Concept Of Distribution Channel
The term ‘Distribution Channel’ connotes a
route or pathway taken by products as they
flow from the point of production to the point
of ultimate consumption.
According to William J. Stanton, “ A
distribution channel consists of the set of
people and firms involved in the transfer of
title to a product as the product moves from
product to ultimate consumer or business
Definitions Of Distribution Channel
“Every producer seeks to link together the set of
marketing intermediaries that best fulfill the
firm’s objectives. The set of marketing
intermediaries is called the marketing channel or
trade channel or distribution channel.”
“Channel of distribution is the structure of intra
company organization units and extra company
agents and dealers, wholesale and retail, through
which a commodity, a product or service is
--American Marketing Association
Characteristics of Distribution Channel
¤ Route or pathway
¤ Flow of goods
¤ Mercantile agents
Role of Distribution Channel
→Distribution channel reduces the cost of any
transaction by routinisation of purchasing
→Distribution channel acts as communication
agent often guided the consumers in the right
direction to fulfill their wants.
→Persuading and influencing the prospective
buyers to favor a certain product and its
→Offering a pre-sale and post-sale services to
→Transferring a new technology to the users
along with the supply of products and playing
the role of changing agents.
→Looking after all physical distribution functions.
→Providing feedback information, marketing
intelligence and sales forecasting services for
their regions to their manufacturers.
Functions of Distribution Channel
Contact b/w producer
Satisfaction to the
Transferring the title
Function of financing
Function of distribution
Helps in production
Creating time and place
Types of Distribution Channel
Direct Indirect Vertical Horizontal
One-level Two-level Multi-level
Administered Contractual Corporate
Conventional Distribution Channel
• In Conventional Distribution Channels it is
assumed that each enterprise working in the
channel is separately owned and operated
• In other words, these are the channels in which
the participants operate on the basis of self-
interest, concerned only with the organization
from where they buy and to whom they sell.
• In this, there are four channel designs such as :-
– Direct: Zero level
– Indirect: one level, two level , multi level
Conventional Channels for Consumer
• Conventional channels are the fragmented
networks where in the manufacturers and the
consumers are loosely linked by
intermediaries in the process of exchange.
• Conventional channels are of two types:-
– Direct Distribution Channel
– Indirect Distribution Channel
Direct Distribution Channel
• This is the oldest, simplest and shortest type
of distribution channel. Under this channel
the producer directly sells his products to the
ultimate consumers without any middlemen.
• That is why, it is called as direct channel and
zero level distribution channel.
Manufacturer Ultimate Consumer
Advantages of Direct Distribution
• Consumers get the product in their pure form.
• The price of products remain low because of
• It is economical method of selling.
• Close contact b/w producer and consumers.
• Consumer’s demand estimated directly by the
Disadvantages of Direct Distribution
• It is not suitable in case of mass production
and sales at large scale.
• It is not suitable when consumers are widely
• Consumers has to pay a price fixed by the
• The sales level remain low.
• All the risks and losses lies with the
Indirect Distribution Channels
• Indirect channel is one which the manufacturer sells
his products with the help of intermediaries. The
whole process of indirect channel of distribution
looks like a chain.
One level Manufacturer ………………… Retailers …………….. Consumers
One level Manufacturer ……………….. Wholesalers ………… Consumers
Two level Manufacturer ………………. Wholesalers …. Retailers ….
Multi level Manufacturer …. Selling Agents …. Wholesalers ….. Retailers ….
One – level Channel of Distribution
• Under this system, manufacturers sell their product to
retailers and retailers sell them in turn to ultimate
• The wholesalers and selling agents are totally
• It is suitable when the products are perishable.
• Manufacturer to wholesaler is also preferred in
distributing industrial goods.
Manufacturer Retailers Consumers
Manufacturer Wholesalers Consumers
Two – level Channel of Distribution
• There are two middlemen in this channel, namely,
wholesalers & retailers.
• Under this channel, the manufacturer sells products in
large quantities to the wholesalers.
• The wholesalers distribute the products to retailers as
per their requirements in small quantities.
