Unit 8

DISTRIBUTION DECISION
Concept

 Distribution is concerned with all the business

activities inclined to make the product
available from point of manufacturing to the
final consumer. It is often termed as the other
half of the marketing.
 Distribution decisions focus on establishing a
system that, at its basic level, allows
customers to gain access and purchase a
marketer’s product.
Objectives of Distribution

 An ideal objective of place or distribution

decision is to deliver a right product –
-To the right place
-At right time
-Through right channel
-With minimum chances of loss and damage
-Transferring ownership from seller to buyer
or at different distribution chains
Marketing channels
 “A distribution channel consists of the set of
people and firms involved in the transfer of
title to a product as the product moves from
producer to ultimate consumer or business
user.“ – William J. Stanton
Channel functions

 There are eight major functions of marketing

channels :
1. Information
2. Promotion
3. Contact
4. Matching
5. Negotiation
6. Physical distribution
7. Financing
8. Risk taking
Flows

 Distribution includes forward and backward

flows.
 Forward flows: It moves from producers to
the market. There are three forward flows:
product flow, communication flow and
ownership flow.
 Backward flows: It move from the market to
the producers. The backward flows are
money, orders, and market information.
 Channel of distribution for
consumer products

Retailer

Wholesaler Retailer
Consume
Producer
r

Agent Retailer

Agent Wholesaler Retailer

1. Producer – consumer
channel
If producers choose to perform all the
distribution functions, they may distribute
the product directly to consumers. Services
are generally marketed through the zero level
channels. Producers of merchandise may
distribute directly to consumers through
multiple shops and chain stores.
Some producers use direct marketing through
internet services to sell the product.
2. Producer – retailer –
consumer channel
Some producers sell directly to retailers bypassing
the wholesalers. Producers normally try to avoid
the marketing costs of selling merchandise in
smaller lots. If a retailer orders in larger lots the
producer may be interested to sell directly. This
way, producers can save a part of the usual
discounts allowed to wholesalers.
Producers generally follow level one channel to
distribute products through large retail
establishments such as department stores, super
markets, and discount houses.
3. Producer – wholesaler – retailer –
consumer channel

In terms of channel use the level two channel

that has both the wholesaler and the retailer
in the channel design is most extensively
used. Most consumer goods are distributed
intensively with the target of achieving
widest possible market .
Merchandise can be distributed widely only
when the producer uses wholesalers to reach
a large number of retail outlets in different
market segments.
4. Producer-agent-retailer-consumer
channel
 In this channel structure, instead of using
wholesalers, many manufacturers prefer to
use a manufacturer’s agent, selling agent,
broker, or any other agent middlemen to
reach the retail market, especially large scale
retailers.
5. Producer – agent – wholesaler – retailer –
consumer channel

This extremely long marketing channel is used

only in special circumstances. Producers try
to avoid this design due to its high selling
costs. This channel is mostly used in
international marketing where the producer
faces distance, and language and other
cultural barriers to deal directly with local
wholesalers. In such a situation the producer
may use a local agent to contact wholesalers
and execute the sales transaction.
 Channel of distribution for
industrial products

Industrial
Distributor
Industrial
Producer
User
Agent

Industrial
Agent
Distributor
1. Producer – industrial
user channel
This zero level channel adopts direct marketing
between the producer and the industrial user.
This is the most extensively used channel
design in industrial marketing.
Raw materials, installations, fabricating
materials and higher priced accessory
equipment are directly marketed. Industrial
users prefer to deal directly with producer to
receive a regular supply and consistent
quality of products.
2. Producer – industrial distributor –
industrial user channel

This level one channel is less frequently used in

industrial marketing. It is specifically used for
distribution of low priced, less complicated
industrial products such as operating supplies
and lower priced accessory equipment. For
example photocopy machines,
telecommunication and communication
equipment, and computers
3. Producer – agent –
industrial user
This level one channel is also less frequently
used in industrial marketing. Producers often
use this channel when they need agents to
identify, locate, contact and negotiate the
sales of high priced capital equipment and
raw materials to industrial users. This channel
is mostly used when the negotiation period is
very long. Producers need agents to
undertake the negotiation in foreign markets.
4. Producer – agent – industrial distributor –
industrial user channel

