It is time to consider the distribution channel as part of the marketing mix element. The position of place or distribution in any organisation is very critical to the success of the company. In building up a distribution system, the company invests a lot of resources in terms of finance and human capital. This is so because if after production, the products do not get to the consumer, the essence of being in business is defeated. Distribution channel is paramount to all manufacturing organisations because it is their route to market and to the heart of the final consumers.
Definition and Terminology in Distribution Strategy
Distribution: This involves moving the raw materials from source to manufacturer and moving finished goods from factory to intermediaries and to the final consumers.
Intermediary: This is a channel member of the distribution system that moves goods from the manufacturer to the final consumers. It is used interchangeably with middlemen.
Channel: This is the route through which goods pass with some exchange taking place before it gets to the final consumers.
Wholesalers: The channel member who gets the goods from the manufacturer and sells to other members of the channel in bulk forms. The wholesaler is sometimes interchanged with distributors.
Retailer: This is the channel member that buys in bulk from the wholesaler, breaks the bulk and sells the goods directly to the final consumers.
Exclusive Distribution: It is the distribution system in which the wholesaler is not allowed to stock competitors’ products.
Push Strategy: It is a marketing effort that encourages the channel members to stock mote products at all times and promote it to the consumers
Pull Strategy: The product is promoted more to the consumers with the intention that they will ask for it and pick the product up from the stores.
Levels of Independent Firms
There are various companies involved in the process of distribution of goods and services. Each of these companies has specific roles to play in the process of delivering the goods to the final consumers. In practice one could observe that some of the firms at different levels of distribution are owned by one organisation but as a separate business or strategic business unit (SBU). Common examples abound in the petroleum sector and in multinational companies producing fast moving consumer goods (FMCG). It is worthy to note that the levels for consumer goods are different from industrial goods.
The levels of these independent firms in the channel of distribution are simply illustrated below. Structures of levels in channel of Distribution
Zero Level = Manufacturer = Consumer
Level 1 = Manufacturer = Retailer = Consumer
Level 2 = Manufacturer = Wholesaler = Retailer = Consumer
Level 3 = Manufacturer = Wholesaler = Agent = Retailer = Consumer
(c) Activities Performed By the Levels: The activities performed by the various levels
of the distribution chain include the following:
1. Market intelligent information gathering
2. Providing information and awareness to the channel members.
3. Offering specialist advice to channel members
4. Getting involved in negotiation of product price, credit facilities and terms of delivery
5. Making sure that the goods are delivered in the right form and at the right place and at the right time.
6. Ensuring that there is a proper fit between product ordered and delivered.
7. Mobilise funds for operations of the channel functions.
8. Breaking the bulk of goods into smaller affordable units
9. Bearing the risk in case the goods go bad.
10. Providing time and place utility
Development of distribution channels
The Channel as a System
The channel works as a system that moves products from the factory to the consumers’ home. It is an organised setting that involves all the channel intermediaries. The system works like a simple flow system despite the number of members in the channel. Each of the intermediaries has its own function to perform with the overall objective of ensuring that the final consumer gets the right product, at the right price, in the right format, at the place and at the right time. Individual channel member functions as a distinct unit and depends on others to deliver their own goals.
The channel is systematic because the flow of its operations and function follows a direction clearly understood by all the channel members. The activity of one of the channel members affects the other members in the channel. The order in which the system or channel flow works if distorted at a single point can create disorder in the whole system.
The channel as a Team
The channel members work together as a team because they all have one big objective which is to deliver the product to the final consumer. Though, the channel members are distinct entities, they cannot afford not to deliver the overall objective. This is so because if the consumer does not buy the product each member will be affected.
They collaborate in their activities and ensure a synergy is established to easily deliver the overall objective. One member of the channel of distribution can invest money to promote the activities of other channel members. Example is seen when the manufacturer will advertise for the outlets of its distributors or retailers. The whole essence of this concept working as a team is to ensure the consumer gets the product.
Factor determining choice of marketing channel
In selecting a channel, one has to consider the type of sales strategy that will be applied.
