DISTRIBUTION

DECISIONS
BNMIT MBA

INTRODUCTION
Distribution of goods or services from the factory to the consumer

provides strategic advantage to the company in the highly competitive

environment. Earlier people used to wait to get the products but now
companies should make them available as and when customer
demands. This has thrown up an opportunity as well as challenge to the
organizations to provide right product at a right place in a right time.
Companies are also emphasizing on how to reduce the cost in the
supply chain. To meet the cost reduction objectives, they are integrating
their system with information technology, outsourcing the distribution
functions and streamlining the supply chain.
Use of technology and interest of corporate in the distribution
management resulted in the evolution of professional retailing and
wholesaling in India.
These above factors have made distribution as one of the important
part of the marketing planning.

Need of marketing channels

Marketing channels are set of independent organizations

involved in the distribution of the goods or services to the

consumer from the factory at right time, and right place.
Marketing channels include retailers, wholesalers, agents,
brokers etc. Some companies do not use these channels. They
directly market their products to consumer.
For example, Dell computers ask its customers to login to the
website, configure their product, and order the same on the
internet.
Then generally a question comes to the mind, why many
companies use marketing channels and some do not.
To answer the question we need to understand what are the
functions marketing channels do and how they are
advantageous than direct marketing.

Functions of marketing channels

1. Physical distribution: transporting and storing goods.
2. Communication: Marketing intermediaries promotes the

companys products. Here channel member provide the

information regarding the product and pushes it to customer.
3. Information: retailers and wholesalers collect the
information from the customer and provide the same to the
company.
4. Title transforming: Marketing intermediaries purchases the
goods from the company and transform the title of goods to
next intermediary or customer.
5. Relationship management: Here marketing intermediaries
try to understand the needs of consumer, try to match his
needs and satisfy them.

Decisions involved in setting up a channel

Marketer should consider various factors before deciding the particular type of channel. It may

be company or competitive factors. The type of goods to be transported and stored will decide
the length and intensity of channel. To decide on the particular channel, marketer will take
following decisions.
1. Understanding the customer profile: Purchasing habits differs from individual to individual.
Individuals who face shortage of time would like to purchase on the net (direct channel) and
who have abundance of time would like to experience the shopping. Some of them would like to
have variety of goods while others want unique or specialized products. Hence marketer should
understand who are his customers? How do they purchase? For example, customer dont like to
travel half a kilometer to purchase a shampoo sachet but he dont mind travelling two kilo
meters while purchasing durable goods.
2. Determine the objectives on which channel to be developed.
a. Reach: Company would like to make the goods available in most of the retail outlets. It will
adopt intensive distribution channel.
b. Profitability: Company wants to reduce the cost in the channels and enhance their profitability.
It will restructure the channel to optimum level so that it can reduce the cost and increase the
profit.
c. Differentiation: Company positions their products differently. When most of the industry players
follow conventional system, company goes with new format of channels. For example, all
computer manufacturers were adopting dealer retailer channel to sell their products but Dell
started selling its product on the internet.

Decisions involved in setting up a channel

3. Identify type of channel members: Once the objectives are set on the basis of companys

policies, it will analyze which type of the channel best suits. Merchants, agents and resellers are
some intermediaries involved in the distribution. Merchants are those who buy the product, take
title and resell the merchandise. Agents will find the customers, negotiate with them but do not
take the title of the product. Facilitators are the people who aid the distribution but do not
negotiate or take the title of the product.
4. Determining intensity of distribution: Intensity of distribution means how many middlemen will
be used at the wholesale and retail levels in a particular territory. If the numbers of intermediaries
are excess then the cost of the channel will increase vice versa if the number of intermediaries
are less then company will not be able to meet all target customers. Therefore company should
adopt optimum number of intermediaries. On the basis of how many intermediaries required,
company can adopt any one of the following strategies.
a. Intensive distribution: A strategy in which company stocks goods in more number of outlets.
The intention is to make the goods available near to the customer. For example, you can find
ParleG glucose biscuits available in almost all the retail outlets in rural and urban areas.
b. Selective distribution: A strategy in which company stocks goods in limited number of retail
outlets. For example, televisions are sold only in selected retail outlets. TVs cannot be sold like
toothpaste. Onida TVs are available in electronic retail shops like Viveks, Girias, Next, Ezone etc
c. Exclusive distribution: In this type of channel format marketer gives only a limited number of
dealers the excusive right to distribute its products in their territories. For example, a Kaya skin
care solution of Marico was marketed through exclusive distribution.