This level two channel is used occasionally by

producers who have to sell lower priced
industrial products in the foreign markets.
This long channel design is also followed
when the product needs to be distributed
extensively and sold through a large number
of retail outlets. Examples are automobile
components, tires, lubricants, paper etc.
Role of marketing intermediaries in
distribution system
 Agent:
Agents are the mediator between producer and
buyer. They neither take ownership nor are
involved in the physical movement of the
products. They serve as a link between producers
and buyers for both consumer and industrial
products. Agents normally work on a
commission on sales basis. Their main roles are:
 Identifying, locating and contacting buyers for
the producer
 Negotiating and contracting the sales deal on
behalf of the producer
Wholesaling

“Wholesaling is the sale and all activities directly related

to the sale, of goods and services to businesses and
other organization for 1) resale, 2) use in producing
other goods or services, or 3) operating an
organization.” – W. J. Stanton
Wholesaling is not necessarily the work of wholesale
middlemen alone. The manufacturers who sell directly
to retailers or to other manufacturers are also involved
in wholesaling. If in a transaction the buyer is buying
for purpose of resale, or further his business
operations, the seller in that transaction is engaged in
wholesaling.
Role and functions of
wholesaler
1. Buying and assembling: Assembling implies
the collection of small lot of scattered
production for economic bulk buying; it also
means bringing together stocks of different
manufacturers producing same line of goods.
Buying comprises of the activities of selection
of manufacturers and placing orders on them
and making special purchases in cases of
seasonal products.
2. Warehousing: Warehousing or storing is closely related
to the function of assembling. As there is always a gap
between the time period of production and
consumption, the goods are to be held and preserved.
This involves capital lock-up plus risks. This warehousing
by wholesalers relieves both the producers and the
retailers from the problems of storage.
3. Transportation: In the process of assembling and
warehousing and re-sales, wholesalers do undertake
transportation of goods from producers to their
warehouses and back to the retailers. What is important
is that this transportation is done on most economic
line, either through their own fleet or through hired
common carriers.
4. Grading, bulk breaking and packaging: In
grading, wholesalers sort-out the stocks in terms
of differing sizes, qualities, moisture contents
and so on. Bulk-breaking is done with a view to
meet the small lot requirements of the retailers
and repacking for the consumers as per the
orders of the retailers.
5. Financing: Wholesaler undertakes marketing
financing. They grant credit on liberal terms to
retailers on one hand and in other hand reduce
the financial burden of the manufacturers by
taking early delivery of stocks from them.
6. Risk-bearing: Wholesalers bear the risks of loss of change
in prices, of damage, deterioration in quality, pilferage,
theft, fire and the like of the goods held in storage. They
also bear risks of non or under payment by the retailers.
7. Dispersing and selling: The goods assembled and held in
stock are mean for dispersing and selling. Wholesalers
use their sales force who move towards retailers to
collect orders.
8. Providing market information: Wholesalers are the vital
link between the retailers and the manufacturers. They
provide relevant and up-to-date information to the
retailers affecting their trade interest; also they
reciprocate the same to manufacturers as to whatever
retailers feed them on changing market conditions
useful for the wholesalers.
Retailing