• This channel is suitable most for the products which
have widely scattered markets such as, groceries, drugs,
food items and shopping products.
Manufacturer Wholesalers Retailers Consumers
Multi–level Channel of Distribution
• This is the longest channel of distribution.
• This channel is mostly used by small scale companies
who cannot afford to develop their own sales force.
• A company with diversified product mix may find it
more appropriate to adopt a variety of distributions
• This channel is used where the wholesalers are
scattered throughout the country and selling agents
undertakes marketing on behalf of the manufacturers.
Manufacturer Selling agents Wholesalers Retailers Consumers
Non Conventional Channel of
• Non conventional channels of distribution or
integrated channels of distribution are the
networks in which channels components
participate in full co-ordination and cohesion
manner rather than working in a loose manner.
• The non conventional channel are of two types:
– Vertical Distribution Channel System
– Horizontal Distribution Channel System
Vertical Distribution Channel
A vertical marketing system is the result of
failure of conventional channels where each
channel participant works with independent
separate identity, seeking to achieve its own
A vertical marketing system comprises the
manufacturer, wholesalers and retailers acting
as a unified system. One channel member
own the other members of the channel.
Vertical Distribution Channels are professionally
managed and centrally programmed networks, pre-
engineered to achieve operating economies and
maximum market impact.
These are rationalized and capital intensive
networks, designed to achieve technological,
managerial and promotional economies though the
integration, coordination and synchronization of
marketing flows from point of production to the
point of sale.
• There are three types of virtually integrated marketing channels:
Corporate System : In this, a single firm owns both
production and distribution facilities.
Eg. Bata, Tata, Modi, Godrej, DCM, etc. have their own
production units and retail outlets.
This system gives a company maximum control over
marketing of its products.
Administrated Vertical System : these are coordination of
all the functions of production and distribution achieved
through the use of programme developed by one or
number of limited firms throughout the whole marketing
system. Thus, one firm, develop the distributors strategies
and policies and the other firms agree to function
according to that dominant firm’s distribution marketing
strategies which enjoys a major portion of market share
and substantial customer’s loyalty.
Contractual Marketing System: In this channel,
independent channel components manufacturer,
wholesalers and retailers are employed on a
voluntary basis to develop a more efficient system on
a contractual basis, so as to obtain economies of
scale and increases market impact.
Thus, the manufacturer hire the services of other
units on contract basis who agree to follow his
distribution policies in return of certain benefits, like
financing, advertising, centralised buying.
Horizontal Distribution Channel
Horizontal channel is a new trend in distribution in
which, two or more companies join hands to exploit a
marketing opportunity or opportunities , either by
themselves or by creating an independent unit.
eg: Maruti Udyog and HDFC Bank, Sugar Syndicate of
India, Associated Cement Company(ACC).
The reasons for horizontal integration are- the
ever changing markets, cut-throat competition,
changing pace of technology, excess capacity, cyclical
and seasonal changes in consumer demand and the
incapacity to take financial risks single handed, and so
Distribution Channels for Industrial
• The channels of distribution for consumer
products are generally long while channels for
industrial products are shorter as retailers are
• Distribution channels for industrial products
are less complicated because industrial
products have more or less fixed pattern of
buying and selling.
• Distribution channels used for industrial
products is as follows:
i. Zero-level Distribution Channel
ii. One-level Distribution Channel
iii. Two-level Distribution Channel
iv. Three-level Distribution Channel
Zero-level Distribution Channel
• This is the most popular and commonly used channel in the
distribution of industrial products, since industrial users place
orders with the manufacturers of industrial products directly.
Manufacturer Industrial Users
• This system is most suitable if the products are sold to
few industrial users. This will help in maintaining close
contact with customers and prospective buyers and create
opportunities for more sales.
Manufacturers of plant and machineries, generating sets,
heating plants, air conditioning plants, solar energy
Plants and refineries, etc. prefer to use this channel.
