Distribution Channel Design and Management

Distributions Function
The major purpose of marketing is to satisfy human needs by delivering products of various types to buyers when and where they want them and at a reasonable cost. The when and where is the function of Distribution

What is a Distribution Channel?

A set of interdependent organizations (intermediaries) involved in the process of making a product or service available for use or consumption by the consumer or business user. Marketing Channel decisions are among the most important decisions that management faces and will directly affect every other marketing decision.

Why are Marketing Intermediaries Used?

The use of intermediaries results from their greater efficiency in making goods available to target markets. Offer the firm more than it can achieve on its own through the intermediaries:
Contacts, Experience, Specialization, Scale of operation.

Purpose: match supply from producers to demand from consumers.

Distribution
P R O D U C E R C O N S U M E R

DISTRIBUTION

Distribution Channel Functions

Information

Transfer
Payments Physical Distribution Risk Taking

Communication Negotiation

Ordering Financing

Typical Channels of Distribution

ANUFACTURER GENT ETAILER

ONSUMER

HOLESALER

Business-to-Business Channels

Direct Wholesaler Agent

Business-to-Business Channel Trends

Infomediaries & Vertical Exchange

Conventional Distribution Channel vs. Vertical Marketing Systems

Conventional marketing channel Manufacturer

Vertical marketing channel

Manufacturer Wholesaler Retailer Consumer

Wholesaler

Retailer

Consumer

Types of Vertical Marketing Systems

Corporate
Common Ownership at Different Levels of the Channel

Administered
Leadership is Assumed by One or a Few Dominant Members

Contractual
Contractual Agreement Among Channel Members

Vertical Marketing Systems

Corporate systems - total ownership

Contractual - legal relationships

Administered - strong leadership

Planning the Channel of Distribution

Determining the structure
Marketing mix strategy Organizational resources External environmental factors Market characteristics Consumer preferences and behavior The nature and availability of Intermediaries Other environmental factors

Customers Desired Service Levels

Lot size Waiting time Spatial convenience Product variety Service backup

Steps in Distribution Planning

Choosing a Distribution System

Intensive Distribution

Exclusive Distribution

Distribution Intensity

Selective Distribution

Intensive Distribution
Producer

Seeks to obtain maximum product exposure at the retail level

Retailer Retailer Retailer

Retailer Retailer Retailer

Retailer Retailer Retailer

Retailer
Retailer

Retailer
Retailer

Retailer
Retailer

Selective Distribution

Producer

Product is sold in a limited number of outlets

Retailer

Retailer

Retailer

Retailer

Retailer

Retailer

Exclusive Distribution

Product is sold in only one outlet in a given area

Producer

Retailer

Developing Distribution Tactics

Selecting Channel Partners Managing the Channel of Distribution
Channel Leader Power

Economic Power

Legitimate Power

Reward or Coercive Power

Distribution Channels & the Marketing Mix

Physical Distribution
Inventory Control
When to order How much to order

Order Processing
Received Processed Shipped

Transportation
Rail, Water, Trucks, Air, Pipeline, Internet

Physical Distribution Functions

Materials Handling
Moving Products Into, Within, and Out of Warehouses

Warehousing
Number Needed Where What Type

Transportation Modes
Rail
Cost-effective for shipping bulk products, piggy-back, fishyback, birdyback.

Water
Low cost for shipping bulky, low-value, non perishable goods, slowest form.

Truck
Most important carrier for consumer goods, flexible.

Air
High cost, ideal when speed is needed or distant markets have to be reached

Pipeline
Carry petroleum based products, very low cost, requires little energy.

Internet
Web sites have products available, used especially for services.

Channel Relationships
Cooperation

Conflict

Power
Coercive Expert Legitimate

Decision Making Framework

Prospects Importance of threatened of channel in terms of current or Destructive potential volume or profitability Conflict High Low

High (FIRE) Act to avert or address Allow threatened conflict channel to decline Low Look for opportunities Do nothing (Smoke) to reassure threatened channel and leverage your power

Channel Conflict: Identifying Threats

First, are the channels really attempting to serve the same end users? Second, do channels mistakenly believe they are competing when in fact they are benefiting from each other's actions? Third, is the deteriorating profitability of a griping player genuinely the result of another channel's encroachment? Fourth, will a channel's decline necessarily harm a manufacturer's profits?

Managing Channel Conflict

WHEN TWO OR MORE CHANNELS TARGET THE SAME CUSTOMER SEGMENT

Differentiate the Channel offer Define Exclusive Territories Enhance or Change the Channels Value

Managing Channel Conflict

CHANNEL ECONOMICS DETERIORATE Change the channels economic formula: (Grant rebates if an intermediary fulfill certain requirements; Adjust margins between products to support different channel economics; and Treat channels fairly to create level playing field) Create Segment Specific Programs (certain services not available via direct channels) Complement value proposition of the existing channel by introducing a new channel Foster consolidation among intermediaries in a declining channel

Managing Channel Conflict

THREATENED CHANNEL STOP PERFORMING OR RETALIATE AGAINST THE SUPPLIER Leverage Power (eg. Strong Brand) against the channel to prevent retaliation Migrate volume to winning channel Back off

Other Distribution Management Issues

Reverse distribution
One Coca Cola Distributor

Ethical, Political, & Legal

Difficult

OK

One thousand retailers