The Firm’s Distribution Policy
Each organisation has its own policies on how to run its businesses. The company’s overall policies will bring out the operational policies of each functional unit or department in the organisation. The company’s operating policies determine the marketing and sales strategies to use in reaching the consumer. A company may decide to run its distribution channel with a minimal number of members in the chain while another may decide to run on the third channel level which means Manufacturer to Wholesaler to Agent to Retailer to final Consumer. A company with a very short chain might have a consumer centric policy getting closer to the consumer and understanding the consumer more.
Product characteristics are inextricable from the product itself and they determine how the product will be sold, hence, the channel of choice to reach the final consumer. These characteristics include:
Financial value of the product,
Seasonality of the product, and
Level of brand loyalty.
Each of these characteristics will determine the channel length. For example, perishable goods would be best distributed directly to the final consumer as any delay in the channel could result into the goods going bad and automatically leads to loss of money.
The market characteristics are those elements that are used to describe the nature of the market which include things like the market size and geographic concentration of the market. For a market where purchase does not require intense conscious decision making that is where purchases are mostly on impulse, the channel will be different from a market where conscious decision making is required. Other market characteristics are the type de buyers available in the market – industrial buyer, government institutional buyers, or single consumer buyer.
The Manufacturer’s Features
Manufacturers with very successful brands will be heavily sought for by other members of the channel. This is common among multinationals with brands that have been in the market for very many years and consumers are still going very loyal to their brands. Finance is another strong feature that will endear channel members to a manufacturer. As much as the manufacturer is seen as having the financial strength there is the possibility that it will finance the other members of the chain. For example, in the telecommunication sectors the main producer finances the retail members of the channel by providing credit finances, kiosk, advert materials etc.
The middlemen in the channel would be more preferred by a manufacturer if they have the financial ability and the technical expertise to distribute manufacturer’s products. The manufacturer will sell directly to such middlemen and avoid the trouble of going down the channel to sell to the final consumers. In this case the middlemen take the load off the manufacturer. Also the level of independence of the middlemen determines how much the manufacturer can handle or control the middlemen in the distribution channel. Control over the other members of the chain could lead to the manufacturer operating exclusive distribution. Exclusive distribution is a situation where the manufacturer does not allow the distribution and sales of competitors’ products by other channel members in the distribution chain.
In making the choice of adopting a channel of distribution, it is very important that the environmental factors be considered. The environmental factors are external to the channel members which they may not have control over them. They include:
- Union activities in the market
- Legal / statutory regulations
- Competitors’ activities
- The State of the Economy
All of these form the environmental issue that have the potentials of affecting the operations of the distribution channels.
Cost of Channel Usage: Managing a channel of distribution from manufacturer to final consumer requires huge funds to run it effectively and successfully. The cost of developing the channels, training the field staff, setting up regional offices or retail outlets and physical movement of the goods is enormous and may pose a challenge to the manufacturer. The cost outlay is examined side by side with the expected returns in running and maintaining the channels. If the expected benefit is greater, the channels could be chosen.
Explain any four factors that a marketing manager will consider before choosing distribution channel.
• Firm distribution policy; Product characteristics; Market characteristics Environmental characteristics and Cost of channel usage
The Linkages for Physical Distribution
The linkages of physical distribution are viewed from different perspectives and are determined by factors such as cost, safety, bulkiness and form of the products. Linking the geographical locations between the different channel members is a huge investment. This is done by transportation which is very visible and critical to achieve the distribution goal. Physical distribution in modern practice encompasses the movement of raw materials from source to the factory and finished goods from the factory to the channel members’ locations and to the final consumers. It is usually referred to as supply chain. It is made up of the chain of activities involved in sourcing, making the product and distributing the product. The linkages could be achieved via five modes of transportation.
This is the most common transport means used for moving goods from one point to another. It is suitable for short link points though it is used for both heavy and light items. It ranges from bicycles through cars to trailers / trucks.
It carries heavy or bulky products and for long distance locations. It is suitable for products like building materials – sand / granites/ gravels, agricultural products, timbers etc.nRail is also used for moving of passengers and light goods. It appears to be a cheaper means of moving goods.
