Prof. Sameer V.

Charania TYBMS V Distribution Channels

MODULE 3: DISTRIBUTION CHANNEL MANAGEMENT

5 DISTRIBUTION CHANNEL
AN OVERVIEW OF DISTRIBUTION CHANNELS
A distribution channel is a group of people and firms involved in the transfer of title or
ownership as the product moves from the producer to the ultimate consumer. Distribution
channels are nothing but intermediaries or middlemen between the producer and the
consumer. They support the process of entire distribution.
NEED FOR DISTRIBUTORS:
1. They are there as the producers cannot reach all their consumers.
2. They multiply reach and provide efficiency to the marketing process.
3. They facilitate smooth flow and create time, place and possession utilities.
4. They have the core competence and the reach which the company may not have and they
can do this entire process more cost effectively.
5. They also provide contact, experience, specialisation and scales of operation
CHANNEL PARTNERS & THEIR FUNCTIONS IN DISTRIBUTION CHANNEL:
1. Distributors/Dealers/Stockiest:
Distributor is an intermediary nominated by a company to most times exclusively re-
distribute the company products to all wholesalers and institutions in a designated territory.
He does not deal in competitor's products.
Examples:
Redistribution stockiest for HUL
A distributor for Philips lighting division
A distributor for L&T engineering division
Functions of Distributor:
Distributor is a person appointed by a company who has responsibilities for:
1. Buying adequate quantities of all the products and pack-sizes of the company for re-
distribution.
2. Ensuring full market coverage of all the customers in the territory assigned to him.
3. Helping finance the operations. While the distributor normally buys by paying for the
goods immediately, it is necessary for him to extend credit to his customers. He has to bear
the cost of this credit.
4. Maintaining the inventory of the company products at his end. As these stocks have
already been paid for, he bears the inventory cost also.
5. Assisting the company in all its promotional efforts whether directed towards the trade or
the end consumers
2. Wholesaler:
The wholesaler, or the wholesale trader, is a trader, who purchases goods in large quantities
from manufacturers or distributor and resells to retailers in small quantities. Channel
members who support the service industries do not handle any goods but only services.
However as no tangibles are involved, they cannot strictly be considered as wholesalers when
they are operating in the service industries.
Wholesalers, whether freelance or working for companies, operate on the principle of
optimum results for their efforts, have thin margins, and are expected to minimize errors in
operation, and maximize service (effectiveness) and minimize operating costs (efficiency).
They buy the goods for resale, keep inventory, take risks of price changes, negotiate terms
with the companies, procure orders and deliver them and even extend credit to their
customers.

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Prof. Sameer V. Charania TYBMS V Distribution Channels

