DISTRIBUTION

MANAGEMENT
PART 1: DISTRIBUTION CHANNEL SYSTEMS

I. CHANNEL CONCEPTS

1. THE DEFINITION OF DISTRIBUTION CHANNELS

External contractual organization that management operates to achieve

its distribution objectives.

 “External”: Outside the firm.

 “Contractual organization”: Firm involved in negotiation functions.
 “Management operates”: Management is involved in the process.
 “Distribution objectives: Goals that change, causing variations in
contractual organization & the way in which management operates
it.

2. THE GROWING IMPORTANCE OF DISTRIBUTION CHANNELS

Where this importance come from:

 The explosion of information technology and E-commerce.

 A greater difficulty in gaining a sustainable competitive advantage.
 The growing power of distributors, especially retailers, in marketing
channels.
 The pressure to reduce costs: sometimes distribution costs are
higher than the manufacturing cost or the cost of raw materials and
component parts.

Advantages of focusing on a better channel strategy:

 It creates competitive advantage with long-term viability.

 Builds strong relationships between manufacturers and channel
members.
 Based on trust, confidence, and people power.
 3. HOW DISTRIBUTION CHANNELS RELATE TO THE MARKETING
MIX

Key challenges in the Marketing Mix:

MARKETING MIX
CHALLENGES
“THE FOUR P’S”
Limited ability to gain and hold competitive
PRODUCT
advantage
Price wars erode profitability & provide unstable
PRICE
basis for sustaining competitive advantage
PROMOTION Expensive and short-lived
PLACE Distribution channels support & enhance
(DISTRIBUTION) other Ps to meet demands of target markets

4. THE FLOWS IN THE DISTRIBUTION CHANNELS

a) Relationship between Channel Strategy and Logistics Management

DISTRIBUTION STRATEGY
VARIABLE

CHANNEL LOGISTICS
STRATEGY MANAGEMENT

Channel Strategy (1st Step): concerned with the entire process of

setting up and operating the contractual organization that is responsible
for meeting the firm’s distribution objectives. Channel strategy must
already be formulated before logistics management can even be
considered.

Logistics Management (2nd Step): is more narrowly focused on

providing product availability at the appropriate times and places in the
marketing channel.

b) There are 5 types of Distribution Channel flows

Definitions:
  Manufacturer: the movement of the product through these various
intermediaries.
 Intermediaries (wholesalers/retailers): the flow of the title to
the goods.
 Consumer: a lot of middlemen standing between them and the
producer of the product.

Channel strategy and management: involve planning for managing all

of the flows
Logistics: concerned almost exclusively with the management of the
product flow

1. Product flow

The actual physical movement of the product from the manufacturer

through all the parties who take physical possession of the product, from
its point of production to final consumers.
 2. Negotiation flow

The interplay of the buying and selling functions associated with the
transfer of title (right of ownership).

3. Ownership flow

The movement of the title to the product as it is passed along from the
manufacturer to final consumers.

4. Information flow

The arrows showing the flow of info.

 5. Promotion flow

The flow of persuasive commu. in the form of ad., personal selling, sales
promotion, and publicity.

II. CHANNEL PARTICIPANTS

1. INTRODUCTION
 a) Classification of Channel Participants

All channel
participants

Do they
perform
negotiatory
functions?

Member participants Nonmember participants

Yes No

Producers and
manufacturers
Wholesale intermediaries
Commercial
Contactual
Intermediaries
Channels
Yes organization Retail intermediaries
(marketing channel)

Consumers Target
Final users Markets
Do they Industries
perform
negotiatory
functions?
Transportation firms

Storage firms

Advertising agencies
No Facilitating agencies
Financial firms

Insurance firms

Marketing research firm

b) What are the motivations of shifting task to

intermediaries?

Producers & Manufacturers:

 lack of expertise
  lack of economies of scale
 lack of local knowledge
 lack of country access
 lack of resources

Intermediaries:

 Spread high fixed costs over large quantities of diverse products

 Achieve economies of scope and economies of scale
 2. WHOLESALERS

3 major types of wholesalers:

A)Merchant wholesalers

Merchant wholesalers: firms engaged in buying, taking title, usually

storing, and physically handling products in relatively large quantities and
then reselling the products in smaller quantities to retailers; to industrial,
commercial, or institutional concerns; and to other wholesalers.
 They can be named: wholesaler, jobber, distributor, industrial
distributor, supply house, assembler, importer, exporter, and etc.

a) They buy + take title to store + handle

b) Merchant Wholesalers Specialize in Performance Distribution Tasks

Merchant wholesalers’ Distribution tasks performed for Manufacturers:

They should:
 Operate at high levels of effectiveness and efficiency
 Average cost curves lower than those for their suppliers

c) Merchant Wholesalers’ Distribution Tasks do serve Customers

Merchant wholesalers’ Distribution tasks performed for Customers:

When merchant wholesalers perform all of the distribution tasks, it will

result on more effective and efficient marketing channels (reflected in
margins earned by wholesalers).

