01/11/2013

Chapter 6

DISTRIBUTION
STRATEGY

CONTENTS
I. Introduction
1. Definition of distribution channel
2. Logistics
3. Intermediaries and their functions
4. Number of channel levels
II. Types of Intermediaries
1. Types of wholesaler
2. Types of retailer
III. Channel Strategy
1. Intensive distribution
2. Selective distribution
3. Exclusive distribution
IV. Selection of Distribution Channels
1. Factors to consider
2. Responsibilities of channel members
3. Channel conflicts
4. Channel design decision

1
 01/11/2013

I. INTRODUCTION

Role of distribution?
•  Discrepancies between production and
consumption:
Discrepancies in quantity

Discrepancies in assortment

Discrepancies in time

Discrepancies in place

2
 01/11/2013

1. DISTRIBUTION CHANNEL
DEFINITION

A set of independent organizations

involved in the process of making a
product or service available for use or
consumption by the consumer or
business user.

2. Logistics
a. Definition
•  Logistics (or physical distribution) is the
planning, implementing, and controlling of
the physical flows of materials and final
products from points of origin to points of
use to meet customer’s needs at a profit.

3
 01/11/2013

b. Logistics Systems, Costs,

and Components
Systems
Concept Transportation

Materials Handling Management

Management
Attempts to
views logistics as Order Processing Minimize the cost
a system of
Of using the
interrelated Inventory Control Components taken
components
As a whole
Warehousing

Packaging Total Cost

Approach

b. Logistics Systems, Costs,

and Components (cont)

Transportation •  Encompasses the

range of activities
Materials Handling
and equipment
Order Processing involved in the
Inventory Control placement and
movement of
Warehousing products in storage
Packaging areas.

4
 01/11/2013

b. Logistics Systems, Costs,

and Components (cont)

•  The importance of
Transportation order processing in
Materials Handling logistics lies in its
relationships with
Order Processing order cycle time,
Inventory Control which is the time
between when an
Warehousing order is placed and
when it is received by
Packaging
the customer.

b. Logistics Systems, Costs,

and Components (cont)

Transportation •  Refers to the firm’s

Materials Handling
attempts to hold the
lowest level of
Order Processing
inventory that will
Inventory Control still enable it to meet
Warehousing customer demand.
Packaging

5
 01/11/2013

b. Logistics Systems, Costs,

and Components (cont)

Transportation
•  the holding of
products until they are
Materials Handling ready to be sold.
Order Processing

Inventory Control

Warehousing

Packaging

3. INTERMEDIARIES &
THEIR FUNCTIONS
Ø  Information: Gather and distribute marketing intelligence
information about actors & forces in the environment
Ø  Promotion: Developing & spreading persuasive
communications about an offer
Ø  Contact: Finding & communicating with prospective
buyers
Ø  Matching: Match demand and supply through breaking
bulk
Ø  Negotiation: Reaching an agreement on price & other
terms of the offer so that ownership or possession can
be transferred
Ø  Physical distribution: transporting and storing goods
Ø  Financing: acquiring and using funds to cover the costs
of the channel work
Ø  Risk taking: Assuming the risk of carrying out the
channel work

6
 01/11/2013

4. NUMBER OF CHANNEL
LEVELS
§  Channel level: A layer of intermediaries that
performs some work in bringing the product
and its ownership closer to the final buyer
§  Direct marketing channel: A marketing channel
that has no intermediary level
§  Indirect marketing channel: Channel
containing one or more intermediary levels
§  The number of intermediary levels indicate the
level (length) of a channel

CONSUMER
MARKETING CHANNELS

0 Level Manufacturer Consumer

1 Level Manufacturer Retailer Consumer

2 Level Manufacturer Wholesaler Retailer Consumer

3 Level Manufacturer Wholesaler Jobber Retailer Consumer

7
 01/11/2013

BUSINESS
MARKETING CHANNELS

0 Level Manufacturer Organization

Business
1 Level Manufacturer Organization
distributor

Manufacturer’s representative
2 Level Manufacturer Or sale branch Organization

Manufacturer’s representative Business

3 Level Manufacturer Or sale branch Consumer
distributor

II. TYPES OF INTERMEDIARIES

8
 01/11/2013

1. TYPES OF WHOLESALERS

a. DEFINITION
Ø  Wholesaling: All activities
involved in selling goods and
services to those buying for
resale or business use
Ø  Wholesaler: A firm engages
primarily in wholesaling activity
Ø  Wholesalers sell not only to
retailers, but also to
manufacturers and other
wholesalers.