One-level Distribution Channel
• In this channel, the manufacturer sells his output to
wholesalers/ selling agents, who in turn sell them to
• This channel of distribution is beneficial when the market is
scattered. This channel is useful for small scale
manufacturers of equipment for air conditioning plants,
boilers, hand tools, office suppliers, building materials, etc.
• The wholesalers working in this channel are also called as
Manufacturer Wholesalers Industrial Users
Two-level Distribution Channel
• This is the longest and popular channel of distribution
which is mostly adopted by large-sized industrial
enterprises for selling their products.
• In this the manufacturer uses the selling agents, to sell their
products to industrial distributors, who in turn sell them to
industrial users. The selling agents may be commission
agents, brokers, consignees, professional distribution
houses. Such selling agents are arranged on area wise basis.
Manufacturer Selling Agents Industrial Distributors Industrial Users
Three-level Distribution Channel
• In this the manufacturer uses the services of selling
agents who have enough resources, marketing
network, expert knowledge and experience of
handling technical products. These selling agents are
appointed on the areas basis. In case the cost of
distribution is low . This system is more suitable foe
selling sophisticated industrial products.
Manufacturer Selling Agents Industrial Users
Factors Affecting the Choice of
•Buying habits of
•Size of order
•Need of product
•Size of the
•Reputation of the
•Cost of channel
Middleman is one who specializes in
performing operations or rendering services
that are directly involved in the purchase and
sale of goods in the process of their flow from
producer to final buyer.
American Marketing Association
Functions of Middlemen
¤ Boost Large Scale Production
¤ Purchase of Raw Materials
¤ Price Determination
¤ Warehousing Facilities
¤ Financial Assistance
¤ Standardization and Grading
¤ Transport Facilities
¤ Advertising Function
¤ Launching of New Product
Types of Middlemen
• Marketing middlemen may be individuals or
the organisations that help the producers to
reach the ultimate consumers.
• Middlemen are broadly classified into two
i. Agent Middlemen
ii. Merchant Middlemen
• Agent Middlemen are also known as “Functional
Middlemen”. They do not handle the products in the
capacity of owners, but they render important services
for the exchange of products b/w the manufacturer
and the consumer.
• They assist in the buying and selling of products by
taking part in negotiating purchase and sale of
• Since, they do not own the product, they do not earn
• But, they take their remuneration for the services
rendered in the form of commission or brokerage.
• Merchant Middlemen are those who take title to the
products and channelise the products from the previous
channel step to the next channel step of the distribution
• They buy and sell the products on their own account and
• They take the title to the products.
• They resell the products at a profit.
• They take the marketing risk and perform many
• They are wholesalers and retailers.
Small- Scale Large-Scale
• “Wholesalers buy and resell merchandise to
retailers and other merchants and to
industrial, institutional and commercial
users, but do not sell in significant amount to
- Cundiff and Still
Characteristics of Wholesalers
i) Wholesalers purchase and assemble goods in large quantities.
ii) They deal in one commodity or one line of products, ex. : Fans, food grains,
electrical fittings, furniture etc.
iii) They are financially healthy. This makes them to store the commodity in , large
quantities and also keep them for larger duration.
iv) They provide credit facilities to the retailers.
v) Often, they advance funds to the producers for production of goods.
vi) Their profit margin is very low. Their profit margin is the difference between
the price at which they buy from manufacturers and the price charged to the
retailers. As they operate in large volumes, they charge a very reasonable
vii) Usually they appoint agents and brokers, through whom they deal with their
viii) Wholesalers advertise their commodities. The benefit of this goes to
manufacturers and retailers.
Functions of Wholesalers
• Buying and Assembling
• Grading and Packaging
• Providing Market Information
Services Rendered by Wholesalers
Services towards manufacturers
• Make possible the large scale production
• Regularisation of Production Cycle
• Better use of capital
• Inventory of goods
• Standardisation of goods
• Help in price determination
• Helpful in advertising
• Financial assistance
• Performs marketing functions
Services towards Retailers
• Quick delivery
• Credit facility
• Convenience in buying
• Return of goods
• Help of advertising
• Provide information
• Creates utilities
• Transport facilities
• Consultancy services
• Stability in prices
Services towards Consumers
• Better selection
• Cheap goods
• Increase in standard of living
• Knowledge of the new products
• Reasonable price
Services towards Society
• Price stability
• Increase in employment
• Market research
• Marketing functions
• Business relations
Types of Wholesalers
ŏ Full function Wholesalers: is a middlemen who buys and sells the
products on his own account, assembles products from different
sources in bulk quantities, carries stocks, sells in small lots, grant
credit and renders many other valuable services towards the
manufacturers and the retailers.
