Chapter 7.

Managing Distribution
Channels and Physical Distribution
LEARNING OBJECTIVES
Definition & Role of Channels of
Distribution

Marketing Flows in a Channel System

Channel Choice and Channel Decision

Channels of Distribution/ Channel Conflict

Direct Marketing

Physical Distribution
 CHANNELS OF DISTRIBUTION
Distribution channel can be defined as the set of interdependent
marketing institutions participating in the marketing activities
involved in the movement or the flow of goods or services from the
primary producer to the ultimate consumer.
Marketing institutions considered as channel components are:
(a) All kinds of merchant middlemen, such as wholesalers and
retailers.
(b) All kinds of agent middlemen, such as commission agents, factors,
brokers, warehouse-keepers and so on. The route or channel
includes both the manufacturer and the ultimate consumer as well
as all intermediaries.
ROLE OF CHANNELS OF DISTRIBUTION
Distribution channels have a distinctive role in the successful
implementation of marketing plans and strategies. These channels
perform the following marketing functions:
1. The searching out of buyers and sellers (contacting).
2. Matching goods to the requirements of the market
(merchandising).
3. Offering products in the form of assortments or packages of items
usable and acceptable by the consumers/users.
4. Persuading and influencing the prospective buyers to favour a
certain product and its maker (personal selling/sales promotion).
ROLE OF CHANNELS OF DISTRIBUTION
5. Implementing pricing strategies in such a manner that would be
acceptable to the buyers and ensure effective distribution.
6. Looking after all physical distribution functions.
7. Participating actively in the creation and establishment of market
for a new product.
8. Offering pre-and after-sale services to customers.
9. Transferring of new technology to the users along with the supply
of products and playing the role of change agents, e.g., in the
agricultural green revolution in our country.
ROLE OF CHANNELS OF DISTRIBUTION
10. Providing feedback information, marketing intelligence and sales
forecasting services for their regions to their suppliers.
11. Offering credit to retailers and consumers.
12. Risk-bearing with reference to stock holding/transport.
MARKETING FLOWS IN A CHANNEL
SYSTEM
 KEY ISSUES IN DETERMINING CHANNEL
REQUIREMENT

A major concern throughout industry is the

1. Product
Proliferation rapid expansion that firms are experiencing in
and
Dynamics the number of stock-keeping units that they
maintain in their product list.

The concept of total quality is do it right the

first time. The general concept of total quality
2. Total is to focus managerial attention on key
Quality
Initiatives concepts of manufacturing: People, Process,
Design and customer service through
distribution channel
 KEY ISSUES IN DETERMINING CHANNEL
REQUIREMENT

There are two popular manufacturing

strategies
(1) Flexible: The goal of flexible
manufacturing is to increase
3.
Manufacturing responsiveness of production to
Strategies
consumer demands.
(2) Focused: The goal of focused
manufacture is the lowest possible per
unit cost and fair quality.
 CHANNEL CHOICE

3.
1. Product 2. Market
Middlemen

5. Marketing 6.
4. Company
Environment Competitors
CHANNEL OPTIONS In Consumer Goods
Market
CHANNEL OPTIONS In Business Goods
Market
 CHANNEL DECISION
The first problem of channel design is whether you want direct sale
to consumer or indirect sale i.e., sale through middlemen. The
selection of these middlemen begins with the knowledge of ultimate
customers his needs and desires for distribution services.
The company must choose whether to attempt extensive, selective,
orexclusive distribution or combination of all the three types.
The company must resolve channels and bring the product
profitably to the market.
 MARKET COVERAGE
1. Extensive Distribution: Extensive or broadcast distribution is
essential when the price is low, buying is frequent and brand
switching is a common phenomenon. Extensive distribution
secures rising sales volume, wider consumer recognition and
considerable impulse purchasing.
2. Selective or Limited Distribution: When special services are
needed, e.g., certain cosmetics to be sold only through chemists,
we have selective distribution. The number of outlets at each level
of distribution is limited in a given geographic area. If the product
has long useful life and consumer brand preference can be
established, selective distribution will be more profitable.
 MARKET COVERAGE
3. Exclusive Distribution: If the amount of product service
expected by final buyers is considerable, exclusive distribution is
preferable. Exclusive distribution creates a sole agency or sole
distributionship in a given market area. Such types of distribution
are very useful in the sale of consumer speciality goods, e.g.,
expensive mens suits. There are four major legal aspects of
exclusive distribution:
i. Exclusive Dealing Contracts:
ii. Tying Contracts:
iii. Closed Sales Territory:
iv. Franchise Selling:
 CHANNELS OF DISTRIBUTION