This is a transportation means that is very slow and most suitable for moving bulky products. It is used for long distance movement of goods and for goods that are not easily perishable. The water transportation vessels carry the largest volume of product at a time. They carry products such as petroleum, heavy machineries, agricultural products and many more.
This is the fastest means of linkage from one geographical location to another. It is very expensive and suitable for moving light products but of high financial value. It is mostly used to move passengers with their luggage.
This means of transportation is mainly used to move petroleum products from one location to another. It requires huge investments to lay the pipes across the different locations and it is not flexible. Petroleum products moved via pipelines include gas, premium motor spirit, diesel, crude oil, etc. The linkages could be interwoven and create some confusion and conflict in the channel system.
Channel Conflict and Resolution
Type of Conflicts
There are two major types of conflict and they are described based on where they are emanating from in the channel of distribution system. There are:
Vertical Conflict: This type of conflict arises between two or more channel members at different levels of the distribution system. For example, conflict between manufacturer and wholesaler. There is likely to be conflict in the system in a situation where the operating norms are not followed.
Horizontal Conflict: This conflict occurs between two or more channel members at the same level on the distribution channel system. This type of conflict occurs between two or more shops within a locality. It occurs in the form of competition among the stores selling similar line of products. Horizontal conflicts also occur when channel members take in more range of products more than what they earlier sold. For example, . drug stores selling provisions and drinks could create conflict between channel members.
Causes of Conflicts
Conflicts in the channels of distribution vary. They include:
Goal Conflict: The business goal of the channel members differ as they all do not have the same intention of going into business, their financial strengths are different and their business visions are different. As long as their goals are different, there is bound to be conflict in achieving the manufacturer’s goals. For example, the manufacturer may have the goal of ensuring total distribution to the entire outlet in a location but the wholesaler, on the other hand may have the goal of making high profit.
Sales Margin Conflict: The financial terms involved in the sales of products is usually determined by the manufacturer and other members of the channel. The manufacturer would only determine the market price based on its production cost but the margin to be made by each member of the distribution channel could create conflict either due to the perceived sales efforts each member would contribute to the sales or delivery of the product to the final consumers.
Sales Effort Conflicts: This could arise when the expectation of a channel member is not met by the other channel member. This conflict could crop up between a wholesaler and retailer if the retailer does not comply with what the wholesaler advised. An example is the wholesaler requests that the retailer should display all wholesalers’ brands at the front shelves and when this is not done, it could lead to conflict.
Resolution of Conflicts: Resolving the conflicts in the channel is very essential because if conflict persists it could hamper the overall goal achievement of the distribution channels, There has to be co-operation among channel members. The most influential channel member is the manufacturer. The manufacturer will always influence the behaviour of the other members and ensure operations in the distribution channels are going on smoothly. The manufacturer is usually referred to as the channel captain. As the channel captain, it influences others’ behaviour in the channel. This however, should be done with careful control.
Conflict within the channel of distribution will be easily resolved if all channel members keep to the term and norms of operation within the system. What is required of each member should be carried out as laid down within the integration of all the channels into singular organisation which could be called vertical marketing system. The new system will now be operating as a whole and not as single individual units.
You have learnt that product distribution is an important element of marketing function. The distribution strategy applied by an organisation is also important because the strategy is what will help the organisation to achieve its marketing objectives. It is important to understand that in product distribution, there are various key elements such as the intermediaries, channels and levels involved. While we understand the intermediaries as the members in a channel, the channel, on the other hand is the route of distribution and the level is the structure indicating the number of intermediaries involved in the channel. In developing distribution channel, you have to understand that it is a system that enhances the movement of products from the factory to consumers’ homes. The channel members always work as a team. Factors determining the choice of distribution channel for an organisation include the firm’s policy, product characteristics, market characteristics, manufacturer’s features, middlemen’s characteristics, environmental factors and cost of channel usage.
Linkages for physical distribution are through different modes of transportation which include road, rail, waterways, air and pipelines. These are however interwoven; sometimes confusion and conflicts arise from them. Conflicts in the channel of distribution can be avoided or resolved if all the channel members keep to the terms and norms of operations.