Subject Business Economics

Paper No and Title 15, Marketing Management

Module No and Title 16, Distribution I

Module Tag BSE_P15_M16

BUSINESS PAPER No. : 15, MARKETING MANAGEMENT

ECONOMICS MODULE No. : 16, DISTRIBUTION I
 TABLE OF CONTENTS
1. Learning Outcomes.

2. Introduction

3. Meaning and role of channel of distribution.

3.1. Role of channel of distribution.

3.2. Channel Structure.

4. Factors in selection of channel of distribution.

5. Summary.

1. Learning Outcomes

BUSINESS PAPER No. : 15, MARKETING MANAGEMENT

ECONOMICS MODULE No. : 16, DISTRIBUTION I
 After studying this module, you shall be able to

 Know about distribution, importance, functions and levels.

 Learn importance of distribution
 Identify the various distribution techniques
 Evaluate the problems faced by intermediaries during distribution
 Analyze Channel structure in distribution.

2. Introduction

The whole sole responsibility of a marketing organization is to get the product to the customer in the right
place at the right time. This gives rise and development of extremely efficient and marketing distribution
systems. Imagine what life would be for a consumer who is not familiar with distribution systems. The
responsibility would be on consumers to find out what is being supplied to them, when and where. If
consumers are not properly satisfied then distribution is of no use, so whatever distribution system is to be
decided it should be according to the requirements of consumers. The way through which the goods and
services are distributed from manufacturer to consumer is called as channel of distribution. The term
channel of distribution has been defined by many eminent authors who are as follow:

According to William J Stanton, “A channel of distribution (sometimes called a trade channel) for a
product is the route taken by the title to the goods as they move from the producer to the ultimate
consumer or industrial user”.

According to Philip Kotler, “Every producer seeks to link together the set of marketing intermediaries that
best fulfill the firm’s objectives. This set of marketing intermediaries is called the marketing channel (also
called as channel of distribution)”.

Producing goods is not only enough, these goods have to be send to the consumers at right place and at
right time. Consumers will buy only those goods which are available to them in a easy and convenient
manner and this is done through distribution. Therefore distribution is considered to be the most
important function of marketing because it determines the place where the goods are to be sent to the
consumers and also form part of 7 p’s of marketing. Thus the success of marketing rests only on a proper
distribution strategy.

Trade requires that there should be distribution of goods and services among consumers. Goods are
produced at certain places but their consumers are scattered throughout the globe. Goods must therefore
be distributed from the point of production to the centers of consumption. The through which products
move from producers to consumers are called channel of distribution. This chapter begins with a
definition of channel of distribution, highlighting the role played by different types of intermediaries and
also explains about distribution mix and functions, formats and levels and various channel management
concepts.

3. Meaning and Role of Channel of Distribution

BUSINESS PAPER No. : 15, MARKETING MANAGEMENT
ECONOMICS MODULE No. : 16, DISTRIBUTION I
 Distribution means supplying of finished product from the production
line to the consumers. The distribution covers various types of sales distribution channels such as
wholesale and retail, and also includes crucial areas of decision which include customer service,
inventory, materials, packaging, order processing, and transportation and logistics. These processes are
often referred to as distribution which is being used to describe the marketing and movement of
products.
Nearly half of the budget of an organization is for marketing, but the physical distribution process
typically is being given a lot of attention from business managers and owners. The consequences are
that these activities are often the target and focus in improvement of processes and cost saving device in
many companies.

Thus Marketing Channel is the structure which links a group of individuals or organizations through
which a product or service is made available to the consumer or industrial user. A channel of distribution
is the route or path along which products flow from the point of production to the point of ultimate
consumption. It starts with the producer and ends with the consumer. A channel of distribution or
marketing channel is a group of individuals and organizations that directs the flow of products from
producers and customers.

There is a wide variation in the relationship of channel members and also a lot of formality is there in
these relationships from the highly organized arrangements in the distribution of manufactured products
through supermarkets, and the most speculative position of roadside sellers of fruits and vegetables.

Channels of distribution represent three types of flows:

(a). product flow downward from producer to consumer.

(b). cash flow upwards from consumers to the producers as payment for products: and

(c). marketing information flows from both levels from producer to consumer and consumer to producer.