“Retailing includes all the activities involved in

selling goods or services directly to the final
consumer for their personal, non-business
use” – Philip Kotler
A retailer or a retail store is known as a dealer. It
is a business enterprise which sells to ultimate
consumers. Retailing, on the other hand,
includes all the activities directly related to
the sale of goods or services to the ultimate
consumer, irrespective of who sells.
Role and functions of
retailers
1. Buying and assembling: Retailers has to
assemble products from different
manufacturers and wholesalers as he has to
keep wide variety of stock of products to
meet the varied and small requirements of
large number of customers. Buying is a
continuous process involving selection of best
and the most economical and dependable
sources of supply.
2. Warehousing: Retailer releases the goods in quantities of
different varieties and price ranges according to the
consumer needs. Warehousing makes possible holding
the stocks to match between the consumer demand and
the wholesalers or manufacturer supply conditions.
3. Selling: Retailer is rightly called as the buying agent of
consumers. He is the means to dispose the goods to the
consumers for producers and wholesalers and collect the
sales revenue for them.
4. Risk-shouldering: Risk shouldering is the basic
responsibility of a retailer arising out of physical
deteriorations and changes in prices. These are
unavoidable as he holds sufficient and variety of
inventories from the time they are bought till they are
sold to the consumers.
5. Grading and packing: Retailers undertake second
round grading and packing activities left by the
manufacturers and wholesalers. Classification of
goods into different grades and lots is common. As
he sells in loose packs and odd lots, packing is
quite important.
6. Financing: In the whole scheme of marketing, the
contribution of retailers is really worth
emphasizing in so far as consumer financing is
concerned. His financing consists of credit granted
on liberal terms to the consumers, investment
made in large variety of stocks, the expenses of
holding stock, salaries and wages of watch and
7. Promotion: Retailers are the best agents to
advertise the products, services and ideas. In
collaboration with wholesalers and manufacturers
retailers do undertake shop display, distribution of
sales literature, introduction of new products in a
convincing way as he recommends what is right or
wrong to a particular customer.
8. Supply of market information: Retailers being in
close and constant touch with consumers, clearly
keenly observes, studies the consumer behavior,
changes in the tastes and fashions and therefore,
demands. This collected information is passed on
to the wholesalers and the manufacturers.
Channel Selection Factors
1. Product considerations:
 Unit value: Products of low unit value are
generally sold through middlemen and products
of high unit value are sold directly. For e.g.
aircrafts, machinery are sold directly.
 Nature of product: Direct channel suitable for
perishable and technical products and indirect
channel suitable for durable and non-technical
products.
 Types of product: Direct or short channels are
suitable for industrial products and indirect or
long channels are suitable for consumer products.
2. Market consideration
 Types of market: Direct or short channels are suitable
for industrial products market and indirect or long
channels are suitable for consumer products market.
 Number of potential customers: For small target
customers direct is suitable and for large target
customers indirect is suitable.
 Geographic concentration of market: When
customers are concentrated in a limited geographic
areas, direct or short channels are practical and when
customers are geographically dispersed, indirect or
long channels are practical.
 Order size: For big order size direct and for small
order size indirect channels are suitable.
3. The middlemen considerations
 Availability of middlemen: The availability of
middlemen also should be considered because if
there are no desired middlemen, the producer must
sell its product alternatively.
 Capacity of middlemen: Here the capacity refers to
financial, physical and technical capability of
middlemen and producer choose capable
middlemen for distribution of his product.
 Attitudes of middlemen towards producer’s policies
 Service provided by middlemen: Producer selects
such middlemen who offer several kinds of
marketing services to provide to customers.
4. Company considerations
 Financial resources: The companies who have
sufficient financial resources, can establish their own
sales force or channel of distribution.
 Ability of management: If a company has skills,
ability, and experience in distribution, it sells its
products directly otherwise through middlemen.
 Desire of channel control: Producers who want to
control their product’s distribution go for direct
channel and vice versa.
 Company’s goodwill: A reputed company can easily
sell its products directly but for a new and unknown
to market company, they have to rely on
5. Environmental considerations

 Legal environment: Every company should pay

attention to government law, rules and
regulations while selecting distribution channel.
 Social environment: Distribution function should
not be against the social norms and values.
 Economic environment: The long distribution
system costs more to customers in most of the
time hence company should choose those
channels which are economy to customers.
Channel Conflict
 Channel conflict is a situation in which channel
members have to compete against one another. It
exists when one channel member perceives another
channel member to be acting in a way that prevents
the first member from achieving its distribution
objectives. Main causes of channel conflicts are:
-Financial and non-financial reason
-Goal incompatibility
-Role ambiguity
-Perceptual differences
-Over dependence
-Ideological differences
Types of channel conflict