1. Manufacturer- 2. Manufacturer- 3. Manufacturer-

Consumer (Direct Retailer-Ultimate Wholesaler-Retailer-
Sale) Consumer Consumer

6. Manufacturer-
4. Manufacturer- 5. Manufacturer-
Distributor-
Agent-Wholesaler- Wholesalers-
Wholesaler-Retailer-
Retailer-Consumer Consumer/User
User
MARKETING MIDDLEMEN
 MIDDLEMEN IN DISTRIBUTION
1. Brokers: Broker is an agent who does not have direct
physical possession of goods in which he deals but he
represents either the buyer or the seller in negotiating
purchases or sales for his principals.
2. Commission Agents: Individuals, firms, or even
companies are organised to buy or sell commodities, acting
as buying or selling agents of producers, or manufacturers.
They may buy or sell on their own account and at their own
risk of loss. In that case, they are called commission
merchants or factors.
 MIDDLEMEN IN DISTRIBUTION
3. Sole Selling Agency: An established firm of good
reputation operating in each area may be appointed as a sole
agent or distributor exclusively for that locality. Usually,
sales agencies involve exclusive selling rights for a territory.
This will prevent competition among agents.
 EVALUATION OF MARKETING
INTERMEDIARIES
Marketing intermediaries or middlemen in the distribution
network are indispensable because they perform specialised
marketing functions such as buying, selling, transporting,
warehousing, grading, sorting, financing, risk-taking, and
dissemination of marketing intelligence.
Middlemen serve as expert purchasing agents for their
customers, and expert sales specialists for their
manufacturers.
 WHOLESALERS & THEIR SERVICES
Wholesalers are individuals or business firms who will sell
products to be used primarily for resale or for industrial use.
Wholesalers offer typical services as middlemen between
producers and retailers in the central market: (1) Maintenance
of salesforce, (2) Storage, (3) Delivery to retailers, (4)
Financial help to both manufacturer and retailer, (5)
Merchandising, i.e., preparations for sale (packing, grading,
branding, etc.), (6) Sales promotional work, (7) Product
servicing, (8) Marketing information, (9) Risk-bearing, and
(10) Finding new retailers.
 RETAILERS & THEIR ROLE
A retailer is the last middleman in the machinery of
distribution and he is responsible to satisfy recurrent wants of
consumers.
 CHANNEL CONFLICT
Even when a company has an effective distribution set up in the
market, some conflict between channel members and between the
company and channel members may take place. This is normally due
to conflicting business interests.
There are three types of channel conflict.
(1) Vertical channel conflict relates to conflict between different
levels within the same channel. Example: Conflict between
distributor and the retailer.
(2) Horizontal channel conflict means conflict between members
at the same level of the distribution channel. Example: Price-
cutting between retailers in the same market.
 CHANNEL CONFLICT
(3) Multi-channel conflict: Here the company selects two or more
channels to sell its products in the same market. Example:
Company makes direct supplies to wholesales as well as key
retailers in the same market. The wholesaler is hurt since this
arrangement affects his sales in the market.
CAUSES OF CHANNEL CONFLICTS

1. Conflicting Objectives 4. Bypassing the area

2. Demand for extra discount distributor
3. Unethical practices 5. Selling competitors product
6. Reduction in the are of
operation
 MANAGING CHANNEL CONFLICT
Channel conflicts can be managed by:
1. Regular communication between the company, distributors
and dealers will certainly go a long way in minimising
channel conflicts.
2. Aligning goals of the company with these of channel
members
3. Dealer councils
4. Arbitration and mediation
 DIRECT MARKETING METHODS

1. In-home 2. Telebuying/
3. e-marketing
Selling Teleselling

5. Direct
4. Mail-Order 6. Permission
Response
Sale marketing
Marketing

7. Automatic Vending Machines

INTEGRATED DIRECT MARKETING

Paid Ad. with

Response
Mechanism

Ongoing
Direct Mail Communication
(Follow-up)

