Channel Management /

Distribution

Dr. Amit Kumar

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 A channel of distribution
comprises a set of institutions
which perform all of the
activities utilized to move a
product and its title from
production to consumption

Bucklin - Theory of Distribution Channel Structure

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 Physical distribution is…
Organizing and moving products through
the channels

aka: Logistics = ordering, transporting,

storing, handling and inventory control

The 3rd largest expense

for most businesses
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 (#1 Materials #2 Labor)
Explain how channel members add
value
 Right PLACE
 Right TIME

 Place UTILITY
Location – having the product where customers can buy it

 Time UTILITY
Having the product available when the customer
wants/needs it
Channel members add value to a
product by performing certain
channel activities expertly
Marketing
Packaging
Financing
Storage
Delivery
Merchandising
Personal selling

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Adding Value through Distribution

 Intermediaries provide value to producers

because they often have expertise in certain
areas that producers do not have.

 Intermediaries are experts in displaying,

merchandising, and providing convenient
shopping locations and hours for customers.

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 CHANNEL FUNCTIONS
• Information
• Inventory Managment
• Promotion
• Bulk Breaking
• Matching
• Negotiation
• physical distribution
• Financing
• Risk taking 7

• Guidance & Technical Support

 CHANNEL FUNCTIONS (cont.)
• Providing marketing information:
– Companies rely on market research to
determine their target markets’ needs and
wants

• Promoting products:
– Can be expensive
– Retailers often take a large portion of
promotion responsibilities
• Ex: local supermarkets/discount stores

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CHANNEL FUNCTIONS (cont.)
• Contact
• Matching
• Negotiating with the customers:
– Different prices are paid by the wholesaler, retailer and
consumers based on negotiation
• Physical distribution
• Financing and risk taking:
– Moving products through a channel costs money
– When channel members work together to finance activities
and to assume financial risks, channels will be more effective

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 Explain key channel tasks
• Marketing
• Packaging
• Financing
• Storage
• Delivery
• Merchandising
• Personal selling

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Explain key channel tasks (cont.)
• Providing marketing information
– Rely on market research to determine their target markets’
needs and wants
• Promoting products
– Costs and responsibilities can be shared
• Negotiating with customers
– Offering to deliver and install products
• Reducing discrepancies
– Selling large quantities of products to wholesalers and
retailers
• Financing and risk-taking
– Work together to finance activities to become more
effective

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 Tasks of Intermediaries -
Wholesalers
• Break down ‘bulk’
• Buys from producers and sell small quantities to
retailers
• Provides storage facilities
• Reduces contact cost between producer and
consumer
• Wholesaler takes some of the marketing
responsibility e.g sales force, promotions

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 Tasks of Intermediaries -
Retailer
• Much stronger personal relationship with
the consumer
• Hold a variety of products
• Offer consumers credit
• Promote and merchandise products
• Price the final product
• Build retailer ‘brand’ in the high street

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 Role of Channel
• Smoothen the flow of goods/services:

Sorting Accumulatio Allocation Assorting

n

– Sorting: Breaking down the heterogeneous supply into

separate stocks.
– Accumulation: Bringing similar stocks from Nos. of
sources together in larger quantities.
– Allocation: Breaking the homogeneous into smaller
quantities.
– Assorting: Building up of an assortment of products for
resale
e.g. every household the customer require different items
(heterogeneous) in small quantities.
 Tasks of Intermediaries -
Internet
• Sell to a geographically disperse market
• Able to target and focus on specific segments
• Relatively low set-up costs
• Use of e-commerce technology (for payment,
shopping software, etc)
• Paradigm shift in commerce and consumption

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Tasks of a Logistics Manager
• plans the flow of materials in a
manufacturing organization (beginning
with raw materials and ending with
delivery of finished products to channel
intermediaries or end customers) and
coordinates the work of departments
involved in the process, such as
procurement, transportation,
manufacturing, finance, legal, and
marketing.
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 Major decisions in marketing logistics:
• There are four major decisions –
• Order processing,
• Inventory management,
• Warehousing and
• Transportation.
(a) Optimizing the mix of the transport modes,
(b) Reducing the transport lead and the lead-time
through effective routing and other means,
(c) Eliminating multiple and wasteful transfer, and
handling of products.

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 Distribution Channel Strategy
The distribution strategy provides guidelines for decision
making

• Setting Distribution Objectives : Basis Customer

requirements

• Finalizing the set of activities :To achieve the channel

objectives

• Organizing the activities : Responsibility of performing the

activities.