 Horizontal conflict: It occurs among companies on

the same level of distribution such as two or more
retailers conflicting or two or more wholesalers
conflicting.
 Vertical conflict: It occurs between producer and
wholesaler or producer and retailer or wholesaler
and retailer.
 Multichannel conflict: It occurs when the
middlemen comes in conflict with the
manufacturer using both direct and indirect
channels of distribution.
Conflict resolution methods
 Conflict resolution is conceptualized as the methods and
processes involved in facilitating the peaceful ending of
conflicts.
1. Arbitration, mitigation, and conciliation
 Arbitration: It is a method where the disputing parties
present their disagreement to arbitrator which is the
third party and who have power to enforce decisions
on disputing parties.
 Mitigation: It is a method of resolving disputes through
mutual understanding between the parties without
using any mediator. It is possible only when both the
parties honestly realize that the good faith between
them must be restored for their long-term relationship.
 Conciliation: It is a non-binding agreement
between parties to resolve disputes by
asking a third party to mediate differences
voluntarily. The third party (voluntary
negotiator) does not have any power to
force the conflicting parties.
2. Goal modification: All the channel member sit
together, scrutinize the causes of the conflicts,
and new goal is formed. All channel members
agree new goals to face external challenges.
3. Persuasion: Channel leader persuades all
channel member to work for the interest of
group members.
4. Resources expansion: Managing channel
conflicts, arising out of competition for limited
resources, is to expansion of financial
resources. For e.g. increase in commission or
profit margin for middlemen.
5. Diplomacy: Diplomacy is the profession,
activity, or skill of managing channel
conflicts where the leader can apply
diplomatic method in the resolution of
channel conflict.
6. Improvement in communication: Clear, open
and two way communication
Marketing Logistics or Physical
distribution
 Physical distribution or marketing logistics
involves planning, implementation and
controlling the physical flow of materials, final
goods and related information from the point of
origin to points of consumption to meet
customer requirement at a profit. – Philip Kotler
 Marketing logistics is concerned with the
management of physical flow of goods from the
point of suppliers to the points of purchasers.
Objectives of Marketing logistics
are:
 To provide customer service;
 To distribute goods more safely at right time;
 To minimize the total cost; and
 To supply goods to the right target market.
Components of Physical Distribution
1. Order processing: It is the tasks associated with
fulfilling an order for goods. It begins with the
acceptance of the order from the customer, and is
not considered complete until the customer receives
the product with confirmation. It consists of:
 Order entry: It is a process of recording an order
received from customers into the company’s entry
system.
 Order handling: It is the process of accepting and
issuing orders.
 Order delivery: It is the process by which ordered
goods are delivered to the customers’ point and
getting confirmation.
2. Warehousing
 Warehouse is a place where goods are stored for certain
period for the distribution of goods to the target market
whenever and wherever required. Its types are:
1. Private warehouse: are owned, managed and
controlled by the owner of goods, usually the
wholesaler.
2. Public warehouse: are also called commercial
warehouse; can be owned and managed by any
member of public like individuals, firms, or by public
bodies like dock authority, railway authority or
government according to the law of country.
3. Bonded warehouse: is one where the imported goods
are stored before the payment of duties by the
importers.
 Importance of warehousing

 Lengthens the life of products and maintains the quality.

 Reduce the level of product damage and losses.
 Keep buffer stock of goods and facilitates supplying
whenever demand creates in market.
 Provides the facilities of marketing activities like bulk
breaking, packaging, labeling, selling goods in small lots.
 Makes available the seasonal products.
 Helps meeting demand of customers living in diverse
geographical areas.
3. Material handling

 Material handling is the movement,

protection, storage, and control of materials
throughout manufacturing, warehousing,
distribution, consumption, and disposal. It can
be done in two ways:
a. Mechanical handling: It uses truck, crane,
fork-lift, conveyer etc. to move the materials
from places to another.
b. Non-mechanical handling: It uses animals and
human labor instead of machines.
4. Inventory management

 Inventory refers to the units of materials that

a business holds for the purpose of business
use or resale.
 A good inventory management is all about
knowing what is on hand, where it is in use,
and how much finished product results.
 The objective of inventory management is to
provide uninterrupted production, sales, and
customer service levels at the minimum cost.
Tools used in inventory management
 Economic order quantity: It is the order quantity that
minimizes total inventory holding costs and ordering
costs.
 Re-order point: It is the level of inventory which triggers
an action to replenish that particular inventory stock.
 Safety stock: It is the stock held by a company in excess
of its requirements for the lead time to guard against
stock-out.
 Activity-based costing: It is a costing method that
identifies activities in an organization and assigns the
cost of each activity.
 Just in time: It denotes the manufacturing system in
which materials are delivered immediately before they
are required in order to minimize storage costs.
5. Transportation

 Transportation is the movement of product from

one place to another. Transportation involves
around 50% costs of total physical distribution
costs. Thus, marketer should take rational decision
on types of carrier and mode of transportation.
 Types of carrier:
a. Private carrier: is a company that transports only
their own goods. The carrier’s primary business is
not transportation. The company itself operates
and controls such transportation carrier.
b. Contract carrier: is a transportation
company which carries the goods of those
customers who are in contract with them.
c. Common carrier: is a company undertaking
to transport goods on regular routes at
agreed rates. A common carrier company
provides scheduled services.
 Modes of transport:
1. Railway transport
2. Road/Highway transport
3. Water transport
4. Pipe-line transport
5. Air transport
6. Human/Animal
 Factors to be considered while selecting
particular mode of transport:
1. Cost
2. Speed
3. Consistency
4. Availability