Distribution Channels A set of interdependent organizations (intermediaries) involved in the process of making a product or service available for use or consumption. Channel decisions affect other marketing decisions involve long-term commitments
Role of Intermediaries Greater efficiency in making goods available to target markets. Intermediaries provide Contacts Experience Specialization Scale of operation Match supply and demand.
Physical Distribution - Nature and Importance
Physical distribution: Moving tangible products through distribution channels
Physical distribution (or logistics) consists of all activities involved in moving the right amount of the right products to the right place at the right time
In the past years, the surge of e-commerce has underscored the importance of physical distribution the challenge relates to fulfillment, which entails having the merchandise that is ordered by a customer in stock and then packing and shipping it in an efficient, timely manner
THE ROLE OF MARKETING CHANNELSIN MARKETING STRATEGY • Marketing channels are key because they are the means of making goods and services available to ultimate users. • Four functions of marketing channels: • Channels facilitate the exchange process by reducing the number of marketplace contacts necessary to make a sale. • Distributors adjust for discrepancies in the market’s assortment of goods and services via sorting, channeling products to meet the buyer’s and producer’s needs. • Channel members tend to standardize payment terms, delivery schedules, prices, purchase lots, and other conditions. • Channels facilitate searches by both buyers and sellers and bring them together to complete the exchange process.
TYPES OF MARKETING CHANNELS • Most channel options involve at least one marketing intermediary, an organization that operates between producers and consumers or business users. • A retailer owned and operated by someone other than the manufacturer of the products it sells. • A wholesaler who takes title to the goods it handles and then distributes these goods to retailers, other distributors, or sometimes end consumers. • Service firms market primarily through short channels because they sell intangible products and need to maintain personal relationships within their channels.
DIRECT SELLING • Direct channel—carries goods directly from a producer to the business purchaser or ultimate user. • Direct selling—a marketing strategy in which a producer establishes direct sales contact with its product’s final users. • Internet and direct mail are also potentially important tools for direct selling. CHANNELS USING MARKETING INTERMEDIARIES • For some products, using intermediaries may be more efficient, less expensive, and less time-consuming.
DUAL DISTRIBUTION • Movement of products through more than one channel to reach the firm’s target market. • Used to maximize the firm’s coverage in the marketplace or to increase the cost-effectiveness of the firm’s marketing effort. REVERSE CHANNELS • Channels designed to return goods to their producers. • Growing importance because of rising prices for raw materials, increasing availability of recycling facilities, and passage of additional antipollution and conservation laws. • Also used for recalls and repairs.
CHANNEL STRATEGY DECISIONS SELECTION OF A MARKETING CHANNEL • Multiple factors affect selection of a marketing channel. Market Factors Product Factors Organizational Factors Competitive Factors
DETERMINING DISTRIBUTION INTENSITY • Intensive distributionDistribution of a product through all available channels. • Selective distributionDistribution of a product through a limited number of channels. • Exclusive distributionDistribution of a product through a single wholesaler or retailer in a specific geographic region. • Restrictions are illegal if they reduce competition or create a monopoly. WHO SHOULD PERFORM CHANNEL FUNCTIONS? • Intermediary must provide better service at lower costs than manufacturers or retailers can provide for themselves. • Consolidation of channel functions can represent a strategic opportunity for a company.
CHANNEL MANAGEMENT AND LEADERSHIP • Marketers have relationships with intermediaries in distribution channels. • Channel captain Dominant and controlling member of a marketing channel. CHANNEL CONFLICT • Horizontal conflict—disagreements among channel members at the same level, such as two competing discount stores. • Vertical conflict occurs among members at different levels of the channel. • The gray market—goods produced for overseas markets that re-enter the U.S. market and compete against domestic versions. ACHIEVING CHANNEL COOPERATION • Best achieved when all members of channel see themselves as equal components; channel captain should provide this leadership.
VERTICAL MARKETING SYSTEMS • Vertical marketing system (VMS) Planned channel system designed to improve distribution efficiency and cost-effectiveness by integrating various functions throughout the distribution channel. CORPORATE AND ADMINISTERED SYSTEMS • Corporate marketing system—single owner runs organizations at each stage of the marketing channel. • Administered marketing system—dominant channel member exercises power to achieve channel coordination. CONTRACTUAL SYSTEMS • Contractual marketing system—coordinates distribution through formal agreements among channel members. • Include wholesaler-sponsored voluntary chains, retail cooperatives, and franchises.
