Designing the distribution channel begins with determining
convenient location to buy the products
The company must balance the consumer service needs with the feasibility and costs plus prices.
Setting Channel Objectives and Constraints
The company must decide which segments to target and the best channels to use in each segment. Here, the objective of the company is to minimize the total channel cost
Besides the target market, the company’s channel objectives are influenced by;
the nature of its product , e.g. perishable products require more direct marketing to avoid delays and too much handling.
company characteristics , e.g. the company’s size and financial situation determine which functions it can
handle, how many channels it can use, which transportation can be used…
characteristics of intermediaries , intermediaries differ in their abilities to handle promotions, customer contact, storage and credit e.g. the company’s own sales force is more intense in selling.
competitors’ channel , some companies may prefer to compete in or near the same outlets that carry competitors’ products, some may not e.g. Burger King wants to locate near McDonald’s
environmental factors , economic conditions and legal constraints affect channel design decisions e.g. in a depressed economy, producers want to distribute their goods in the most economical way, using shorter channels.
Identifying major channel alternatives-Types
E.g Industrial product
Company sales force
E. g consumer electronics co.
Mail order market
The advent of print media, the telephone, radio, television, and the Internet have all provided new ways for marketers to get their message to their intended audience. As various technologies advance, these information channels offer more precise delivery of a message. Can you identify an emerging information distribution channel? Discussion Question
Number of Marketing Intermediaries
Intensive distribution- strategy in which companies stock their products in as many outlets as possible. Convenience products and common raw materials must be available where and when consumers want them e.g. toothpaste, candy… Procter & Gamble, Coca-Cola .
Motivating channel members- channel positioning, offering, capability building programs
Coercive power- threaten to terminate relationship
Reward power- xtra benefit for good performance
Legitimate –warranted under contract. GM insist dealers for certain inventory
Expert power- special knowledge, ex. Sales lead generation, sales training
Referent power- manufacturer is highly respected that members feel proud. e.g IBM, caterpilar, HP
Channel Dynamics New channel systems evolve
Evolution of channels Decline- discount stores low value Introductory- specialist stores Low growth-high value Mature- deptt. stores High-growth Growth- Dedicated stores
Vertical Marketing Systems (VMS )
VMS consists of producers, wholesalers, and retailers acting as a unified system - that seek to maximize profits for the whole channel.
one channel members owns the others, has contracts with them or use so much power that they all cooperate.
this occur to control channel behaviour and manage channel conflict.
In a corporate VMS, production and distribution stages are combined under single ownership, in order to manage cooperation and conflict management e.g. AT&T ,Bata & woodland.
A vertical marketing system that coordinates production and distribution stages, not through ownership but through the size and power of one of the parties
e.g. P&G,HLL, Nestle, Maruti are market leaders, they can command special displays, shelf space, promotions and prices form the other parties
It consists of independent firms at different levels of production and distribution who join together through contracts to obtain more economies or sales impact than each could achieve alone.
three types of contractual VMSs;
wholesaler-sponsored voluntary chains ; are contractual marketing systems in which wholesalers organize voluntary chains of independent retailers to help them compete with large corporate chain organizations. E.g-vegetables n food market
retailer cooperatives ; are contractual marketing systems in which retailers organize a new, jointly owned business to carry on wholesaling and possibly production.e.g vishal, amartex
franchise organizations ; are contractual marketing systems in which a channel member, called a franchiser, links several stages in the production-distribution process.
Parle brands: thums up, gold spot, limca, mazza
NIIT, Aptech, SSI
three forms of franchisees;
manufacturer-sponsored retailer franchise system e.g. Ford licenses dealers to sell its cars. The dealers are independent businesspeople who agree to meet various conditions of sales and service.
manufacturer-sponsored wholesaler franchise system e.g. Coca-Cola licenses bottlers (wholesalers) in various markets who buy Coca-Cola syrup concentrate and then carbonate, bottle and sell the finished product to retailers in local markets.
service-firm-sponsored retailer franchise system in which a service firm e.g. McDonald’s, Burger King, Holiday Inn licenses a system of retailers to bring its service to consumers.
Hybrid Marketing (multichannel)
company uses several marketing channels (e.g. direct mail - telemarketing, retailers, distributors, dealers, sales force) to sell its products to different customer segments.