• Developing policy guidelines: for the smooth functioning

Distribution Channel Management
 It encompasses all activities dealing
with the distribution function of the firm

 It can be viewed as happening in two

phases:
Ex ante phase
Ex poste phase
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Designing Marketing Channels

 The important factors affecting the

designing of the marketing channel or a
strategic objectives, product portfolio,
target market, technological advancement,
competitions, channel structure, channel
intensity, the type of intermediaries
required at different levels, and the cost
involved in selecting a particular channel.

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Channel Design Decision

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Analyzing Customer Desired service Output
Levels

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Establishing Objectives & Constraints

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Identifying the Major Channel Alternatives
 A channel alternative is described by three elements:
 Types of intermediaries.
 Depends on the service outputs desired by the target
market & the channel’s transactions costs. The company
must search for the channel alternative that promises the
most long-run profitability.
 Number of intermediaries.
 Exclusive distribution
Selective distribution
Intensive distribution
 Terms & responsibilities of channel members
The producer must determine the rights &
responsibilities of the participating channel members,
making sure that each channel member is treated
respectfully & given the opportunity to be profitable. 25
Evaluating the Major Channel Alternatives
 Each alternative needs to be evaluated against three
criteria.
 Economic Criteria
The first step is to determine whether a company sales
force or a sales agency will produce more sales.
The next step is to estimate the costs of selling different
volumes through each channel.
The final step is comparing sales & costs.
 Each channel will produce a different level of sales & costs.
 Control Criteria
The agents may concentrate on other customers’ products
or they may lack the skills to handle our products.
 Adaptive Criteria
The channel members must make some degree of
commitment to each other for a specified period of time. 26
 Channel Design Process
List of all service outputs that the channel needs to offer

Develop the levels at which each of the service outputs have to be offered- Information from the
customer or benchmarking with the competitors.

Develop flow of channel-Work back and conceive the activities to fulfill these service output
objectives

Calculate the cost – To perform these activities by particular channel or your organizations.

Design the ideal channel structure- Network of members performing functions to achieve
service output objectives at minimum cost.

Compare the ideal channel design -Existing in reality so as to modify the ideal channel
structure.

Assess the ideal channel design- Effectiveness, Efficiency, Equity, Scalability, and Flexibility

Develop the channel establishment/modification plan.

 Channel Flow
Flow Name Explanation
Physical possession Transportation and storage of the product in order to physically deliver the
product to the end-user
Ownership Nominally taking title to the product so that in case the product is damaged
or lost due to any reason, the loss is accounted for
Promotion Promoting the product to the customers in several ways such as
advertising, displaying, demonstrating, giving information about, etc.
Negotiating Coming down to an agreement about the terms of trade with the upstream
and downstream entities in the channel including the customer
Financing Taking care of the financial requirements (mainly working capital) of the
members of the channel
Risk-taking Underwriting the risks associated with the possession of ownership of the
channel including warranties for after-sales service
Ordering Receiving and recording the order, consolidating it, and passing it on to the
upstream
Payment Receiving payment, recording it, consolidating it, and passing it on to the
upstream
Channel Design Decisions

 Channel design/structure = form or shape

that a marketing channel takes to perform
the tasks necessary to make products
available to consumers.

 Includes ALL the parties involved

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Channel Design Decisions (cont.)
 Analyzing consumer needs

 Setting Channel Objectives

 Identifying Major Alternatives

Types of intermediaries
Company sales force
Manufacturer’s agency
Industrial distributors
Number of intermediaries
Responsibilities of intermediaries
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3 Dimensions of Channel Design

1.Length & Structure of the channel

2.Intensity of various levels

(Exclusive, Selective, Intensive)

3.Types of intermediaries involved

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 Length of Channel
 Channel length = number of levels in a distribution
channel.

2 level 3 level 4 level 5 level

Manufacturer Manufacturer Manufacturer Manufacturer

Agent

Wholesaler Wholesaler

Retailer Retailer Retailer

Consumer Consumer Consumer Consumer

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Channel Design (cont.)

 Efficient movement of finished product

from the end of the production line to
customers.
 Coordinate the execution of distribution
plans
 So as to provide good customer service at
acceptable cost.

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 Determinants of Channel Structure
1. The distribution tasks that need to be performed

2. The economics of performing distribution tasks

3. Management’s desire for control of distribution

4. Transaction Efficiency (refers to

the transaction process – minimizing the waste of
time, effort and money in the interactions between
the parties).
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REVIEW Channel Structure/Design
1. Setting distribution objectives
 Meeting customer needs is the ultimate goal

2. Specifying distribution tasks

 who does what along the supply chain (channel of distribution)

3. Considering alternative channel structures

 Three dimensions:
 Length/Intensity/Types of intermediaries

4. Choosing optimal channel structures

 each participant in the marketing channel focuses on performing
those activities at which it is most efficient. This results in much
greater efficiency and higher output.