Outward Direct Face to Face sales

Marketing call
 ADVANTAGES OF DIRECT MARKETING
1. Direct marketing can focus marketing efforts effectively in terms
of selling to the selected target markets.
2. Marketer can contact prospects directly rather than wait for them
to appear in the store.
3. It gives great convenience to customers for making purchases.
4. It is a lower-cost way of doing business than through a retail store.
5. It needs less capital to be invested in business.
6. It can be a side activity.
DISADVANTAGES OF DIRECT MARKETING
1. Conventional retailers are not looked with suspicion by prospects.
But they do have suspicion towards direct marketers and their
claims. The marketer must be well-known and established to
remove this fear.
2. Direct marketing, e.g., in-home selling, telemarketing, affects
consumer privacy.
3. Except for direct-to-home marketing, goods cannot be inspected
prior to purchase.
4. In absence of personal inspection, marketer has to offer liberal
return facilities.
5. In-home selling through sales force is costly.
 PHYSICAL DISTRIBUTION
The objective of physical distribution is to deliver the right goods to
the right customer at the right time and place. In a sense, marketing
policy must be to put the product within an arms length of desire or
demand
Physical distribution involves management (planning, action and
control) of the physical flows of (1) raw materials, and (2) finished
products from the points of origin to the points of use/consumption
to meet the customer needs at a profit. It covers all activities in the
flow of goods between producer and consumer.
TYPES OF DISTRIBUTION FUNCTIONS
11 COMPONENTS OF PHYSICAL
DISTRIBUTION
 TOTAL-SYSTEM APPROACH TO PHYSICAL
DISTRIBUTION
The total system concept of physical distribution is inevitable.
Different components of physical distribution such as
transport, warehousing, inventory management, and order
processing constantly interact with one another as they are
inter-dependent. Hence, their costs are naturally closely inter-
related. Many a time one function subsidises another.
The total- system approach means a total efficiency approach
and a total cost approach.
IMPORTANCE OF PHYSICAL DISTRIBUTION
MANAGEMENT

2. Broader 3. The Sales

1. Ever
Scope of Generating
increasing cost
Marketing Power

4. Rising 5.
Competitive Management
Demand Science
PHYSICAL DISTRIBUTION ELEMENTS
TIGHTENING THE CHAIN UPTO CUSTOMER
DECISION AREAS IN PHYSICAL DISTRIBUTION
1. ORDER PROCESSING

Trade off among

1. Transport Cost
2. Inventory Cost
3. Order-
processing Cost
 2. INVENTORY MANAGEMENT
Inventory management is the heart of the game of physical
distribution. Managerial decisions regarding: (1) size, (2)
location, (3) handling, and (4) transporting of inventories
assume unique significance in physical distribution system.
Inventory control aims at the following triple objectives:
(1) never run out of anything (out of stock),
(2) never build up a very large inventory, i.e., having too much
of anything on hand (unwanted stock), and
(3) never send out too many small orders for more
- STANDARDS IN INVENTORY CONTROL

1. The 2. The
Maximum Minimum

4. The
3. The
Standard
Ordering Point
Order
- JUST-IN-TIME (JIT) INVENTORY CONTROL
JIT concept of production and inventory control originated in
Japan and is being adopted all over the world.
A buyer buys in small quantities Just-in-time for use in
production and then produces right quantities Just-in-time
for marketing.
By buying in small quantities and keeping low levels of stocks
of parts and finished goods, a marketer can secure remarkable
cost savings.
 3. WAREHOUSING SYSTEM
Warehousing involves more than storage. Warehouses perform
many of the usual functions of wholesalers, e.g., breaking bulk,
dispatch of smaller consignments to retailers, holding the stocks for
retailers, regulating the goods flow to retailers, providing market
intelligence and many other merchandising services of
manufacturers. A full service warehouse is called distribution
centre.
Every firm requires a certain number of warehouses to offer a
desired level of customer service, i.e., prompt delivery of goods.
However, it has also to minimise total physical distribution cost.
 3. WAREHOUSING SYSTEM
The Distribution Centre: The distribution centre is a new idea
developed after World War II. It is a full-service warehouse,
primarily related to market. It emphasises movement of goods
rather than their storage.
A distribution centre provides services with the help of a computer
and modern material- handling equipment. It serves a regional
market. It consolidates large consignments from production points,
processes, and re-groups products according to customers orders
and maintains a full product-line.
 4.PACKAGING AND MATERIAL-HANDLING
SYSTEM
The dimension of the package must ensure efficient use of
containerisation and palletisation. Higher cubic footage will
increase warehousing costs.
The modern mechanised handling services and protective
packaging have improved the level of customer service and at
the same time lowered physical distribution costs.
Material handling and packaging services have also speeded
up the order-processing and movement of consignments
 5. TRANSPORT SYSTEM
Warehousing and transportation of inventories constitute the core
of physical distribution package.
Transportation is the crux of the problem of physical distribution. It
is sometimes called the Gordian knot of physical distribution
management.
Material-handling can be reduced by reducing the number of times
an item is handled and also reducing the amount of time for each
handling.
We have five means of transport at our disposal: (1) railway, (2)
road, (3) water, (4) airplanes, and (5) pipelines.
 SPEEDY DISTRIBUTION OF GOODS
Earlier, General Electric (GE) required three weeks after an order to
deliver a custom-made industrial circuit breaker box. Now, it take
only three days.
The theme of distribution is that the whole business is built on
values and speed and customer satisfaction derived from speedy
production and distribution of products and services at affordable
prices.
Speed reflects higher efficiency. Values manifest effectiveness,
particularly in quality. In a lean organisation, team management is
granted more power and responsibility to solve problems and make
decisions
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