B)Agents, brokers, and commission merchants

Agents, brokers, and commission merchants: independent middlemen who
do not take title to the goods in which they deal but are actively involved
in negotiator functions of buying and selling while acting on behalf of their
clients. They are usually compensated in the form of commissions on sales
or purchases.
 Common type is known as manufacturers’ agents, commission
merchants, brokers, selling agents, and import & export agents.

 Agent: specialize in performing market coverage and sales

contact distribution tasks for manufacturers.
 Brokers: market coverage; sales contact; order processing;
marketing information; product availability; customer service
 Commission merchant: market coverage; sales contacts; order
processing; credit; holding inventory

C)Manufacturers’ sales branches and offices

Manufacturers’ sales branches and offices are owned and operated by

manufacturers but are physically separated from manufacturing plants.
They are used for the purpose of distributing the manufacturer’s own
products at wholesale. Some wholesale allied & supplementary products
purchased from other manufacturers
 3. RETAILERS

“The role of the retailer in the distribution channel, regardless of his size
or type, is to interpret the demands of his customers and to find and stock
the goods these customers want, when they want them, and in the way
they want them. This adds up to having the right assortments at the time
customers are ready to buy.”
Charles Lazarus, Chairman of Lazarus stores, US

Definition: Retailers consist of business firms engaged primarily in selling

merchandise for personal or household consumption and rending services
incidental to the sale of goods. They range in size from mom-and-pop
neighborhood stores to giant mass merchandise chains such as Wal-Mart.

A)Growing Power of Retailers

Three major developments:

1. Increase in size and buying power

2. Application of advanced technologies
3. Use of modern marketing strategies

B) Distribution Tasks Performed by Retailer

1. Offering manpower and physical facilities that enable

producers/manufacturers and wholesalers to have many points of
contact with customers close to their places of residence
2. Providing personal selling, advertising, and display to aid in selling
suppliers’ products
3. Interpreting consumer demand and relaying this info. back through
the channel
4. Dividing large quantities into consumer-sized lots, thereby providing
economies for suppliers (by accepting relatively large shipments)
and convenience for consumers
5. Offering storage, so that suppliers can have widely dispersed
inventories of their products at low cost and enabling consumers to
have close access to the products of producers/manufacturers and
wholesalers
6. Removing substantial risk from the producer/manufacturer (or
wholesaler) by ordering and accepting delivery in advance of the
season
C) Example: The landscape of the European Retail Alliances the
Example of AgeVore (Switzerland) (RIEN COMPRIS)
DISTRIBUTION
MANAGEMENT
PART 2: Developing the Distribution Channel

I. DISTRIBUTION CHANNEL STRATEGY

Definition: “The broad principles by which the firm expects to achieve its
distribution objectives for its target markets.”

a) The role of distribution in the firm’s overall

objectives & strategies

 The higher the priority given to distribution, the higher the level at
which it should be considered in formulating the organization’s
overall objectives and strategies.

 Distribution does increasingly warrant the attention of top

management, because competition has made the issue of
distribution too important for top management to ignore.

 What is the essence of modern Marketing Management? To develop

the right marketing mix of product, price, promotion, & distribution
(place)

b) Reasons to emphasize on Distribution Strategy

 Distribution is the most relevant variable for satisfying target market

demands.

 Parity exists among competitors in the other three variables of the

marketing mix.

 A high degree of vulnerability exists because of competitors’ neglect

of distribution.

 Distribution can enhance the firm by creating synergy from

marketing channels.

c) The four most important factors to make Strategic

Distribution
  Target Market Demand

Firms should stress distribution when it serves customers’ needs in the

target market.

 Marketing channels are so closely linked to customer need

satisfaction because it is through distribution that firms can provide
the kinds and levels of service that make for satisfied customers.

 Competitive Parity

Distribution advantages are not easily copied by competitors.

 Distribution advantages are based on a combination of superior

strategy, organization, and human capabilities.

 Distribution Neglect

Competitors’ neglect of distribution strategies provides excellent

opportunities.

 The channel manager must analyze target markets to determine

whether competitors have neglected distribution and whether
vulnerabilities exist that can be exploited.

 Distribution and Synergy

“Hooking up” with a mix of cooperative channel members will strengthen

the channel.

 Because each channel member is an independent entity, rewarding

opportunities exist for channel managers to cultivate cooperation
among members.
 d) Finding the right Distribution partners:

Viewing the relationship with channel members as a partnership or

strategic alliance can offers recognizable benefits to the manufacturer &
channel members on a long-term basis.

But:
Because customers perceive channel members as an extension of the
manufacturer’s own organization, members should:
 Reflect channel strategies the firm has developed to achieve its
 distribution objectives
 Be consistent with the firm’s broader marketing objectives &
strategies
 Reflect the objectives & strategies of the organization as a whole