Tasks in Physical Distribution Management
Physical distribution refers to the actual physical flow of products
In contrast, physical distribution management is the development and operation of processes resulting in the effective and efficient physical flow of products
Effective physical distribution management requires careful attention to five interrelated activities:
Order processing Inventory control Inventory location and warehousing Materials handling Transportation
Tasks in Physical Distribution Management 1. Order Processing
The starting point in a physical distribution system is order processing, which is a set of procedures for receiving, handling, and filling orders promptly and accurately
Electronic data interchange (EDI):
Between customer and supplier orders, invoices, and other business functions are transmitted by computer
Originally, EDI required a direct computer link between supplier and customer, now it is being conducted via the Internet
EDI can trim the cost of order processing significantly, which in turn may reduce purchase prices
Tasks in Physical Distribution Management 2. Inventory Control
The goal of inventory control is to satisfy the order-fulfillment expectations of customerswhile minimizing both the investment and fluctuations in inventories
JIT combines inventory control, purchasing, and production scheduling
Applying JIT, a firm buys in small quantities that arrive just in timefor production and then it produces in quantities just in time for sale
Tasks in Physical Distribution Management 2. Inventory Control (continued) - Just-in-Time:
Benefits of JIT are:
Dramatic cost savings
Shortened and more flexible and reliable production and delivery schedules
Quick responses to quality problems
The central promise is that those who intend to consume a product should activate a process to produce and deliver replacement items
In this way, a product is pulled through a channel on the basis of demand
Tasks in Physical Distribution Management 3. Inventory Location and Warehousing
Management must make critical decisions about the size, location, and transportation of inventories
These areas are interrelated, often in complex ways
One key consideration in managing inventories is warehousing, which embraces a range of functions, such as assembling, dividing, and storing products and preparing them for reshipping
Tasks in Physical Distribution Management 4. Materials Handling
Selecting the proper equipment to physically handle products, including the warehouse building itself, is the materials handling subsystem of physical distribution management
Equipment that is well matched to the task can minimize losses from breakage, spoilage, and theft
Efficient equipment can reduce handling costs as well as time required for handling
Tasks in Physical Distribution Management 5. Transportation
Management must decide on both the mode of transportation and the particular carriers
The leading modes of transportation are railroads, trucks, pipelines, water vessels, and airplanes
Using two or more modes of transportation to move freight is termed intermodal transportation; this approach is intended to seize the advantages of multiple forms of transportation
Designing the Marketing Channel
Channel Design: Decisions involving the development of new marketing channels either where none had previously existed or to the modification of existing channels
Channel Design Distinguishing points of the definition include: A decision made by the marketer The creation or modification of channels The active allocation of distribution tasks in an attempt to develop an efficient structure The selection of channel members A strategic tool for gaining a differential advantage
Who Engages in Channel Design? Firms Wholesalers Retailers • Look up the channel to secure suppliers • Producers, manufacturers, service providers, franchisors • Look down the channel toward the market • Look both up and down the channel
Channel Design Paradigm Recognize the need for channel design decision 7. Select channel members 2. Set & coordinate distribution objectives 6. Choose the “best” channel structure 3. Specify distribution tasks 5. Evaluate relevant variables 4. Develop alternative channel structures
When to Make a ChannelDesign Decision Dealing with changes in availability of particular kinds of intermediaries Opening up new geographic marketing areas Facing the occurrence of major environmental changes Meeting the challenge of conflict or other behavioral problems Reviewing and evaluating Developing a new product or product line Aiming an existing product at a new market Making a major change in some other component of the marketing mix Establishing a new firm Adapting to changing intermediary policies that may inhibit attainment of distribution objectives
Distribution Objectives Setting distribution objectives requires knowledge of which, if any, existing objectives & strategies may impinge on these distribution objectives.
Channel Structure Dimensions 1. Number of levels in the channel 2. Intensity at the various levels Allocation Alternatives 3. Types of intermediaries at each level
Number of Levels Range from two to five or more Number of alternatives is limited to two or three choices Limitations result from the following factors: Particular industry practices Nature & size of the market Availability of intermediaries
Intensity at the Various Levels Relationship between the intensity of distribution dimension & number of retail intermediaries used in a given market area Intensity Dimension Intensive Selective Exclusive Numbers of Intermediaries (retail level) Many Few One
Types of Intermediaries Numerous types Manager’s emphasis on types of distribution tasks performed by these intermediaries Watch emerging types Electronic online auction firms (eBay) Industrial products sold in B2B markets (Chemdex, Converge.com)
Variables Affecting Channel Structure Categories of Variables Market Variables Product Variables Company Variables Intermediary Variables Environmental Variables Behavioral Variables
Market Variables Market Geography Location, geographical size, & distance from producer Market Size Number of customers in a market Market Density Number of buying units (consumers or industrial firms) per unit of land area Market Behavior Who buys, & how, when, and where customers buy
Product Variables Bulk & Weight Perishability Unit Value Degree of Standardization Technical versus Nontechnical Newness
Company Variables 6 Size The range of options is relative to a firm’s size Financial The greater the capital, the Capacity lower the dependence on intermediaries Managerial Intermediaries are necessary Expertise when managerial experience is lacking Objectives Marketing & objectives may & Strategies limit use of intermediaries
Intermediary Variables 6 Availability Availability of intermediaries influences channel structure. Cost Cost is always a consideration in channel structure. Services Services that intermediaries offer are closely related to the selection of channel members.
Environmental Variables Competitive Economic Sociocultural The impact of environmental forces is a common reason for making channel design decisions. Technological Legal
Behavioral Variables Develop congruent roles for channel members. Be aware of available power bases. Attend to the influence of behavioral problems that can distort communications.