ŏ Converters: they operate as manufacturers and wholesalers. They
buy the products and sell them to the subsequent channel
members after processing them. Eg: they may convert wheat into
wheat flour or pallets.
ŏ Drop Shipper: is a wholesaler who neither stores the products nor
delivers them to the buyers from his own stock. He books the
orders and inform the manufacturers/ supplier. When goods are
ordered, the manufacturer dispatches them directly to the
wholesalers/ large retailers, but the bills are made in the name of
these wholesalers which they ultimately recover from the retailers.
Types of Wholesalers
On the basis of area covered
• Local Wholesalers: they purchase the product
from the manufacturers and deliver them to
the local retailers. They deal in variety of
• Provincial Wholesalers: they purchase the
products and sell it to the retailers in a
particular district or state.
• National Wholesalers: they are located at
strategic places and from there distribute the
products all over the country.
On the basis of operations
• Industrial Wholesalers: also known as ‘Industrial
Distributions’. They deal only in the industrial
products, sells directly to the industrial users
rather than to retailers.
• Agricultural Wholesalers: they purchase the
agriculture produce direct from the cultivators/
farmers. They deal in fruits, grains, vegetables,
• Mail order Wholesalers: they carry their business
through mail by conveying to retail, industrial and
institutional customers about the main features of
On the basis of specialty
• General line wholesalers: they carry a broad
assortment of products within a single merchandise
line. They are distributors of consumer products or
• Specialty wholesalers: they carry only one or two
products. Such a tea, coffee, dairy products, soft drinks,
• Rack Jobber: they deal in specialized lines of products
such as toiletries and house wares to grocery retailers
and supermarkets and also provide certain special
• Producer’s co-operatives: farmers are the members.
They assemble farm produce to sell in local markets. At
the end of the year the profits are distributed among
members. They improve their produce quality and
promote a co-operative brand name.
“A retailer is merchant or occasionally an
agent whose main business is selling directly
to the ultimate consumers.”
- Cundiff and Still
“Retailing is selling final consumer products to
- Mc Carthy
Characteristics of Retailers
• He is regarded as the last link in the chain of
• He purchases goods in large quantities from the
wholesaler and sell in small quantity to the
• He deals in general products or a variety of
• He develops personal contact with the consumer.
• He aims at providing maximum satisfaction to the
• He has a limited sphere in the market.
Functions of Retailers
• Buying and Assembling
• Grading and Packing
• Risk taking
• Personal services
Services Rendered by Retailers
I. Service towards Manufacturer and
• Offer opportunities
• Selling of new product
• Provide information
• Making sales
• Provide storage facility
Services Rendered by Retailers
II. Service towards Consumers
• Wider choice
• Easy shopping
• Credit facilities
• Home delivery
• Special facility
• Customer advice
• Storage facility
• Connecting link
Types of Retailers
Small Scale Retailers
• Unit stores: unit stores are the retail stores run on
proprietary basis dealing in general stores or
single line stores such as drugs, clothes, grocery,
etc. They are also called specialty stores.
• Street traders: are retailers who display their
stock on footpaths or at the sidewalks of busy
spots of the cities and towns. They deal in light
goods like toys, plastic goods, hosiery products,
• Market Traders: these retailers open their
shops on fixed days or dates in specified areas.
They do join fairs and festivals. They deal in
general or special line stores. They keep on
moving from one place to another place.
