DISTRIBUTION AND
THE VALUE-ADDED
CHAIN
What is a distribution
channel?
An interdependent network that creates
value through the physical flow of goods
and services and the transfer of ownership
Attempt to bridge the gap between the
“production orientation” of a manufacturer
and the “usage orientation” of a buyer
Channel is viewed as a system of
distribution – a “value chain” to provide the
desired level of value to the end-user
Role of
Intermediaries
Contacts
Experience
Specialization
Scale of operation
Channel Flows
Physical Flow
Title Flow
Payment Flow
Information Flow
Promotion Flow
Physical Distribution or Logistics
The planning, implementation, and control of the
flow of materials and final goods from points of
origin to points of use to meet the needs of
customers at a profit.
Objective of Physical Distribution
Getting the right goods to the right places at the
right time for the least cost.
Physical Distribution
Decisions
Order Processing
Warehousing
Inventory
Transportation
Supply Chain Management
A long-term “partnership” among
marketing channel participants aimed at
reducing inefficiencies, costs, and
redundancies in the logistical system in
order to provide high levels of customer
service
Supply Chain Management views
logistics as an integral part of the
marketing channel relationship
Some Distribution Functions
Wholesaling
All activities involved in selling goods and services to those
buying for resale or business use
Retailing
All business activities involved with the sale of goods and services
to the final consumer for personal, family or household use
Agents
Agent is one who acts on behalf of a principal and ssecures orders
Brokers
A party that arranges transactions between a buyer and a seller,
and gets a commission when the deal is executed
Some Distribution Functions
Jobbers
Jobbers represent manufacturers of products sold in bulk (such as
raw materials) for which they take title but do not take
possession. The relationship between jobbers and manufacturers
is usually short-term.
Facilitators
A Facilitator is any part that improves the efficiency of the
distribution process but does not take title or negotiate purchases
or sale. Facilitator may provide financing/credit, market
information, and grading/certification of the product, among
other products and services.
Commission Merchants
Commission Merchants deal on a short term basis with
manufacturer of product sold in bulk (such as raw material). They
do not take possession of the materials. Commission merchant
represent the manufacturer; they can negotiate prices and
The Value of an
Intermediary
Problem:
Intermediaries should be eliminated because
they add little and drive up the cost.
Realization:
You can eliminate a middleman, but you cannot
eliminate the middleman’s functions.”
Solution:
The cost a channel member adds to a
product’s price must be commensurate with
the value added by the member
Distinctive Aspects of B2B
Channels
Why are intermediaries dropped?
Smaller number of customers
Larger quantities – bulk buying
Complex and dispersed delivery
requirements
Technical support requirements
Absence of required expertise in the
middleman market
Use of e-commerce and decrease in face to
face transactions
Distinctive Aspects of B2B
Channels
Four approaches:
Direct selling
Selling through own sales force
Manufacturers' rep
Industrial distributors
Mixed systems are growing in importance in
companies
serving multiple segments or when sales
force is used
for technical support and / or reliance on the
web
Manufacturers’
Representatives
Features:
Type of agency, which operates an independent
business
The rep represents manufacturers not directly
competing with one another but sell related
products
Long lasting contractual agency agreements
Do not maintain inventories or take title
Commission arrangements
Appropriate for SME type manufacturers
Lot of dependence on quality of relationship with
manufacturer
Means of entering untapped markets
Extensive knowledge of customer needs
Immediate access of manufacturer to key decision
Manufacturers’
Representatives
Issues:
Conflicts are prevalent especially when successful
reps are replaced by sales force
Poor market feedback and after-sales service to
manufacturer
Sacrifice of control by the principal
Reputation and image of principal
Poor training provided to reps
Income related concerns, unstable revenues and
fear of loss of agency
Obsolescence of product
Industrial Distributors
Features:
Wholesaler who is an independently owned and
operated merchant selling to industrial,
commercial and institutional customers
Takes title and keeps inventory
Provides local coverage, delivery and even
credit
Sometimes after-sales service and even
manufacturing and assembly
General line, specialized or combination houses
Sizable assets in inventory and account
receivables
Industrial Distributors
Issues:
Key concern of manufacturer is loss of control,
especially when distributor's carry competitor lines
also
Sheer size disparity between large distributors and
small manufacturers
Exclusivity arrangements with distributor (excluding
other distributors)
Motivation
Ineffective promotions for distributor sales force
Generic support program to all distributors alienates
them
Channel Conflict
A clash of goals and methods
between distribution channel
members
Horizontal Conflict
Occurs among channel members on the
same level
Vertical Conflict
Occurs among channel members at
different levels
Conflict and the Channel of
Distribution
Channel itself is a system of interdependent players
who combine to produce value but often have
incongruent goals
Rooted in differences in the objectives and needs of
the different parties within the supply chain
Conflict requires an outlet
Conflicts must be allowed to be constructively
expressed
Minimized by opening an effective communication
network between manufacturer and intermediary.