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CHANNEL MANAGEMENT
DECISIONS

Channel strategy is not

formulated in a vacuum
Channel strategy and product strategy

Channel strategy and price strategy

Channel strategy and promotion strategy

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 Describe channel management
decisions
Decisions about a product’s physical movement and transfer of
ownership from producer to consumer.

• FIRST - Setting channel objectives

– Determine what the company is trying to achieve
– Meet the needs and wants of their target market
– Give their product a competitive edge

• SECOND - Channel members:

– Selection
– Management
– Motivation
– Evaluation 37
 1. Selecting Channel Members
Determine the types of members the belong
in the channel, as well as the channel
length (total number of channel members)
– Usually based on the nature of the product
– Factors to consider:
• Create product value that others cannot or are not
willing to provide
• Channel the product to its desired market
• Have a pricing and promotion strategy compatible
with the product’s needs
• Offer customer service compatible with the
products needs
• Be willing and able to work cooperatively with other
members within the product’s channel
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1. Selecting Channel Members (cont.)
Involves determining the characteristics that
distinguish the better ones by evaluating channel
members
• Do they: Provide value? Perform a function?
Expect an economic return ?
• Years in business
• Lines carried
• Profit record
• Policies, strategies, & image
• Experience & track record

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1. Selecting Channel Members (cont.)
Selecting intermediaries that are sales agents
involves evaluating

• Number and character of other lines carried

• Size and quality of sales force

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1. Selecting Channel Members (cont.)
• Market segment - must know the specific segment
and target customer

• Selecting intermediates that are retail stores that

want exclusive or selective distribution involves
evaluating
• Store’s customers

• Store locations

• Growth potential
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 2. Managing Channel Members

• Determining channel responsibilities

• Members must work together appropriately
and perform the tasks they are best suited for

• The company must sell not only through the

intermediaries but also to/with them

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 2. Managing Channel Members (cont.)

• Partner relationship management (PRM) and

supply chain management (SCM) software are
used to
• Forge long-term partnerships with channel
members
• Recruit, train, organize, manage, motivate, and
evaluate channel members

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 3. Motivating Channel Members

• Develop a cooperative/collaborative and balanced

relationship with the partner
• Understand the partner’s customers – their needs, wants, and
demands
• Understand the partner’s business – operationally and
financially and what’s really important to them
• Look at the partner’s needs in terms of customer support,
technical support, and training
• Establish clear and agreed upon expectations and goals
• Develop recognition programs focusing on the partner’s
contributions
• Build internal support systems and dedicate resources to the
partner

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3. Motivating Channel Members (cont.)

–Motivation can be positive or

negative
• Sanctions may be imposed on
middlemen not performing well
• Chargebacks – financial penalties
assessed for a variety of problems
• Incentives may be offered for reaching
performance goals

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 Motivating Channel Members
• Constant training, supervision & encouragement.
Producers can draw on the following types of power to
elicit cooperation:
• Coercive power. Manufacturer threatens to withdraw a
resource or terminate a relationship if intermediaries fail
to cooperate. Produces resentment.
• Reward power. Manufacturer offers intermediaries extra
benefits for performing specific acts.
• Legitimate power. Manufacturer requests a behavior
that is warranted by the contract.
• Expert power. Manufacturer has special knowledge that
the intermediaries value.
• Referent power. Intermediaries are proud to be
identified with the manufacturer.
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 4. Evaluating Channel Members

Produces must evaluate intermediaries performance

against such standards as:

• Sales quota attainment

• Average inventory levels

• Customer delivery time

• Treatment of damaged and lost goods

• Cooperation in promotional and training programs.

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4. Evaluating Channel Members (cont.)

Should constantly evaluate the

channel:

• What is working?

• What is not working?

• What can be improved?

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 4. Evaluating Channel Members (cont.)

Risks & Dangers of Distribution Decisions

• Transaction costs both apparent & hidden

• Risks include loss in transit, destruction,

negligence, non-payment and so on.

