Distribution Channel and Logistics Management

What is Distribution Channel

A distribution channel (also known as a marketing channel) is a set of interdependent organizations or intermediaries involved in the process of making a product available for consumption. A channel directs the flow of products from producers to customers.

Channels and Marketing Decisions

• A push strategy uses the manufacturer’s sales force, trade promotion money, and other means to induce intermediaries to carry, promote, and sell the product to end users.

• Push strategy is appropriate where there is low brand loyalty in a category, brand choice is made in the stores, the product is an impulse item, and product benefits are well understood.

• A pull strategy uses advertising, promotion, and other forms of communication to persuade consumers to demand the product from intermediaries.

• Pull strategy is appropriate when there is high brand loyalty and high involvement in the category, when people perceive differences between brands, and when people choose the brand before they go to the store.

Categories of Buyers

• High Involvement Shoppers

• High Value Deal Seekers

• Variety Loving Shoppers

• Habitual Shoppers

Design of Distribution Channel

Analyze customer needs

Evaluate major channel alternatives

Identify major channel alternatives

Establish channel objectives

Levels of Distribution Channel

Functions of Distribution Channel

• Gather information

• Develop and disseminate persuasive communications

• Reach agreements on price and terms

• Acquire funds to finance inventories

• Assume risks

• Provide for storage

• Provide for buyers’ payment of their bills

• Oversee actual transfer of ownership

Distribution Channel Decisions

Selecting channel members

Training channel members

Motivating channel members

Evaluating channel members

Modifying channel members

Marketing Systems

A conventional marketing system comprises an independent producer, wholesaler(s), and retailer(s).

I) 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, franchises them, or has so much power that they all cooperate.

• VMSs arose as a result of strong channel members’ attempts to control channel behavior and eliminate the conflict that results when independent members pursue their own objectives.

• VMSs achieve economies through:

Size

Bargaining power

The elimination of duplicated services

Corporate VMS

A corporate VMS combines successive stages of production and distribution under single ownership.

Administered VMS

• An administered VMS coordinates successive stages of production and distribution through the size and power of one of the members.

• Manufacturers of a dominant brand are able to secure strong trade cooperation and support from resellers.

What is Channel Conflict

• Channel conflict occurs when one member’s actions prevent another channel from achieving its goal.

• Types of channel conflict

– Vertical

– Horizontal

– Multichannel

Causes of Channel Conflict

Goal incompatibility

Unclear roles and rights

Differences in perception

Intermediaries’ dependence

on the manufacturer

Strategies for Managing Channel Conflict

• Adoption of super ordinate goals

• Exchange of employees

• Joint membership in trade associations

• Cooptation

• Diplomacy

• Mediation

• Arbitration

• Legal recourse

What is a Franchising System

A franchising system is a system of individual franchisees, a tightly knit group of enterprises whose systematic operations are planned, directed, and controlled by the operation’s franchisor.

Characteristics of Franchises

• The franchisor owns a trade or service mark and licenses it to franchisees in return for royalty payments

• The franchisee pays for the right to be part of the system

• The franchisor provides its franchisees with a system for doing business

McDonald’s is a Franchising System

Types of Wholesalers

Merchant

Full-service

Limited-service

Brokers and agents

Manufacturers

Specialized

Functions of Wholesalers

• Selling and promoting

• Buying and assortment building

• Bulk breaking

• Warehousing

• Transportation

• Financing

• Risk bearing

• Market information

• Management services and counseling

LOGISTICS MANAGEMENT

• A company’s logistics management contains the following elements:– Warehousing

– Transportation

– Inventory Control

– Order Processing

Warehousing

• Storage warehouse—holds goods for moderate to long periods in an attempt to balance supply and demand for producers and purchasers.

• Distribution warehouse—assembles and redistributes goods, keeping them moving as much as possible.

• Automated warehouse technology can cut distribution costs and improve customer service.

• Warehouse locations are influenced by warehouse and materials handling costs and delivery costs from warehouses to customers.

Warehousing

• Every company stores its goods while they wait to be sold.

• A company must decide on (1) how many and (2) what types of warehouses it needs and (3) where they will be located.

• The company might own private warehouses or rent space in public warehouses or both.

Transportation

• The choice of transportation carriers affects (1) the pricing of products, (2) delivery performance, (3) condition of the goods when they arrive - all affect customer satisfaction.

• In shipping goods, there are five transportation modes: rail, water, truck, pipeline, and air.– Rail; is the most cost-effective mode for shipping large

amounts products e.g. coal, farm and forest products over long distances.

– Road; trucks are very flexible in their routing and time scheduling. They can move goods door to door, saving

the need to transfer goods from truck to rail and back again. They are efficient for short hauls of high-value products. They can offer faster service.

– Water; the cost is very low for shipping bulky, low-value, nonperishable products e.g. coal, oil, metallic ores. It is the slowest mode and affected by the weather.

– Air; costs higher than rail and truck but ideal when speed is needed and distant markets have to be reached. Products are perishables (fresh fish, cut flowers), high-value, low-bulk items (technical instruments, jewellery).

• In choosing a transportation mode, shippers consider five criteria; (1) speed - door to door delivery time, (2) meeting schedules on time, (3) ability to handle various products, (4) number of geographic points served, (5) cost per tone-mile.

Inventory Control

• Inventory decisions involve (1) when to order and (2) how much to order.

• In deciding when to order, the company must think of the risks of running out of stock and costs of carrying too much.

• In deciding how much to order, the company must think of order-processing costs and inventory-carrying costs.

• Just-in-time logistic systems are used by some companies in which the producers carry only small inventories only enough for a few days of operations. Such systems result in savings in inventory carrying and handling costs.

Order Processing

• Orders can be submitted in many ways; by mail, telephone, through salespeople, or via computer.

• Order processing systems prepare invoices and order information. The warehouse receives instructions to pack and ship the ordered items. And bills send out.