Functions of Wholesaler:
i. Assembling or Aggregating the Goods: At the start of this task, the wholesaler is very
clear on the requirements of his set of customers-retailers and any business institutions. He
knows the type, quality and quantity of the goods his customers need and hence is able to
place orders on his suppliers who are normally producers or even other wholesalers.
In the case of a distributor working for a company or number of companies, his work is better
cut out. His customers are defined by the market coverage plan advised to him by the
company. He has past history of the buying pattern of these regular customers and is able to
place a near accurate order on the company for what he needs at pre-determined intervals
(also defined by the company). At times, the orders are collected from the distributor by the
company salespeople or by the C&FA over phone. In all the cases, the wholesaler buys the
goods from his principals.
ii. Warehousing of the Goods: After the wholesaler or distributor has bought the goods from
the company, protection of the goods becomes his responsibility. He has to make sure that he
has adequate and safe storage space for the quantities he buys.
The warehouse premises may be his own or rented. Depending on the value of the goods, the
wholesaler may even insure the goods. If the goods have to be stored in temperature
controlled conditions, the wholesaler or distributor has to provide for the cold storage
facilities. The goods have to be protected against weather conditions and also in a manner
that they do not get spoilt or damaged as the cost of such losses are to the account of the
wholesaler.
iii. Order Booking and Execution: The wholesaler has to book orders from his customers
on a regular schedule to sell the goods already bought. In the case of a wholesaler operating
out of a shop in the market, the customers (retailers, other wholesalers) come to his shop to
buy the goods. He has to use his selling skills to ensure that they buy all their requirements
from his shop only. He may set his own revenue target to be achieved every day or week or
month.
In the case of a company distributor, he or his sales staff has to visit each customer and book
orders that can be delivered with ready stocks or later as per the schedule. The order booking
is also done as per a beat plan by which the distributor works his markets.
iv. Transportation of the Goods: The freelance wholesaler rarely delivers the goods to the
doorstep of his customers. They normally come to his shop, place orders and collect the
goods and take them back. In the case of a company distributor, however, he has to deliver
the goods to the customer premises. In all cases of wholesalers, they do deliver the goods to
their industrial and institutional customers.
v. Financing of the Business: The wholesaler has to provide finance for buying the goods he
wants to sell. Rarely do companies extend credit facilities to a wholesaler or a distributor. If
the freelance wholesaler is buying from another wholesaler (like a company distributor or a
bigger wholesaler), he may get the goods on credit terms. The wholesaler is, however,
expected to extend credit to his customers who could be other wholesalers, retailers or
institutions.
vi. Risk Bearing: The wholesaler has already paid for the stocks he is trying to sell. As he
owns the stock, he is responsible for any losses incurred on the stocks while in his possession.
There is also the partial risk of bad debts on credit extended to customers.
vii. Grading and Packing: The wholesaler breaks bulk and sells to his customers in smaller
lot sizes. For this he may have to do some re-packing. In the case of commodity type
products like agricultural products he also does the cleaning and grading of the goods. For
example, a rice wholesaler buying from different rice mills will grade the rice, price it

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Prof. Sameer V. Charania TYBMS V Distribution Channels

differently and then sell it to his customers. In the process, the wholesaler will also clean the
rice of external contaminants.
viii. Providing Market Information: He is a two-way communicator of valuable
information. To his retail customers, he informs them of various type of goods available,
competition, promotions in force and so on. To his suppliers, he provides information
gathered from the retailers about the consumer's reaction/response to the company products.
In the case of company distributors, the information is collected by the company through
structured report formats. The wholesaler is an important source of competitors' information
particularly on prices, promotions, etc.
3. Retailers:
A retailer, or merchant, is an entity that purchases goods through various distribution
channels and sells goods or commodities in small quantities directly to consumers, with the
goal of earning a profit.
Functions performed by Retailers
A retailer is the key person in distribution channel. Following are the functions performed by
retailers:
i) Providing Assortments: Manufacturers generally concentrate in producing specific types
of products: Example: Cadbury's makes chocolates, Amul makes dairy products, Kellogg
makes breakfast cereals etc. If such manufacturers make a decision to have their own stores
selling only their own products, consumers would have to go to many different stores to'
make purchases for their needs. Retailers collect a variety of products and services from a
number of sources and then offer these as an collection to their customers, Offering an
assortment enables their customers to choose from a wide selection of brands, designs, sizes,
colors, and prices at one location in one store.
ii) Breaking Bulk: Breaking bulk is beneficial to both manufactures and consumers.
Manufacturers prefer to ship products in bulk quantity cartons in order to reduce
transportation costs as it is more cost effective for manufacturers to package and ship
merchandise in larger, rather than smaller quantities. Consumers, in turn prefer to purchase
merchandise in smaller, more manageable quantities. Retailers purchase the products in
larger quantities from manufacturers and then offer the products in smaller quantities to the
consumers as per their requirements. This is called breaking bulk.
iii) Holding Inventory: Holding inventory is a main function of retailers in order to keep
inventory that has been broken down from their bulk packaging into user-friendly sizes so
that products can be made available in smaller quantities whenever consumers want them.
This will help the consumers to easily maintain small inventory products at home since they
are aware that the retailers will always preserve an inventory of the products which they need
at the store and make the product t available when they need more. This also helps in
reducing the consumer's cost of storing products. Consumers find this convenient since they
have limited storage space especially for perishable merchandise like dairy and frozen
products.
iv) Providing Convenient Locations and Timings: Retailers choose the locations of their
stores and keep them open for longer timings so that they are conveniently located and
available to their customers fulfilling their requirements of goods and services as soon as they
require them.
v) Providing Services: Retailers offer services which make it easier for consumers to buy
and u products. This could be in the form of credit to consumers so that they can use product
now and pay for it later. This could also involve services like providing space required for
displaying products so that consumers can see them before buying.