Decisions involved in setting up a channel

5. Assigning the responsibilities to channel members.

Company should define the territory in which channel

member should operate, at what price he should sell,
services he should perform, and how he should sell.
6. Selecting the criteria to evaluate the channel
member: company may have different types of
channel alternatives. It would like to choose any one
of the alternatives, which meets its objectives.
Channels can be evaluated in the design phase by
the method called SCPCA.

Decisions involved in setting up a channel

a. Sales(S): The ability of each channel member to generate the sales for

company in a given period.

b. Cost(C): how much cost each channel alternatives incur? Which one of
the alternative provides the optimum solution?
c. Profitability (P): various channel alternatives available to the company
and their profitability shall be compared. Company with better
profitability shall be selected.
d. Control (C): Every company would like to have better control over its
channel members. Alternative channels can be evaluated on the basis of
how much control each channel member desires? And how much control
the company is willing to provide?
e. Adaptability (A): Marketing is dynamic world. Competition exerts
pressure on companies to relook at their practices and supply chain
continuously. The channel alternatives should be flexible enough to meet
the changing requirements. Whichever channel alternative meets such
objectives shall be selected.

CHANNEL LEVELS
The producer and the final customer are part of every

channel.
A zero-level channel (also called a direct-marketing

channel) consists of a manufacturer selling directly to

the final customer. The major examples are door-todoor sales, home parties, mail order, telemarketing,
TV selling, Internet selling, and manufacturer-owned
stores. Avon sales representatives sell cosmetics doorto-door; Tupperware representatives sell kitchen
goods through home parties .

CHANNEL LEVELS
A one-level channel contains one selling intermediary,

such as a retailer. A two-level channel contains two

intermediaries. In consumer markets, these are
typically a wholesaler and a retailer. A three-level
channel contains three intermediaries. In the
meatpacking industry, wholesalers sell to jobbers,
who sell to small retailers. In Japan, food distribution
may involve as many as six levels. From the
producer's point of view, obtaining information about
end users and exercising control becomes more
difficult as the number of channel levels increases.

CONSUMER MARKET
CHANNEL

INDUSTRIAL MARKET
CHANNEL

Channel management strategies

Managing and motivating channel

member
Now days companies are considering their
channel members as partners. These
companies are asking its intermediaries to
integrate their business with them. Integrated
business reduce the cost,increase the
efficiency, and helps in better customer
service. Companies are adopting partner
relationship management (PRM) software to
add value to their supply chain.

Channel management strategies

Evaluating Channel Members
The channel members need to be evaluated on a

regular basis to assess their performance.

Producers must periodically evaluate intermediaries'
performance against such standards as sales-quota
attainment, average inventory levels, customer
delivery time, treatment of damaged and lost goods,
and cooperation in promotional and training
programs. A producer will occasionally discover that
it is paying too much to particular intermediaries for
what they are actually doing.

Channel management strategies

Selecting Channel Members
Companies need to select their channel members carefully. To

customers, the channels are the company. Consider the negative

impression customers would get of McDonald's, Shell Oil, or MercedesBenz if one or more of their outlets or dealers consistently appeared
dirty, inefficient, or unpleasant.
To facilitate channel member selection, producers should determine
what characteristics distinguish the better intermediaries. They should
evaluate the number of years in business, other lines carried, growth
and profit record, financial strength, cooperativeness, and service
reputation. If the intermediaries are sales agents, producers should
evaluate the number and character of other lines carried and the size
and quality of the sales force. If the intermediaries are department
stores that want exclusive distribution, the producer should evaluate
locations, future growth potential, and type of clientele.

Channel management strategies

Training Channel Members

Companies need to plan and implement

careful training programs for their

intermediaries.
Microsoft requires third-party service
engineers to complete a set of courses and
take certification exams. Those who pass are
formally recognized as Microsoft Certified
Professionals, and they can use this
designation to promote business.