9
 01/11/2013

b.Types of Wholesalers

Manufacturer’s Merchant
Sales Branches Wholesalers

Agents And
Brokers

b. Types of Wholesalers (Cont)

Manufacturer’s
Offices and
Branches

Sales Offices Sales Branches

•  Operate like an •  Some goods need rigid

independent agent
•  The sales office performs
functions similar to sales
branch except that it
does not carry inventory
distribution control
•  Other middlemen won’t
handle the product line
•  Require complex
installation or servicing

10
 01/11/2013

b. Types of Wholesalers (cont)

Merchant
Wholesalers

Full Service Limited Service

•  General Wholesalers •  Cash And Carry Wholesalers

•  Limited Line Wholesalers •  Truck Jobbers

•  Specialty Line Wholesalers •  Drop Shippers

•  Industrial Distributors •  Mail-order Wholesalers

•  Rack Jobbers

b. Types of Wholesalers
(cont)
Merchant
Wholesalers

Full Service •  Carry wide range of lines

•  General Wholesalers with little depth per line
•  Limited Line Wholesalers
•  Generally nonperishable:
hardware, clothing, drugs,
•  Specialty Line Wholesalers some foods, cosmetics,
•  Industrial Distributors and tobacco products

11
 01/11/2013

b. Types of Wholesalers (cont)

Merchant
Wholesalers

Full Service
•  Carry a narrow range of
•  General Wholesalers product lines but with
•  Limited Line Wholesalers
great assortment of
products within each line
•  Specialty Line Wholesalers
•  Example: kitchen
•  Industrial Distributors accessories

b. Types of Wholesalers
(cont)
Merchant
Wholesalers

Full Service •  Specialize in only one or

•  General Wholesalers two product lines
•  Limited Line Wholesalers
•  Example: specialty line
wholesaler of exotic fruits
•  Specialty Line Wholesalers and vegetables
•  Industrial Distributors

12
 01/11/2013

b. Types of Wholesalers (cont)

Merchant
Wholesalers

Full Service
•  General Wholesalers
•  Stock inventory for resale
to manufacturers
•  Limited Line Wholesalers
•  Relatively trivial
•  Specialty Line Wholesalers manufacturer’s total
purchasing requirements
•  Industrial Distributors

b. Types of Wholesalers
(cont)
Merchant
Wholesalers

Limited Service
•  Provide products in a
•  Cash And Carry Wholesalers
warehouse setting for resale
but do not deliver, extend •  Truck Jobbers
credit or promotional support
•  Office supplies, groceries, •  Drop Shippers
auto supplies, and hardware
products •  Mail-order Wholesalers

•  Rack Jobbers

13
 01/11/2013

b. Types of Wholesalers (cont)

Merchant
Wholesalers

Limited Service
•  Small wholesalers that sell
directly from their trucks or •  Cash And Carry Wholesalers
vans to retailers for cash
•  Fruits, vegetables, dairy •  Truck Jobbers
products, and snack foods
•  Drop Shippers
often are distributed by truck
jobbers •  Mail-order Wholesalers

•  Rack Jobbers

b. Types of Wholesalers (cont)

Merchant
Wholesalers

Limited Service
•  Sell products, take orders, and
arrange for delivery directly to •  Cash And Carry Wholesalers
customers
•  Truck Jobbers
•  Do not store, handle, or deliver
any products •  Drop Shippers
•  Lumber, coal, and building
materials •  Mail-order Wholesalers

