Negotiation Time, legal costs, contracts
Financing Credit terms, terms, conditions of sale,
Risking Price guarantees, warranties, insurance, repair, after-sale
support/service, reputation
Ordering Administration, technology, time
Payment Processing, collection, bad debt servicing
DESCRIBING THE PRODUCTIVE ACTIVITIES OF A CHANNEL:
AN APPLICATION OF EFFICIENCY TEMPLATE
Efficiency Template
- A Template/Model or a matrix designed to measure the costs
and value added by each channel member in its performance
of the channel flows.
The efficiency template describes:
a. The types and amounts of work done by each channel
member in the performance of the marketing flows.
b. The importance of each channel flow to the provision of
Service Output Demand (SOD)
c. The profit that each channel member should reap after
successful completion of the necessary flows.
Therefore, the usage of efficiency template are:
a. It reveals how the cost of particular flows are shared among each
channel members.
b. It shows how much each channel member contributes to the
overall value creation in the channel.
c. It reveals how important each of the flows is to total channel
performance.
d. It can be a powerful tool in explaining current channel
performance and justifying changes that channel managers wish
to make to the currently operating channels.
Designing a Zero Based Channel
A zero based channel design in one that:
a. Meets the target market segments demands for service
outputs
b. Minimum cost is borne in performing the necessary
channel flows that produces the required service outputs.
Designing a Zero Based Channel
A zero based channel design in one that:
a. Its all about maximizing profitability by maximizing customer
satisfaction.
b. In order to construct a perfect “Zero Based Channel” one should
know its:
a. Target- Market Understanding each target market segment
b. Buyer Behavior
c. End User Demands
Equity Principle
a. Compensation in the channel system should be given on
the basis of the degree of participation in the marketing
flows and the value created by this participation.
b. The principle states it is appropriate to reward each channel
member in accordance with the value that members
creates in the channel.
Supply side channel analysis ` Channel structure
and intensity
Channel Structure
- summarizes the types of channel members, the
intensity or numbers of members of each type that co-exist in
the market, and the number of distinct channels that co-exist in
the market.
The number of levels of intermediaries in the channel
Two – Level
Three – Level
Four – Level
Five - Level
and intensity
Intensity at the Various Levels
Intensity refers to the number of intermediaries at each level of
the marketing channel.
1. INTENSIVE
2. SELECTIVE
3. EXCLUSICE
and intensity
1. Intensive (sometimes called saturation) means that as many
outlets a possible are used at each level of the channel.
Many consumer convenience goods fit this category.
and intensity
1. Intensive
and intensity
INTENSIVE
ADVANTAGES DISADVANTAGES
Product Awareness High Distribution
Increase Sales and Expenses
Earnings Difficulty in Managing
Impulsive Purchase Retailers
Huge Customer
Recognition
and intensity
2. Selective means that not all possible intermediaries at a
particular level are used, but rather that those included in the
channel are carefully chosen.
Consumer shopping goods are often in this category.
and intensity
2. Selective
and intensity
SELECTIVE
Better Communication Decreased Market
Optimum Market Penetration
Coverage
Consumer Satisfaction
and intensity
3. Exclusive is actually a way of referring to a very highly-
selective pattern of distribution. In this case only one
intermediary on a particular market area is used.
Specialty goods often fit into this category.
and intensity
3. Exclusive
and intensity
EXCLUSIVE
High-quality results Increased
Greater Attention dependency
Disputes leading to
huge losses
and intensity
INTENSITY NUMBER OF
OBJECTIVE
LEVEL INTERMEDIARIES
Achieve mass market selling
1. Intensive Many
Goods: Convenience goods
Work with selected intermediaries
2. Selective Goods: Shopping and some specialty Several
goods
Work with single intermediary
3. Exclusive Goods: Specialty goods and industry
equipment
and intensity
Perspective of Channel Members in terms of Distribution
UPSTREAM MEMBERS DOWNSTREAM MEMBERS
(Manufacturers) (Resellers)
Considers how many

Considers how many outlets
competing brands to carry in
to pursue (degree of
a product category (category
selectivity)
selectivity)
and intensity
Why Downstream Channel Members Dislike Intensive Distribution?
Channel members
differentiate themselves
by offering unique
assortments.
and intensity
CHANNEL MEMBERS DROP A BRAND IN THREE WAYS:
2. If they cannot 3. After

1. If the brand find a converting a
is already satisfactory
prospective
saturated in substitute for a
brand and the customer to
their trading
category is not buy a new
areas.
essential brand
and intensity
Can the Manufacturer sustain intensive distribution?
• POSSIBLE SOLUTIONS ARE THE FOLLOWING:
1. Creating so much brand equity as to exercise pull over the
channel’s customers
2. Frequently introducing new products that have low failure
rates
3. Practicing resale price maintenance where it is legal
4. Offering branded variants
5. Imposing and enforcing a restrictive contract
and intensity
Dual Distribution
The manufacturer will use wholly owned and independent channels to
serve prospective customers.
Advantages Disadvantages
1. Can provide valuable 1. Firms will be seen as biased
information toward their own channels
2. Can give the manufacturer 2. May view each other as
leverage over both channels rivals
and intensity
Carrier – Rider Relationships BENEFITS
The relationship between the RIDER – Avoidance of the cost of
manufacturer and the carrier of its hiring a large employee sales force
product. or finding independent channel
member
Piggybacking Relationship
CARRIER – The fee earned for
- A product of a particular manufacturer carrying the rider’s product along
is being carried and delivered by another with any synergies that result from
manufacturer’s owned sales force and adding a complementary product
distribution abilities. to its line

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Distribution MANAGEMENT

Product Price Place Promotion

Sorting Accumulation Allocation Assorting

OWNERSHIP Manufacturer Wholesalers Retailers Consumers

Manufacturer Wholesalers Retailers Consumers

Manufacturer Wholesalers Retailers Consumers

OWNERSHIP Manufacturer Wholesalers Retailers Consumers

Considers how many

2. If they cannot 3. After

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