Channel management strategies

Modifying Channel Arrangements

A producer must periodically review and

modify its channel arrangements. Modification

becomes necessary when the distribution
channel is not working as planned, consumer
buying patterns change, the market expands,
new competition arises, innovative
distribution channels emerge, and the product
moves into later stages in the product life
cycle.

DESIGNING MARKET
CHANNELS
Designing a marketing channel system involves analyzing customer needs, establishing channel

objectives, identifying major channel alternatives, and evaluating major channel alternatives.
1. Analyzing Customers Desired Service Output Levels
Channels produce five service outputs:
1. Lot size: min qty
2. Waiting and delivery time
3. Spatial convenience: geographic coverage
4. Product variety
5. Service backup
The marketing-channel designer knows that providing greater service outputs means increased
channel costs and higher prices for customers.
2. Establishing Objectives and Constraints
1. Channel institutions should minimize total channel costs and still provide desired levels of
service outputs.
2.Planners can identify several market segments.
3.Channel objectives vary with product characteristics.
4. Channel design must take into account the strengths and weaknesses of different types of
intermediaries.

DESIGNING MARKET
CHANNELS
3. Identifying and Evaluating Major Channel Alternatives
Alternatives are: sales forces, to agents, distributors, dealers,

direct mail, telemarketing, and the Internet.

Each channel has unique strengths as well as weaknesses.
Most companies now use a mix of channels.
Each channel hopefully reaches a different segment of buyers and
delivers the right products to each at the least cost.
A channel alternative is described by three elements:
The types of available business intermediaries
The number of intermediaries needed.
The terms and responsibilities of each channel member.

CHANNEL CONFLICT
No matter how well channels are designed

and managed, there will be some conflict, if

for no other reason than that the interests of
independent business entities do not always
coincide. Channel conflict is generated when
one channel member's actions prevent the
channel from achieving its goal.

TYPES OF CONFLICTS
Suppose a manufacturer sets up a vertical channel consisting of wholesalers

and retailers. The manufacturer hopes for channel cooperation that will
produce greater profits for each channel member. Yet vertical, horizontal, and
multichannel conflict can occur.
Vertical channel conflict means conflict between different levels within the
same channel. General Motors came into conflict with its dealers in trying to
enforce policies on service, pricing, and advertising. Coca-Cola came into
conflict with bottlers who also agreed to bottle Dr. Pepper.
Horizontal channel conflict involves conflict between members at the same
level within the channel. Some Pizza hut franchisees complained about other
Pizza hut franchisees cheating on ingredients, providing poor service, and
hurting the overall Pizza hut image.
Multichannel conflict exists when the manufacturer has established two or
more channels that sell to the same market. Multichannel conflict is likely to
be especially intense when the members of one channel get a lower price
(based on larger volume purchases) or work with a lower margin.

CAUSES OF CONFLICT
Causes of Channel Conflict
It is important to identify the causes of channel conflict.

Some are easy to resolve, others are not.

One major cause is goal incompatibility. For example, the
manufacturer may want to achieve rapid market penetration
through a low-price policy. Dealers, in contrast, may prefer
to work with high margins and pursue short-run profitability.
Sometimes conflict arises from unclear roles and rights. HP
may sell personal computers to large accounts through its
own sales force, but its licensed dealers may also be trying
to sell to large accounts. Territory boundaries and credit for
sales often produce conflict.

CAUSES OF CONFLICTS
Conflict can also stem from differences in perception. The

manufacturer may be optimistic about the short-term

economic outlook and want dealers to carry higher
inventory. Dealers may be pessimistic. In the beverage
category it is not uncommon for disputes to arise
between manufacturers and their distributors about the
optimal advertising strategy. Conflict might also arise
because of the intermediaries' dependence on the
manufacturer. The fortunes of exclusive dealers, such as
auto dealers, are profoundly affected by the
manufacturer's product and pricing decisions. This
situation creates a high potential for conflict.

MANAGING CONFLICTS
There are several mechanisms for effective

conflict management. One is the adoption of

super-ordinate goals. Channel members come
to an agreement on the fundamental goal
they are jointly seeking, whether it is survival,
market share, high quality, or customer
satisfaction. They usually do this when the
channel faces an outside threat, such as a
more efficient competing channel, an adverse
piece of legislation, or a shift in consumer
desires.