BUSINESS PAPER No. : 15, MARKETING MANAGEMENT

ECONOMICS MODULE No. : 16, DISTRIBUTION I
 Figure 1

3.1 Role of channel of distribution

According to Louis stern a marketing channel consists of various interdependent organizations which are
being involved in the process of making a product or service available for consumption or use by
consumer or industrial users. A channel of distribution serves as the connecting link between the
producers and consumers. It creates time and place utilities by bridging the time gap between the time and
place of production and those of consumption.

Distribution system is being managed with an approach which is called the system approach and it also
takes into consideration the key interrelated functions in providing efficient movement of product from
producer to consumer. These functions are interrelated because if any time a decision is being made in
one area it has a deep impact on the others. For example, a business that is providing customer handbags
would also take into consideration shipping finished products via air freight versus rail or truck in order to
expedite shipment time. The importance of this decision would keep aside the cost of inventory control
which could be much more costly. Distribution management through a systems approach can provide
benefit in cost supervision and control and also help in meeting the customer service requirements.

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ECONOMICS MODULE No. : 16, DISTRIBUTION I
 The companies use various mode of distribution for sending goods
and services to the final consumers like airways, truck, etc.

Marketing activities are necessary because it facilitates various marketing transactions in terms of cost
and money. The final price at which the product or service is being sold to the consumer also reflects the
various costs including margin money paid to wholesalers and retailers and it also includes the
manufacturer marketing expenses. These costs vary widely from product to product and from consumer to
consumer but still these costs are very substantial. If these costs are substantial then why consumers pay
such high marketing costs. Can’t it be possible that consumers should buy products directly from
manufacturers and the role of various intermediaries should be bypassed? It is not possible to eliminate
the role of intermediaries because it is a marketing truth that if intermediaries are not present then who
will perform the various functions of marketing. Various sources of efficiency often enable some
combination of middlemen to perform various marketing functions at lower cost than either the customer
or manufacturer could buy themselves the goods and services. For example it is likely to be very efficient
for an importer of food items to deliver directly to every small grocery business in the country. The
importer will employ an agent to take order from wholesalers. The importer will deliver food items to the
wholesaler who will then further send the items to retailers. The wholesaler either will deliver to the
retailers along with the products of many other importers and manufacturer so that the retailers can make
all their supplies purchases in one trip. This results in great saving of time and money since the trucks are
not going perhaps hundreds of miles with one lot of food items abroad. Food items passes through
lengthy and complex distribution systems. Each intermediary in the process performs a useful function,
increasing the efficiency in the process of exchange.

Marketing channels that incorporate specialized middlemen improve market efficiency in several ways:

 Efficiency in function: This is also called as functional efficiency. When intermediaries perform
several activities more effectively and efficiently than manufacturer and the customers are getting
the benefit of expert advice from the various functional specialists
 Economies of scale efficiency: When large quantities of goods are being purchased from
manufacturer then the middlemen sort out the goods and break them into smaller quantities,
according to the requirements of consumer. Thus middlemen operate at the most efficient scale.
 Transaction efficiency: When goods in bulk quantity are purchased from suppliers then
intermediaries sort, promote and sell these products to the consumers. Promoting, sorting, and
selling are also known as assorting. Intermediaries acquire wide variety of products and delivers
to the consumers into one transaction. Thus intermediaries help in saving the time and effort of
the consumers and manufacturers and supply the products any time as per their requirements.

Ultimately it can be said that the presence of intermediaries gives a fighting spirit and also provides a
competitive edge to the marketing organization and the intermediaries can concentrate best on their
marketing function of producing selling and consuming.

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ECONOMICS MODULE No. : 16, DISTRIBUTION I
 3.2 Channel Structure

The path which is being selected to move a product through various middlemen is known as the channel
structure. The path selected varies from organization to organization and from product to product. The
channel of distribution structure should be planned in a careful way because the whole success of a
distribution strategy rests on a careful planned channel structure. According to Louis W Stern the channel
structure is divided into following ways.