• So, careful choice & evaluation of each &

every channel partner is a necessity.
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Distribution Decisions - Major
Considerations…

– Multiple channels

– Control vs. costs

– Intensity of distribution desired

– Involvement in e-commerce

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 1. Multiple Channels
• Some products meet the needs of both
industrial and consumer markets.
• J & J Snack Foods sells its pretzels, drinks
and cookies using multiple channels to:
– Supermarkets
– Movie Theaters
– Stadiums
– Schools
– Hospitals
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 2. Control vs. Costs
• All manufacturers and producers must
weigh the control they want to keep over
the distribution of their products against
the costs and profitability.
– Direct sales force – company employees are
expensive with payroll, benefits, expenses;
may set sales quotas and easily monitor
performance
– Agents – work independently, running their
own businesses; less expensive = less
control; agents sell product lines that make
them more money 52
 Cost and Control
Cost
efficiency

Direct distribution Indirect distribution

Management’s Desire for
Control of Distribution

• In general, the shorter the channel structure, the

higher the degree of control, and vice versa.

• The lower the intensity of distribution, the higher

the degree of control, and vice versa.

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 3. Distribution Intensity
• = how widely a product will be distributed;
marketers want to achieve the ideal market
exposure; determining distribution patterns.
Achieve ideal market exposure (make
their product available without over
exposing and losing money)
To achieve market exposure, marketers
must determine distribution
intensity 55
 Distribution Intensity

– Exclusive Distribution

– Selective Distribution

– Intensive Distribution

– Integrated Distribution

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 Intensity of Channel Structure
• Channel intensity: the number of intermediaries at
each level of the marketing channel.

Intensive Selective Exclusive

All Possible Relatively Few Just One

Intermediaries Intermediaries Intermediary

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 Intensive Distribution
• = the use of all suitable outlets to sell a product.

• The objective is complete market coverage and the

ultimate goal is to sell to as many customers as possible,
wherever they choose to shop.

• Ex. Motor oil is sold in quick-lube shops, farm stores,

auto parts retailers, supermarkets, drugstores, hardware
stores, warehouse clubs, and other mass
merchandisers.

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 Selective Distribution
• = a limited number of outlets in a given geographical area
are used to sell the product.

• Very important to select channel members that maintain

the image of the product & are good credit risks,
aggressive marketers & good inventory planners.

• Ex. Armani & Lucky Brand sell their clothing only through
top department stores that appeal to the affluent
customers who buy its merchandise. It does not sell in a
chain megastore or a variety store.
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 Exclusive Distribution
• = protected territories for distribution of a product in
a given geographic area; business maintains tight
control over a product

• Ex. Franchisor legally requires a franchisee to sell

only the franchisor’s products

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 Integrated Distribution
Manufacturer acts as wholesaler and retailer
for its own products.

• EX. Sherwin-Williams Paint, Merle Norman

• Ex. The Gap or Ann Taylor sells its clothing

in company-owned retail stores.

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 Dual distribution
• A manufacturer may sell its products
through multiple outlets at the same time:

– Toll-free phone system

– Company website
– Multiple retailers

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 4. Involvement in E-commerce
• = means by which products are sold to
customers and industrial buyers through the
Internet.
• Consumers have also become accustomed to
buying products online.
• one-stop shopping and substantial savings for
industrial buyers.
• E-marketplaces provide smaller businesses with
the exposure that they could not get elsewhere

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 Explain how customer service
facilitates order processing
• Ensures timely delivery of products
• Effective communication is important
– Order processing
• Correct shipping information
• Correct products
• Handling complaints
• Reducing the probability of complaints
• Nice and friendly people

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Identify actions that customer service
can take to facilitate order processing

• EX. In retail selling, bag the merchandise with

care. Products such as glassware may require
individual wrapping before bagging.Work quickly
to bag your customer’s merchandise and
complete the payment process.
• EX. In business-to-business sales, complete the
paperwork quickly and leave a business card.

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Use of Technology in Distribution

 Some businesses have the capacity to

distribute most or all of their products
through the internet
e-commerce: Products are sold to customers
and industrial buyers through the Internet.
e-marketplace
 Satellite tracking = a dispatcher has
current knowledge of a delivery truck’s
location and destination
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Use of Technology in Distribution (cont.)

 Tracking of package
Bar coding on package
Package scanned at transition points in
distribution chain
Customer uses internet to follow package along
distribution chain; e-mail may be used
Global distribution: in some countries the postal
service is not reliable; package tracking
facilitates global trade

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Use of Technology in Distribution (cont.)

 Problems

Cost of technology

Changing technology = updating equipment

Need for compatible systems within and

between businesses & countries

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Distinguish between
horizontal and vertical conflict

 Horizontal Conflict: occurs between

channel members at the same level

Good, old-fashioned business competition

Ex: two retailers selling pet supplies

compete to sell to the same target market

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Distinguish between
horizontal and vertical conflict (cont.)

Vertical Conflict: occurs between

channel members at different levels
within the same channel

Producers and wholesalers, wholesalers

& retailers, or producers and retailers

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