MANAGING CONFLICTS
Co-optation is an effort by one organization to

win the support of the leaders of another

organization by including them in advisory
councils, boards of directors, and the like. As
long as the initiating organization treats the
leaders seriously and listens to their opinions,
co-optation can reduce conflict, but the
initiating organization may have to
compromise its policies and plans to win their
support.

MANAGING CONFLICTS
When conflict is chronic or acute, the parties may have

to resort to diplomacy, mediation, or arbitration.

Diplomacy takes place when each side sends a person
or group to meet with its counterpart to resolve the
conflict. Mediation means resorting to a neutral third
party who is skilled in conciliating the two parties'
interests. Arbitration occurs when the two parties agree
to present their arguments to one or more arbitrators
and accept the arbitration decision. Sometimes, when
none of these methods proves effective, a company or
a channel partner may choose to file a lawsuit.

DISTRIBUTION SYSTEMS
Horizontal Marketing Systems
Another channel development is the horizontal

marketing system, in which two or more unrelated

companies put together resources or programs to
exploit an emerging marketing opportunity. Many
supermarket chains have arrangements with local
banks to offer in-store banking.
The companies might work with each other on a

temporary or permanent basis.

DISTRIBUTION SYSTEMS
Vertical Marketing Systems
One of the most significant recent channel developments is the rise of

vertical marketing systems. A conventional marketing channel

comprises an independent producer, wholesaler (s), and retailer(s).
Each is a separate business seeking to maximize its own profits.
Even if this goal reduces profit for the system as a whole. No channel
member has complete or substantial control over other members.
A vertical marketing system (VMS), by contrast, comprises the
producer, wholesaler(s), and retailer(s) acting as a unified system.
One channel member, the channel captain, owns the others or
franchises them or has so much power that they all cooperate. The
channel captain can be the producer, the wholesaler, or the retailer.
Notable producer channel captains are Coca-Cola with soft drinks,
Gillette with shaving products, and Procter & Gamble with detergents.

DISTRIBUTION SYSTEMS
Multichannel Marketing Systems
Once, many companies sold to a single market through a single channel. Today, with

the proliferation of customer segments and channel possibilities, more companies

have adopted multichannel marketing. Multichannel marketing occurs when a single
firm uses two or more marketing channels to reach one or more customer segments.
By adding more channels, companies can gain three important benefits.
The first is increased market coverage.
The second is lower channel costselling by phone rather than personal visits to

small customers.
The third is more customized sellingadding a technical sales force to sell more
complex equipment.
The gains from adding new channels come at a price, however. New channels
typically introduce conflict and control problems. Two or more channels may end up
competing for the same customers. The new channels may be more independent and
make cooperation more difficult.

MULTI LEVEL MARKETING

MLM started in the US, in 1959, by business

partners Rich DeVos and Jay Van Andel,

originally with just one single product and a
new and unique business vision. They
believed that they should be paid relative to
the benefit the company continued to get
from their original work.

MULTI LEVEL MARKETING

MLM Multi-Level Marketing(sometimes called

Network Marketing, Referral Marketing or Direct

Marketing), multiple levels of people are marketing a
product to consumers.
A sales representative (also referred to as a
distributor, member, affiliate, partner or associate)
gets customers and recruits and trains another sales
rep to get customers.
The products and company are usually marketed
directly to consumers and potential business
partners by means of relationship referrals and word
of mouth marketing.

CRITICISM OF MULTI LEVEL

MARKETING
Criticism Of MLM The Federal Trade Commission(FTC)

issued a decision, in 1979 in which it indicated that

multi-level marketing was not illegal in the United
States. AMWAY was found guilty of price fixing and
making exaggerated income claims.
MLM's are also criticized for being unable to fulfill
their promises for the majority of participants The
exploitation of personal relationships for financial
gain

CHECK POINTS FOR MLM

Check points for the legal MLM Company must have

their own branded products.

A good residual plan is must.
Value for money should be there at the time of joining.
Products should be of daily use or must have
repurchase power.
Quality should be good as it is word of mouth business.
Management should not be a part of some past illegal
things. At least a Private Limited firm should be there.

MLM IN INDIA
AMWAY
MODICARE
TUPPERWARE
ORIFLAME

EXAMPLE