•  Rack Jobbers

14
 01/11/2013

b. Types of Wholesalers (cont)

Merchant
Wholesalers

Limited Service

•  Sell from catalogs. Store and •  Cash And Carry Wholesalers

deliver products, however, do
•  Truck Jobbers
not extend credit or provide
promotional support •  Drop Shippers
•  Jewelry, specialty foods, and
automotive parts •  Mail-order Wholesalers

•  Rack Jobbers

b. Types of Wholesalers (cont)

Merchant
Wholesalers

Limited Service

•  Supply products and the •  Cash And Carry Wholesalers

display units on which the
•  Truck Jobbers
products are displayed
•  Stock the units, take orders, •  Drop Shippers
and control the retailer’s
inventory and typically sell •  Mail-order Wholesalers
products on consignment
•  Rack Jobbers

15
 01/11/2013

b. Types of Wholesalers (cont)

Agents And
Brokers

Brokers Agents

•  Bring buyers and sellers •  Selling Agents

together but do not handle or
store merchandise or extend
credit.
•  No title to goods
•  Eg. Food brokers, securities
brokers and real estate
brokers
–  Perform all or a few
marketing functions to
–  No title to merchandise
•  Manufacturer’s Agents
–  Represent firms with non-
competing product lines

2.TYPES OF RETAILERS

16
 01/11/2013

a. Definition
v  Retailing: All activities involved in selling
goods or services directly to final
consumers for their personal, nonbusiness
use

•  Approx. 3.1 million retailers in the U.S.

•  $4.1 trillion in annual sales
•  Retailing accounts for 1 of 5 jobs
•  Average annual sales 1 million
•  Most retailers are smaller, averaging less
than $500,000

a. Definition
v  Retailer: Business whose sales
come primarily from retailing
v  2 Retail Formats:
•  Store-based Retailers
operate from a fixed location that
requires consumers to travel to the
store to view and select
merchandise and/or services.
•  Nonstore-based Retailers
attempt to reach the consumer at
home, work, or any place other
than a store where they might be
susceptible to purchasing.

17
 01/11/2013

Store-based Retailers

Department Convenience
Stores Stores

Specialty Discount
Stores Stores

Supermarkets Supercenters

Store-based Retailers
Specialty stores
–  A retail store that carries a narrow product line
with a deep assortment within that line
–  3000-7500 square feet
–  Examples: Hallmark Card Shops, Tiffany’s

Department stores
–  A retail organization that carries a wide variety of
product lines
–  Clothing, home furnishings, household goods
–  Each line is operated as a separate department
managed by specialist buyers or merchandisers
–  120-130,000 square feet

18
 01/11/2013

Store-based Retailers
Supermarkets
- Large-scale, low-cost, low-margin, high-volume, self-
service store that carries a wide variety of food, laundry,
& household products
- Varied Size

Hypermarkets/Supercenters
- Combination supermarket and department store
- One stop shopping with up to a 30-50 mile radius in rural
areas
- Dominant new form of growth for major retailers
•  120-160,000 square feet

Store-based Retailers
Convenience stores
–  Small stores, located near a
residential area, that is open long
hours seven days a week and carries
a limited line of high-turnover
convenience goods with higher prices
Discount stores (Category killer)
–  Similar to supermarket, except that
they offer goods at very low prices

19
 01/11/2013

Nonstore-based
Retailers
Street
Peddling

Automatic
Mail Order Electronic
Merchandising
Shopping

Direct Selling

Nonstore-based Retailers
•  Street Peddling
–  Oldest non-store format
–  Inexpensive Items

20
 01/11/2013

Nonstore-based Retailers

•  Direct Selling •  Mail Order

–  Personal basis –  Mail order houses
–  Tupperware, –  Catalogs such as
CUTCO, Avon L.L. Bean,
–  Move to cold- Williams-Sonoma,
calling instead of Right Start, etc.
canvassing

