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Role of Distribution Channel in FMCG sector

Role of Distribution Channel in FMCG sector

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08/03/2013

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ROLE OF DISTRIBUTION CHANNEL IN FMCG
Distribution channel (also known as marketing channel)
Distribution (or placement) is one of the four aspects of marketing. A distributor is the middleman between the manufacturer and retailer. After a product is manufactured, it may be warehoused or shipped to the next echelon in the supply chain, typically either a distributor, retailer or consumer.
The other three parts of the marketing mix are product management, pricing, and promotion.Frequently there may be a chain of intermediaries, each passing the product down the chainto the next organization, before it finally reaches the consumer or end-user. This process isknown as the 'distribution chain' or the 'channel.' Each of the elements in these chains willhave their own specific needs, which the producer must take into account, along with thoseof the all-important end-user.
Channels
A number of alternate 'channels' of distribution may be available:
Selling direct, such as via mail order, Internet and telephone sales Agent, who typically sellsdirect on behalf of the producer Distributor (also called wholesaler), who sells to retailersRetailer (also called dealer or reseller), who sells to end customers Advertisement typicallyused for consumption goods Distribution channels may not be restricted to physical products alone. They may be just as important for moving a service from producer toconsumer in certain sectors, since both direct and indirect channels may be used. Hotels, for example, may sell their services (typically rooms) directly or through travel agents, tour operators, airlines, tourist boards, centralized reservation systems, etc. There have also beensome innovations in the distribution of services. For example, there has been an increase infranchising and in rental services - the latter offering anything from televisions throughtools. There has also been some evidence of service integration, with services linkingtogether, particularly in the travel and tourism sectors. For example, links now exist betweenairlines, hotels and car rental services. In addition, there has been a significant increase inretail outlets for the service sector. Outlets such as estate agencies and building societyoffices are crowding out traditional grocers from major shopping areas.
Channel members
Distribution channels can thus have a number of levels. Kotler defined the simplest level,that of direct contact with no intermediaries involved, as the 'zero-level' channel.The next level, the 'one-level' channel, features just one intermediary; in consumer goods aretailer, for industrial goods a distributor. In small markets (such as small countries) it is practical to reach the whole market using just one- and zero-level channels.In large markets (such as larger countries) a second level, a wholesaler for example, is now
 
mainly used to extend distribution to the large number of small, neighborhood retailers.In Japan the chain of distribution is often complex and further levels are used, even for thesimplest of consumer goods.In Bangladesh Telecom Operators are using different Chains of Distribution, especially'second level'.In IT and Telecom industry levels are named "tiers". A one tier channel means that vendorsIT product manufacturers (or software publishers) work directly with the dealers. A onetier / two tier channel means that vendors work directly with dealers and with distributorswho sell to dealers.But the most important is the distributor or wholesaler.
The internal market
Many of the marketing principles and techniques which are applied to the externalcustomers of an organization can be just as effectively applied to each subsidiary's, or eachdepartment's, 'internal' customers.In some parts of certain organizations this may in fact be formalized, as goods aretransferred between separate parts of the organization at a `transfer price'. To all intents and purposes, with the possible exception of the pricing mechanism itself, this process can andshould be viewed as a normal buyer-seller relationship. The fact that this is a captivemarket, resulting in a `monopoly price', should not discourage the participants fromemploying marketing techniques.Less obvious, but just as practical, is the use of `marketing' by service and administrativedepartments; to optimize their contribution to their `customers' (the rest of the organizationin general, and those parts of it which deal directly with them in particular). In all of this, thelessons of the non-profit organizations, in dealing with their clients, offer a very useful parallel.
Channel Decisions
Channel strategyProduct (or service)- Cost- Consumer location
Channel management
The channel decision is very important. In theory at least, there is a form of trade-off: thecost of using intermediaries to achieve wider distribution is supposedly lower. Indeed, mostconsumer goods manufacturers could never justify the cost of selling direct to their consumers, except by mail order. In practice, if the producer is large enough, the use of intermediaries (particularly at the agent and wholesaler level) can sometimes cost more thangoing direct.
 
Many of the theoretical arguments about channels therefore revolve around cost. On theother hand, most of the practical decisions are concerned with control of the consumer. Thesmall company has no alternative but to use intermediaries, often several layers of them, butlarge companies 'do' have the choice.However, many suppliers seem to assume that once their product has been sold into thechannel, into the beginning of the distribution chain, their job is finished. Yet thatdistribution chain is merely assuming a part of the supplier's responsibility; and, if he hasany aspirations to be market-oriented, his job should really be extended to managing, albeitvery indirectly, all the processes involved in that chain, until the product or service arriveswith the end-user. This may involve a number of decisions on the part of the supplier:Channel membershipChannel motivationMonitoring and managing channels
Channel membership
Intensive distribution - Where the majority of resellers stock the 'product' (with convenience products, for example, and particularly the brand leaders in consumer goods markets) pricecompetition may be evident.Selective distribution - This is the normal pattern (in both consumer and industrial markets)where 'suitable' resellers stock the product.Exclusive distribution - Only specially selected resellers or authorized dealers (typicallyonly one per geographical area) are allowed to sell the 'product'. Often this form of distribution stipulates the contracted resellers cannot offer competing products.
Channel motivation
It is difficult enough to motivate direct employees to provide the necessary sales and servicesupport. Motivating the owners and employees of the independent organizations in adistribution chain requires even greater effort. There are many devices for achieving suchmotivation. Perhaps the most usual is `incentive': the supplier offers a better margin, totempt the owners in the channel to push the product rather than its competitors; or acompetition is offered to the distributors' sales personnel, so that they are tempted to pushthe product. At the other end of the spectrum is the almost symbiotic relationship that the alltoo rare supplier in the computer field develops with its agents; where the agent's personnel,support as well as sales, are trained to almost the same standard as the supplier's own staff.
Monitoring and managing channels
In much the same way that the organization's own sales and distribution activities need to bemonitored and managed, so will those of the distribution chain.In practice, many organizations use a mix of different channels; in particular, they maycomplement a direct salesforce, calling on the larger accounts, with agents, covering thesmaller customers and prospects.

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