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Prof. Sameer V. Charania TYBMS V Distribution Channels

Retailers may also provide additional information about the features an availability of
products to customers through salespeople. With multi-channel retailing, retailers offer the
flexibility of multiple retail formats like retail store web sites and mail-order catalogues. This
provides convenience and enables customers to buy anytime during the day or night.
Customers can also choose pick merchandise up at a store or also get it home-delivered.
vi) Recording and Providing Feedback: Retailers document transactions and feedback from
customers which they notify to the wholesalers and manufacturers in the form of sales
forecasts delivery delays, defective items, customer complaints, inventory turnover, another
information. This feedback enables the wholesalers and manufacturers modify goods and
services in order to better satisfy customers and increase sales.
vii) Increasing the value of products & services:
Retailers provide assortments, break bulk, hold inventory, offer convenient locations &
timings, provide services & record feedback, thus increasing the value provided to consumers
from products & services
DIFFERENCE BETWEEN WHOLESALER & DISTRIBUTOR:
Wholesaler Distributor
1 A wholesaler is a trader who purchases A distributor is an entity that buys non
goods in large quantities from competing products or product lines,
manufacturer’s & sells to retailers in warehouses them, resells them to retailers or
small quantities direct to the end user or customers
2 Wholesalers are not exclusive to a Distributors commit themselves to a particular
company or product & buy large manufacturer & not any of its competitors.
quantities of goods from different Example: Distributors of Coca Cola will not
manufacturers sometimes even distribute Pepsi products & vice versa. In this
competititor manufacturers way, they can maintain a closer relationship
with their suppliers than wholesalers do.
3 Wholesalers do not enter into exclusive Many distributors maintain exclusive buying
. buying contracts with manufacturer. agreements that limit the number of
participants or enables distributors to cover a
certain territory
4 Wholesalers may require purchasing Distributors sell to some wholesalers, but
from distributors. mostly to value-added resellers (VAR) &
retailers
5 Wholesalers pass on market information The distributor performs some of the some
about customers trends or new products functions that are similar to wholesaler does
to retailers but mostly they do not but takes a more active role in educating
undertake specific sessions explaining resellers & retailers about new products,
the features of a product. through presales training, road shows, &
demos on behalf of manufacturers.
6 Wholesaler does not have services Distributors may provide services around the
contract negotiation & handling procurement process, such as contract
warranties negotiation, marketing for resellers & retailers
& handling warranties.
7 Wholesalers generally do not handle Distributors have the personnel &
customer service calls or provide after communication facilities to allow them to
sales service handle customer service calls more effectively
than wholesalers & some distributors provide
after sales service.
8 A wholesaler only fulfills orders from A distributor actively looks out for orders

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Prof. Sameer V. Charania TYBMS V Distribution Channels

retailers & assumes no role other than
satisfying retailers demands.
Wholesaler
9 Wholesalers view retailers as their key
customers
from various sources in the market, executes
the orders & also manages returns.
Distributor
Distributors have a wider scope of operation
than wholesalers

CHOICE OF DISTRIBUTION SYSTEM:

