Distribution Decision

We talk about two system of distribution:

i. One in which we do not have any wholesaler i.e. company has its own retail outlets.
ii. One in which we have wholesaler between the manufacturer and wholesaler.

Manufacturer Manufacturer

Wholesaler

Retailers Retailers
Fig-1 Fig-2

In the first system the manufacturers must have a contact line with each of the retailers. Each
constraint line involves direct and verbal communication by salesman etc., while if the
middle man is involved in the system we get figure (2).

The significant difference between the two systems is the reduction in the number of contact
lines which must be maintained by the manufacturer and consequently there is an increase in
the number of contact lines in the entire system.

If there is the fixed cost in each transaction which the contact lines depict, then for a given
transaction without middle man the manufacturer may result greater cost. When middle man
is introduced manufacturer have to maintain only one contact line.

Now, we consider a situation of competitive manufacturer for a given product. Here we have
considered three manufacturers and five retailers.

Hence we can conclude that the existence of the middle man reduces the number of contact
lines and hence improve the natural efficiency of the total system.

Without a middle man, to retain each of the individual contact lines may be not only costly to
the manufacturer but also to the retailer, because a contact line operates in two directions.
The retailer must spend time with the salesman to place orders.
We now split each of the contact lines with its cost component.

Manufacturers

Retailers

Manufacturers

Wholesaler

Retailers

A detailed cost analysis of direct selling costs replacements a first step in evaluating various
channels alternatives on a sales cost basis. e.g.: Intra city travel costs and cost of waiting time
should be determined.

Let S1 =Direct selling cost to retailers

S 2 =selling cost using wholesaler

Here we are to select the least cost alternative. It is believed that choice of distribution
channel affect the sales revenue. S 2 is more cost effective as the manufacturer has to send
lesser contacts to retailers. S1 does better than S 2 in terms of sales response produced and the
manufacturer relevance are likely to do a better job than wholesales salesman.

If T is the total cost and A and B are the costs associated with S1 and S 2 respectively.
We know that S1 is costlier than S 2 .

∴ T + A>T +B ⇒ A> B

T +B
The unit Cost of sales under S 2 is (T + B ) divided by the total sales quantity i.e.
d
where d is quantity sold .

But as we know the sales response is better in S1 . Now if the sales were to increase from
d to u , their unit cost of sales under S1 would be (assuming the number of sales call to be
T + A + k (u − d )
equal):
u

where k ( u − d ) amounts for the increase in cost associated with the selling of additional
units.

Now for S1 to be equally good alternative to S 2 , the above two cost expressions would be:

T + B T + A + k (u − d )
=
d u

⇒ uT + uB= d (T + A − kd ) + dku

⇒ u (T + B − kd =
) d (T + A − kd )

d (T + A − kd )
∴u =
(T + B − kd )

i.e., the sales level to be for S1 to be as good as S 2 .

If u is very high it is difficult to achieve on the other hand, if it is too low it can be easily
achieved. In either case, the best channel is clear, S 2 in the first case and S1 in the second
case. In the cost estimates are so close to each other then the selection maybe made on the
basis of unquantifiable factors. Thus in the absence of a close preference between two
alternatives, the executives adopt an alternative policy which would achieve the best results.
Question 1:

A Firm has a fixed cost of Rs 10,000/- for a process, “A” and “B” are the costs that have been
complied for S1 (direct selling) and S2 (using wholesaler) which comes out to be Rs 1 Lakh
and Rs 70,000/- respectively current sales using wholesaler personnel is one Lakh and extra
sales cost associated with added sales using manufacturer representative is Rs 0.5/unit. Find
out the increase in sales that would be necessary for S1 to be as good as S2.

Solution:

Here we are given

Fixed Cost= T= 10, 000

Total cost using Manufacturer =A= 1,00,000

Total cost using Wholesaler =B= 70,000

Current Sales using wholesalers personnel=d=1,00,000

Extra Sales Cost associated with the added sales using manufacturers
representatives=k=0.5/unit

d (T + A − kd )
∴u =
(T + B − kd )
Substituting the values we get,

u = 2, 00, 000

∴ Increase in sales that would be necessary

= u−d
= 2, 00, 000 − 1, 00, 000 = 1, 00, 000

Extra questions:

Question 2: A Firm has a fixed cost of Rs 20,000/- for a process, “A” and “B” are the costs
that have been complied for S1 (direct selling) and S2 (using wholesaler) which comes out to
be Rs 1,40,000 and Rs 1,00,000/- respectively current sales using wholesaler personnel is one
Lakh fifty thousand and extra sales cost associated with added sales using manufacturer
representative is Rs 0.65/unit. Find out the increase in sales that would be necessary for S1 to
be as good as S2.

Question 3: A Firm has a fixed cost of Rs 25,000/- for a process, “A” and “B” are the costs
that have been complied for S1 (direct selling) and S2 (using wholesaler) which comes out to
be Rs 1,35,000 and Rs 1,05,000/- respectively current sales using wholesaler personnel is
70,000 and extra sales cost associated with added sales using manufacturer representative is
Rs 0.25/unit. Find out the increase in sales that would be necessary for S1 to be as good as
S2.