E.g. IBM uses its own sales force ,direct catalog & telemarketing operation , independent IBM dealers , dealers for business segments + large retailers like Wal-Mart.
Adv.- in large and complex markets the company can expand its sales and market coverage
services to the specific needs of diverse customer segments.
they are harder to control and generate more conflict.
Horizontal Marketing Systems (HMS)
HMS is a channel arrangement in which two or more companies at one level join together to follow a new marketing opportunity.
Adv.-companies combine their capital, production capabilities, marketing resources and therefore accomplish more.
Companies might join forces with competitors or noncompetitors. They might work with each other on a temporary or permanent basis or they may create a separate company.
E.g. Coca-Cola and Nestle formed a joint venture to market ready-to-drink coffee and tea worldwide. Coke provided worldwide experince in marketing and distribution beverages and Nestle contributed two established brand names - Nescafe and Nestea .
All channel firms should work together to be successful. Each channel member is dependent on the others
e.g. a Ford dealer (retailer) depends on the Ford Co. for design cars
Ford depends on the dealer to attract consumers, persuade them to buy
service cars after the sale.
dealer depends on other dealers to create overall reputation for the entire distribution channel.
There is disagreement among channel members on goals and roles - who should do what and for what rewards .
H orizontal ; occurs among firms at the same level of the channel. In other words, one dealer may complain about the other.
Vertical ; occurs among different levels of the same channel. In other words, the producer may complain about its dealers or vise versa.
Multichannel ;manufacturer has established 2 or more channels that sell to same market.
Causes of conflict
Manufacturer- mkt share, max. profit
Channel members-max. sales, max. profit
Automobile component ,FMCG
Difference in perception of market
they provide platform for dealers to voice grievances
Members can be motivated to perceive customer satisfaction as ultimate goal
Arbitration & mediation
Manufacturer helps in intramiddlemen conflict
Court ,govt. agency b/w manufacturer n dealers
Designing International Distribution Channels
Channel systems can vary from country to country. Each country may have its own unique distribution system. International marketers have to adapt their channel strategies to the existing structures within each country.
Physical Distribution and Logistics Management
Companies must decide on the best way to store, handle and move their products and services so that they are available to customers in the right amount, at the right time, and in the right place.
Logistics effectiveness has a major impact on (1) customer satisfaction and (2) company costs (15% of the product’s price).
Process of getting goods to customers
Supply chain management
Procure right inputs
Convert into finished goods
Dispatch to final destination
Nature and Imp of Market Logistics
Marketing logistics includes planning, implementation, and controlling the physical flow of materials, final goods, and related information from points of origin to points of consumption to meet customer requirements at a profit.
Logistics deal with
outbound distribution - moving products from the factory to customers,
inbound distribution - moving products and materials from suppliers to the factory.
manage the whole-channel activities of suppliers, purchasing agents, marketers, channel members and customers.
Goals of the Logistics System
Getting right goods to right places at the right time for the least cost.
Objective- to maximize profits, not sales.
company must compare the benefits of providing higher levels of service with the costs.
Some companies may offer less services and charge less, but others may offer more services than its competitors and charge higher prices to cover their costs.
Major Logistics Decisions
Orders submitted thru mail, telephone, salespeople or via computer.
Short order-to-remittance cycle
Elapsed time b/w order receipt, delivery & payment
Customer credit checking
Inventory & prdn scheduling
Order and invoice shipment
Receipt of payment
Longer above cycle-lower customer satisfaction
Co stores its goods until they are sold coz prdn n consumption cycles rarely match
The company might own
bring more control
ties up capital
is less flexible if locations change
charge for rented space
provide additional services for inspecting, packaging, shipping and invoicing goods but at a cost
offer wide choice of locations and warehouse types
Basic types of warehouses are
storage warehouse s store goods for moderate to long periods
distribution centers are designed to move goods rather than just store them. They are large and automated warehouses designed to receive goods from suppliers, take orders and deliver goods to customers.
Automated warehouses with advanced materials handling systems under control of a central computer
Inventory decisions involve
when to order
Order (reorder) point-stock level to place a new order
how much to order.
Balance order processing costs & inventory carrying costs
Order processing cost-setup costs + running 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.
The choice of transportation carriers affects
the pricing of products
condition of the goods
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.
Truck ; 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.
Pipeline ; are specialized means of shipping petroleum, natural gas and chemicals from sources to markets. It costs less than rail but more than water.
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;