(1) Channel Structure related to consumer goods:

Consumer goods are the goods which are made for direct consumption by the consumers. The four most
common channel structures in consumer market are depicted in Fig 3. This figure shows different kind of
intermediaries and each is appropriate to different kinds of selling situations. These intermediaries are:

a. Producer-Consumer (direct supply)

In this channel the manufacturer and consumer have direct dealing with each other. In this
channel there are many variations also. Direct supply can be done through factory outlets, through
mail orders and through door to door selling also. This path is simple and a cost saving path
because intermediaries are being eliminated and no margin money has to be paid to the
intermediaries. This type of channel also helps in building a sales and distribution force for the
company.

b. Producer-retailer-consumer (short channel)

This path is most popular among the retailers because they buy the goods in bulk quantities and
they also obtain special prices regarding with delivery arrangement and handling of stock. This
path is mostly used by supermarket chains and a most appropriate path for large manufacturers
and retailers who deal in bulk quantities, ultimately which helps in maintaining a direct and
efficient relationship among the consumers.

c. Producer-wholesaler-retailer-consumer (long channel)

When one more level the wholesaler is being added to the structure then the marketing
organization will have an added advantage when small manufacturers and retailers are involved
in this chain. Small manufacturing organization and small kirana stores do not have sufficient
resources to provide wide variety of goods to consumers scattered all over the globe and they also
don’t have sources that they can buy goods directly from manufacturer. Thus wholesaler serves as
a linking pin between manufacturer and small retailers and provides goods to small retailers in
small and manageable quantities as per their requirements. Providing goods in small quantities
also known as assortment of goods.

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ECONOMICS MODULE No. : 16, DISTRIBUTION I
 d. Producer-agent-wholesaler-retailer-consumer

This channel is the longest and indirect channel. This channel can be used when manufacturer
wants to enter into an export market. This channel can also be used by smaller organizations who
want to expand their business in remote market and they don’t have sufficient knowledge about
the market.

Figure 2
The above diagram depicts that producer of consumer goods can directly distribute goods to
consumers and can also take the help of middlemen like retailers and wholesalers for distribution of his
products and may also distribute his products with the help of three middlemen through agent,
wholesalers and retailers.

(2). Channel Structure for Organizational goods:

Organizational goods are those goods which are used in producing other goods or services. These are not
directly used by consumers. These types of products involve a conversation between buyer and seller on
technical and commercial issues and this conversation helps in matching the various requirements of
consumers related with product and its characteristics. This type of channel is found only in
organizational goods. A manufacturer of organizational goods may use any of the following channels of
distribution for the distribution of his products.

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ECONOMICS MODULE No. : 16, DISTRIBUTION I
 a. Manufacturer-user

This channel is a direct channel and is most suitable where goods are to be sold at a high unit cost
and the goods are highly technical in nature. In this channel there are small numbers of buyers
which are scattered within defined geographical region.

b. Manufacturer-distributor-users

This channel is a less direct channel and this channel can be opted when the size of customer
grows. If size of customer decreases then the role of intermediary function also increases.

c. Manufacturer-agent-user

In this channel the agent is being introduced who acts on behalf of the manufacturers in dealing
with various production and selling situations. The agents does not have title of goods but they
can buy and sell goods only behalf of manufacturers and retailers on commission basis. Thus the
agent helps in the exchange process without participating in the exchange process.

d. Manufacturer-agent-distributor-user

This type of channel is useful when one wants to enter into international market. In this type of
channel the sales agent are being appointed which are scattered in the international market and
provides distribution facility to the consumers as per their requirements.

Figure 3

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ECONOMICS MODULE No. : 16, DISTRIBUTION I
 4. Factors in selection of channel of distribution

There are many channels of distribution for a product and a manufacturer has to select any one or more of
these channels. Selection of a particular channel depends on the following factors.

(1) Factors related to manufacturer:

The factors which are related to manufacturer which affect the channel of distribution are

(i). Financial resources:

The very first factor which affect in the selection of channel of distribution is the availability of
financial resources with the manufacturer. If manufacturer has sufficient financial resources, he
may prefer to sell his product directly to consumers. If the manufacturer does not have sufficient
financial resources he must decide to distribute his products with the help of middlemen.

(ii). Goodwill:

Selection of a particular channel also depends on the goodwill of the manufacturer. If

manufacturer has high reputation then he can select direct channel but if he does not have such
reputation then he can take the advantage of goodwill of middlemen.

(iii). Size of enterprise:

If size of enterprise is large then it may select any channel of distribution but if the size is small
and manufacturer lacks experience then they have to depend on middlemen.