Nonstore-based Retailers
•  Automatic •  Electronic Shopping
Merchandising –  Home-based Internet
–  Sale of products shopping hurdles
by vending •  Cost of being on-line
machines (but not •  Payment fraud
video games)
•  Loss of cultural tradition
•  Inadequate delivery
services
•  Slow transmission rates
•  Possible channel
conflict

21
 01/11/2013

III. CHANNEL STRATEGIES

CHANNEL STRATEGIES

3 choices

Intensive Selective Exclusive

All Possible Few Just One

Intermediaries Intermediaries Intermediary

22
 01/11/2013

CHANNEL STRATEGIES
v  Intensive distribution: A large number of
intermediaries are used in a particular
market, making the products available
widely
v  Selective distribution: Products are sold
through a small number of selected outlets
in a particular market
v  Exclusive distribution: The distribution is
handled by a very limited number of dealers
(can be one distributor) who has exclusive
rights in a particular market

INTENSIVE DISTRIBUTION

Ø  Number of middlemen : As many as

possible
Ø  Coverage : As large area as possible
Ø  Type of product : Convenience goods
Ø  Price : Low price product
Ø  Example : Toothpaste, candies, batteries…

23
 01/11/2013

SELECTIVE DISTRIBUTION

Ø  Number of middlemen : Selected, depending

on product sold
Ø  Coverage : Wide area
Ø  Type of product : Shopping goods
Ø  Price : Mid price product
Ø  Example : Televisions, Computers, Cosmetics

EXCLUSIVE DISTRIBUTION

Ø  Number of middlemen : Minimum (a single

retailer or just a relatively few retailers)
Ø  Coverage : small
Ø  Type of product :specialty goods or which
require considerable after-sale servicing
Ø  Price : High price
Ø  Example : Rolex watches

24
 01/11/2013

IV.SELECTION OF
DISTRIBUTION CHANNEL

FACTORS TO CONSIDER
Ø  Nature of the goods or service: perishability, customisation,
after-sales service/technical advice, franchising, value
Ø  Middlemen factors: availability and willingness of distributors
Ø  Producer factors: Objectives, resources and desire for
control of producer.
Ø  Consumer factors: The size, needs and level of services
required by customers
Ø  Competitors’channel choice
Ø  Environment factors: Weather, coverage, geographical
location of the firm’s market affect the channel choice.
Small markets allow the use of direct channels

25
 01/11/2013

RESPONSIBILITY OF
CHANNEL MEMBERS
Ø  Firm and intermediaries need to agree on the
terms & responsibilities. They should agree on
–  Price policies
–  Conditions of sale
–  Territorial rights
–  Specific services to be performed by each party
Ø  Mutual services and duties need to be spelled out
carefully

CHANNEL CONFLICT
Ø  Channel conflict: Disagreement among marketing channel
members on goals and roles – who should do what and for
what rewards
Ø  Horizontal conflict: Conflicts occurs among firms at the
same level of the channel
Ø  Vertical conflict: Conflicts between different levels of the
same channel
Ø  Advantage of conflict: Without it the channel could become
passive & noninnovative
Ø  Disadvantage of conflict: Severe or prolonged conflict can
disrupt channel effectiveness & cause lasting harm to
channel relationship
Ø  Firm should manage conflict to keep it from getting out of
hand

26
 01/11/2013

CHANNEL DESIGN DECISION

•  Find out what target consumers want from the channel
•  Prefer to buy nearby or travel; in person, over the phone…
Analyzing consumer need •  Specialization or wide assortments; kind of service…
•  waiting time, availability, level of service…
•  Firm should balance consumer need & feasibility and cost of
meeting these needs
§  Set the targeted level of customer service
Setting channel objectives
§  Minimize the total channel cost of meeting customer service
requirements
§  It also depends on the nature of firm, its products, marketing
intermediaries, competitors, environment…

Identify major alternatives •  Identify types of intermediaries

•  Number of marketing intermediaries
•  Responsibility of channel members

§  Economic; Control, Adaptive criteria

Evaluating the major
alternatives §  Sales quota, average inventory levels, customer delivery time,
treatment & lost goods, cooperation in firm promotion & training
programs, service to customers…

27