• Hawkers and Peddlers: they do not have any
fixed place of business. They carry the
products in hand cart selling the goods door
to door. They lack capital and cannot store
goods in bulk. They are unable to attract the
permanent customers as they do not have a
• Cheap-Jacks: is a retailer who has fixed place of
business in a locality but goes on changing his
place to exploit the market opportunities. They
deal in cheap varieties of ready-made garments,
plastic goods, shoes, etc. However, the speed of
change of locality is not fast like hawkers.
• Syndicate Stores: they are known for widest
varieties of goods in product line but unknown
brands. These retailers buy most of the
unbranded goods and try to sell under their own
names. Like garments, toys, groceries, etc.
Large Scale Retailers
• Departmental Stores: This type of retailer is often the
most complex offering a wide range of products and
can appear as a collection of smaller retail stores
managed by one company.
The department store retailers offer products at
various pricing levels. This type of retailer adds high
levels of customer service by adding convenience
enabling a large variety of products to be purchased
from one retailer.
• Chain Stores: Chain stores are retail outlets that share a
brand and central management, and usually have
standardized business methods and practices. It is a
system of branch shops operating under a centralised
management and dealing in similar lines of goods.
• Mail Order House: in this, the seller contacts the
buyer through some form of advertising. That is
the customer do not visit the seller’s premises
nor there is a personal inspection of goods before
the purchase. The transaction is settled through
postage medium like Registered post.
• Fair- price shops: these are the retail outlets
started by the manufacturer in different cities to
sell at price which are quite fair. This practice is
used in public distribution system by the
government. These are designed to meet the
needs of the weaker sections of societies.
• Consumer Co-operatives: these are the stores owned
by a group of consumers themselves on co-operative
principles. It is an association of consumers to obtain
their requirements by purchasing in bulk and selling
through the stores to the members and non-
members.it believes in wholesale buying and retail
selling at reasonable prices.
• Supermarkets: Generally this type of retailer
concentrates in supplying a range of food and beverage
products. However many have now diversified and
supply products from the home, fashion and electrical
products markets too. Supermarkets have significant
buying power and therefore often retail goods at low
Physical Distribution System
Physical distribution involves the actual
movement and storage of goods after
they are produced and before they are
- Cundiff & Still
Objectives of Physical Distribution
• To provide better customer service
• To reduce cost
• To increase sales
• To create utilities
• To establish differential advantage over rivals
• To develop communication system
• To attain price stability
• To increase the reputation
Importance of Physical Distribution
• Creation of utilities
• Reduction in distribution cost
• Increase in sales volume
• Broader marketing scope
• Larger market share
• Stability in prices
• Improvements in customer services
• Effects on product planning
• Coordination b/w demand and supply
• Facing rising competition
Components of Physical Distribution
It is that part of general management which is responsible
for the design, administration and operation of the system
to control the movement of raw materials and finished
The structure of physical distribution is made up of
following broad components namely:
• Inventory Control
• Material Handling
• Order Processing
Types of Physical Distribution
• Rail Transport
• Road Transport
• Water Transport
• Air Transport
• Private Warehouses
• Public Warehouses
• Household Warehouses
• Bonded Warehouses
• Co-operative Warehouses
• Institutional Warehouses
• Inventory Control: Inventory Control is the supervision
of supply, storage and accessibility of items in order to
ensure an adequate supply without excessive
It can also be referred as internal control - an
accounting procedure or system designed to promote
efficiency or assure the implementation of a policy or
safeguard assets or avoid fraud and error etc.
Thus, material control involve the following activities:
• Purchase of materials
• Receiving of materials
• Inspection of materials
• Storage of materials
• Issuing of materials
Material Handling: Material Handling is the
movement, storage, control and protection of
materials, goods and products throughout the
process of manufacturing, distribution,
consumption and disposal.
Material Handling methods are :
• Manual material handling method
• Mechanical material handling method
• Automatic material handling method
• Order Processing: Order processing is a key
element of Order fulfillment. Order processing
operations or facilities are commonly called
"distribution centers". "Order processing" is
the term generally used to describe the
process or the work flow associated with the
picking, packing and delivery of the packed
item(s) to a shipping carrier.