Regular meetings, site visits, complaint management
systems, telephone or email interfaces, distributor
councils and surveys of intermediaries are possible
steps to enhance communications
Designing and Managing Industrial
Channel Strategy
Step 1: Understand how customers buy
The balance of power has shifted to the customer, who can gather information on
the Internet and compare offerings quickly and efficiently. Ensure that your offering
is centered on the customer rather than the product. Surveys and customer
research will help you understand how customers currently buy and how they would
prefer to buy from you.
Step 2: Include your sales goals
What are your sales goals? This will allow you to understand which channel(s) can
support the sales volume you desire
Can your company satisfy customers' requirements? If not, then what type of
partners are required to gain these competencies?
Step 4: Be prepared to move into the market
Today's channels require a call center, Web site, channel partners, and field pres
ence. Otherwise, you are reducing your growth potential. Many of today's firms have
designed multiple channels to serve the customer.
Designing and Managing Industrial
Channel Strategy
Step 5: Segment your market
Divide your market by such buying patterns as likes, wants, and needs,
then place these on the left side of a sheet of paper. On the right side of
the paper list your current customers. In the middle of the paper, place
your channels to market. These channels should include the Web,
catalogs, telemarketing, direct salespersons, and distributors, among
others.
Step 6: Remember the influencers
Don't forget to target the parties who influence your target customers,
which can include consultants, engineers, or other experts. It may be
necessary to create a second channel to communicate with these highly
influential parties.
SOURCE: Adapted from "The Channels to Watch," Sales and Marketing
Management, 150, no. 3 (March, 1998), pp. 54-56, Rasmusson. 0
Copyright 1998 by Sales and Marketing Management.
Forces Necessitating Change in
Distribution Strategy
Environment in the market, and in the
firm’s overall marketing strategy
Product moves through its life cycle
Existing customers change
Change in the economics of various
distribution alternatives
Sources of Resistance to Strategy
Changes
Manufactures resist changes – status quo is
preferred
Moral or social commitments rather than
merit
Fear of an abandoned channel being picked
up by competitors by managers
Resistance to change can also come from
middlemen
New technologies
New training programs
Fear of disruption, causing conflict
The Need to Evaluate
Middlemen
Evaluation provides the marketer with
guidance in determining whether or not
objectives are being met
Provides benchmarks for improvements
Aid in adding or dropping intermediaries
Productivity, profitability and effectiveness are
paramount
Evaluating Middlemen:
The Contribution Approach
Numeric approach to evaluating middlemen
Evaluating middlemen based on their
contribution to indirect fixed costs and
profitability
Middlemen-controllable contribution is
divided by the sales generated by that
middlemen - the result is a profitability
index. This index is a good indicator for
comparing the performance of various
distributors
Evaluating Middlemen:
The Weighted Factor Approach
Subjective approach to middleman evaluation
Lends itself to a large number of different criteria.
1. Identify the criteria or factors to be used in
evaluating the intermediary
2. Apply importance weights
3. Evaluate each middlemen on each factor
4. Total the score representing cumulative
performance
5. Compare these overall performance ratings of
various middlemen
Evaluating Middlemen:
The Weighted Factor Approach
Channel Organization
Conventional Marketing Systems
Highly fragmented networks in which
loosely aligned manufacturers, wholesalers
and retailers have bargained with each
other at arms’ length, negotiated
aggressively over terms of sale, and
otherwise behaved autonomously.
Each entity seeks to maximise its own
profits, even at the expense of maximising
the profits for the system as a whole.
Channel Organization
Vertical Marketing Systems
Professionally managed and
centrally programmed networks,
pre-engineered to achieve
operating economies and maximum
market impact
Recent Developments in
Supply Chain Management
1. Integrated alliances have systems for ensuring
prespecified delivery speed and consistency,
computer link for information exchange and order
status, and joint-inventory programs.
2. Focused alliances include relationships where
there is a strong commitment of resources to
implement a small number of services.
3. Extensive alliances incorporate a broad range of
services but lack the intensity of integrated
alliances.
4. Finally limited alliances revolve around one type of
service, like on-time delivery (Zinn &