Companies have to decide on the number of intermediaries to use at each channel level.
Three strategies are available: Exclusive distribution, Selective distribution and Intensive
distribution.
1. Exclusive distribution: means severely limiting the number of intermediaries. It is used
when the producer wants to maintain control over the service level and service outputs
offered by the resellers agree not to competing brands. By granting exclusive distribution, the
producer hopes to obtain more dedicated and knowledgeable selling. It requires greater
partnership between seller and reseller and is used in the distribution of new automobiles,
some major appliances, and some women’s apparel brands.
2. Selective distribution: involves the use of more than a few but less than all of the
intermediaries who all are willing to carry a particular product. It is used by established
companies and by new companies seeking distributors. The company does not have to
dissipate it efforts over too many outlets. It enables the producer to gain adequate market
coverage with more control and less cost than intensive distribution.
3. Intensive distribution: consists of the manufacturer planning the goods or service in as
many outlets as possible. The strategy is generally used for items such as soap, snack foods,
products for which the consumer requires a great deal of location convenience.
Manufactures are constantly tempered to move from exclusive or selective distribution to
more intensive distribution to increase coverage and sales. This strategy may help in the short
term but often hurts long term performances.
FACTORS AFFECTING DISTRIBUTION STRATEGY:
Development of an effective distribution strategy is the objective of any marketing or sales
strategy. There are various factors that govern the formulation of a distribution strategy.
Factors that should be considered while developing appropriate distribution strategy are as
follows:
1. Locational Demand: refers to distribution or dispersion of demand in various areas or
geographical locations. Dispersion of demand greatly influences the nature and magnitude of
the distribution network. Demand patterns change from time to time in various regions or
locations. Some areas may have very high demand for certain products while some might
have low demand for the same product. The distribution network has to continually adjust to
shifting demand patterns. Example: More frequent and efficient distribution system should
be developed in rapidly growing markets, whereas logistics may be withdrawn from areas
where brand is declining.
2. Product Characteristics: indicate product package weight, volume, value, type, etc.
These factors affect the planning of distribution network and the cost. Industrial products and
some other consumer products are heavy weight high volume products. The frequency of
stock replenishment for such products is also very less. In contrast FMCC products are of
small packets and light in weight and also require more frequent replenishment because of
high rate of turnover. The frequency of sale of an FMCG product is much more than that of a
consumer durable. Hence distribution strategies may be different for FMCG products and
Industrial goods.

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Prof. Sameer V. Charania TYBMS V Distribution Channels

3. Pricing Policy: is the cost or profit element in the product. If the company's follows
premium pricing policy with good margin, then frequent stock replenishment may not be
required. Example: Dove soap, Nike sports shoes. But for products like Surf, Tide, Lux
where the product turnover is very high, the stock replenishment also will be very high.
Hence logistics and distribution should be worked out according to the product types. In case
of industrial goods, companies adopt FOR (free on rail, free on road) ex-factory pricing
strategy which passes on the logistics of distribution to the buyer.
4. Speed and Efficiency: relates to speed of delivery or replenishment, order filling speed
and accuracy. These actually imply customer service levels i.e. serving the needs of the
customers at the right time and right place. Cost of transportation, warehousing, inventory of
finished are related to customer service level. Hence there should be compatibility between
service speed, efficiency and cost on one hand and resulting customer satisfaction on the
other hand.
5. Distribution Costs: It refers to total cost of distribution as a proportion or percentage of
sales. It is a budgetary factor for the marketing department. Distribution spending should be
planned and also reviewed from time to time. For products of high value like laptops,
machinery, distribution cost may be 10 percent or less, however for FMCG products,
especially food products, the distribution cost may be up to 25 to 30 percent. Hence each
element of distribution cost should be analyzed so re that the costs are minimum.
A company's distribution strategy therefore rightfully depends upon the above mentioned
areas. Only after taking into consideration all the above aspects a distribution strategy of a
company can be formulated this is suitable to the company in all the relevant aspects.

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