THE DISTRIBUTION Arslan Haider

MANAGEMENT arslan.haider@lbs.uol.edu
.pk

ENVIRONMENT Week 3
OUTLINE
1. DEFINING THE DISRIBUTION FUNCTION
2. DISTRIBUTION CHANNEL FORMATS
3. ROLE OF DISTRIBUTION CHANNELS
4. DISTRIBUTION CHANNEL TRANSACTION FLOWS
5. DISTRIBUTION CHANNEL INVENTORY FLOWS

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DEFINING THE DISRIBUTION
FUNCTION
To begin with, it is important to separate the term distributor from the term distribution.
Classically, distributor refers to the channel entities that act as intermediaries
between manufacturers and end-use customers.
The APICS Dictionary, for example, describes a distributor as “A business that does not
manufacture its own products but purchases and resells these products” [1].
The Council of Supply Chain Management Professionals (CSCMP) similarly defines a
distributor as

A business and industry that acts as a third party local representative and distribution
point for a manufacturing firm. These firms may perform some light assembly or kitting
of goods, but generally provides a buffer for finished goods. Distributors typically
purchase the goods in quantity from the manufacturer and ship to customers in smaller
quantities. [2]
The essential role of a distributor is to facilitate the flow of finished goods from channel
producers to end-use customers.

In contrast to the role of the distributor, distribution refers to a process and not a channel
entity. Using the APICS Dictionary, distribution is defined as
The activities associated with the movement of material, usually finished goods or service
parts,
from the manufacturer to the customer. These activities encompass the functions of
transportation,
warehousing, inventory control, material handling, order administration, site and location
analysis, industrial packaging, data processing, and the communications network necessary
for
effective management. It includes all activities related to physical distribution, as well as
the
return of goods to the manufacturer. In many cases, this movement is made through one or
more
levels of field warehouses.
Distribution systems are also characterized either as

Direct delivery or Echelon-delivery based.

In direct delivery, products are delivered directly from the manufacturer to the
customer, bypassing warehouses and channel intermediaries. This approach to
distribution is often employed by manufactures pursuing a make-to-order strategy.

In an echelon-delivery system, the product is moved and stored using a

hierarchical channel structure consisting of various levels of company-owned or
independent distribution centers, warehouses, and retailers before it is delivered
to the customer. This approach to distribution is often employed by manufactures
pursuing a make-to-stock strategy.
Distribution systems are also either
Centralized or Decentralized.
In a centralized system,

all decisions are made at a central location for the entire supply chain. Centralized
systems employ fewer channel warehouses, contain minimal safety stocks, have reduced
operating overheads, pursue economies of scale, have decreased inbound transportation
costs, and realize targeted service levels while minimizing total system cost.

Decentralized distribution
possesses the opposite attributes: decisions are made on the echelon level, businesses
must
assume responsibility for increased costs to support channel warehouses, warehouses
must
bear the cost of local safety stocks, inbound transportation costs increase, and total
system
costs increase.
2.DISTRIBUTION CHANNEL
FORMATS
1. BASIC SUPPLY CHAIN DISTRIBUTION FORMATS