(iv) Marketing Experience and Managerial ability:

Marketing of goods is an art. If the enterprise has sufficient experience and managerial ability, the
decision may be taken for distributing product directly to the consumers. If the enterprise lacks
marketing experience and managerial ability, the enterprise must decide to sell its products with
the help of middlemen.

(v). Desire to control:

If the manufacturer wants to have a complete control over all the marketing activities, he should
select a short channel of distribution or he should distribute his goods directly to the consumers.
If on the other hand the manufacturer has no such desire, then he can distribute the goods through
a long channel of distribution

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ECONOMICS MODULE No. : 16, DISTRIBUTION I
 (2) Factors related to product:

Following are the factors related to the product which affect the selection of channel of distribution.

(i). Perishability of products:

If product is perishable in nature then shortest channel must be selected. If it can be stored for
some time then longer channel can be used.

(ii). Weight:

High weight products are generally distributed directly by the manufacturer. Goods of light
weight are distributed through longer channel.

(iii). Price per unit:

It has been the experience that channel of distribution for low price goods is long and that of high
price goods is short.

(iv) Technical nature of product:

If the product is of technical nature then longer channel is used but if it is less technical then
shorter channel can be used.

(v) Ordered Products:

If a manufacturer manufacture goods according to orders only, he usually takes the decision to
distribute these goods directly to consumers. If a manufacturer produces goods according to
standards, he may decide for distributing these goods though a longer channel.

(3) Factors related to market:

Following are the factors related to market which affect the selection of a channel of distribution:

(i) Number of consumers:

If number of consumers is large then it can be distributed through longer channel and if the
market segment is small then shorter channel can be used.

(ii) Size of order:

If a product is bought by the consumers in large quantity, the manufacturer may distribute it
directly to consumers. If the product is bought by the consumers in small quantity, the
manufacturer will have to arrange to supply the product at all places and at all times. Thus, such a
product is distributed through a long channel of distribution.
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 (iii) Nature of market:

If the product is industrial in nature then it is directly distributed to consumers. If they are
consumer goods then middlemen are used.

(iv) Policies of competitors:

If competitors are distributing their products through middlemen, the enterprise may also decide
to do so. If the competitors are supplying their goods directly to consumers the enterprise may
also decide to do so.

(v) Regional Concentration:

If the consumers of a product are scattered all over the country, it will not be possible for the
manufacturer to distribute such products directly. Therefore, it becomes necessary that such a
product must be distributed through a longer channel of distribution. If on the other hand, the
consumers of a product are scattered over a particular region, it can be supplied by the
manufacturer himself or it can be distributed through a short channel of distribution.

(4) Factors related to middlemen:

Following are the factors related to middlemen

(i) Cost consideration:

If the cost of distribution of a product through a channel of distribution is within the range of
enterprise, a decision may be taken to adopt it otherwise it is better to distribute the goods directly
to consumers.

(ii). Availability of desired middlemen:

If desired middlemen have enough experience the manufacturer may determine to distribute his
product through middlemen. If desired middlemen are not available for a particular product the
manufacturer will supply it directly.

(iii) Sales Possibilities:

If manufacturer expects that the sales of the product can be increased through middlemen, the
manufacturer may take the help of these middlemen for distribution. If the increase in sales is not
expected through middlemen, the manufacturer may decide to distribute his products directly.

(iv) Marketing Policies and Strategies:

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ECONOMICS MODULE No. : 16, DISTRIBUTION I
 Sometimes a manufacturer adopts a channel of distribution for
distributing his products because of his marketing policies and strategies. The main reason behind
such decision is to take the advantage of goodwill of middlemen.

(v) Services provided by Middlemen:

A manufacturer should select a channel of distribution which may meet his requirements. So a
channel must be selected for the services provided by middlemen.

5. Summary

According to Louis stern marketing channels are set of interdependent organizations involved in the
process of making a product or service available for consumption or use by consumers. There are
numerous institutions which have a good distribution system and due to that transactional and functional
efficiency also increases. Thus this chapter highlights the channel structure in distribution process and the
role served by the distribution system in various marketing organizations. It also studies about various
factors to be considered while considering a channel of distribution.

BUSINESS PAPER No. : 15, MARKETING MANAGEMENT

ECONOMICS MODULE No. : 16, DISTRIBUTION I