2. ALTERNATIVE DISTRIBUTION CHANNEL FORMATS

2.1.BASIC SUPPLY CHAIN
DISTRIBUTION FORMATS(STRATEGIES
FOR MANUFACTURERS)
Processed Based: the manufacturer operates as a single
value-added delivery chain. Whether delivering factory direct
or through company-owned warehouses, the objective of this
strategy is to achieve optimal efficiencies and productivities
by directly managing production and distribution functions as
a single integrated system.
Market Based: managing a limited set of logistics functions
across a multidivisional or a multiple-enterprise channel. The
object is to execute joint product shipments to customers
originating across the enterprise or to facilitate sales and
logistical coordination by a single-order invoice.
Channel Based: the manufacturer (normally with large
amounts of finished goods) seeks to manage the distribution
2.2. ALTERNATIVE DISTRIBUTION
CHANNEL FORMATS
1. Manufacturer-Based Channel Formats
2. Merchant Wholesaler Channel Formats
3. Distribution Service Channel Formats
4. Distribution Retail Formats
5. Exporting and Importing Channel Formats
6. Buyer-Initiated Formats
7. E-Business Formats
8. Delivery Network Facilitators
2.2.1 MANUFACTURER-
BASED CHANNEL FORMATS
Manufacturers who perform the functions of sales and
distribution themselves without the assistance of an
independent wholesale distributor.
Organizations in this category operate as both wholly-owned
and operated divisions of a manufacturing company or as
independent businesses belonging to a large, multi-company
corporation. Manufacturer channel formats are described as
follows:
• Factory direct • Sales branches and offices
• Manufacturer-owned full-service wholesale
distributor
2.2.1 MANUFACTURER-
BASED CHANNEL FORMATS
• Factory direct: Product is shipped directly from the factory,
sold through company catalogues, an internal sales force,
independent agents, or the Internet. This distribution strategy
is often used by make-to-order manufacturers who build
custom products per customer request.
• Sales branches and offices: Manufacturers who distribute
their own products through simple or complex matrices of
sales offices and channel warehouses. Sales offices do not
carry inventory but are responsible for regional marketing,
pricing, promotion, customer order processing, and customer
service.
• Manufacturer-owned full-service wholesale
distributor: An acquired wholesale distribution company
2.2.1 MANUFACTURER-
BASED CHANNEL FORMATS
• Manufacturer’s outlets: Manufacturer-owned retail
outlets located in high-density markets. These stores are
primarily used to liquidate seconds and excess inventory,
such as designer clothing and athletic wear. Example: Apple.
• License: A manufacturer contracts with an independent
distributor or retailer, granting product and marketing
exclusivity for a specific period of time. This distribution
method is often used for products in the development stage
of their life cycles. Examples would be Disney, and various
forms of importers.
• Consignment-locker inventories: The plant ships
finished goods to a point of consumption, but title does not
2.2.2 MERCHANT
WHOLESALER CHANNEL
FORMATS
Merchant wholesalers are independent enterprises that buy
finished products from producers and other wholesalers and
sell to companies for resale or production consumption. This
type of distributor format performs the bulk of the work of
distributing finished goods through the distribution channel.
Merchant wholesalers can be further divided into:
1. Full-service wholesalers: they provides a wide range of
products and services to the customer. Besides stocking
inventory and maintaining a sales force, they perform other
value-added functions such as sales order management,
credit, transportation, EDI, and Web communications.
2. Limited-service wholesalers: they are characterized by
2.2.2.1 FULL-SERVICE
WHOLESALERS CHANNEL FORMATS
WHOLESALERS
– Wholesale merchants: They provide products and a full range of
value-added services to the retail industry. Normally stock a targeted
range of products within several merchandise lines in an effort to service
both multi-line and single line retailers.
– Industrial distributors: This type of format is composed of wholesale
merchants who sell products exclusively to manufacturers. Similar to
retail distributors, they carry a multitude of products lines (often called a
mill supply house), a general line, or a specialty line. Industrial distributors
also focus on MRO items (maintenance, repair, and operating supplies),
OEM items (original equipment supplies), or industrial equipment (such as
machinery).
2.2.2.2 LIMITED-SERVICE
WHOLESALERS CHANNEL FORMATS
WHOLESALERS
– Cash-and-carry wholesalers: They stock a limited line of fast-moving
products that are sold to small retailers. This format requires the customer
to pick up and pay for the goods at the point of transaction. An example
would be a produce distributor that delivers, or makes available for pick-
up, vegetables and fruits to small local grocers.
– Truck wholesalers: Often termed a truck jobber, this distribution
format performs primarily a selling and delivery function only. They
normally carry a limited line of products (such as milk, bread, and soft
drinks) that they sell for cash to supermarkets, small groceries,
restaurants, business and institutional cafeterias, and hotels.
– Drop Shippers. This channel format operates in industries associated
with commodities handled in bulk, such as building materials, coal,
lumber, and paper-based products. Drop shippers normally do not
inventory or transport the product. When they receive a customer order,
they will locate a suitable supplier who, in turn, delivers the product to the
2.2.2.2 LIMITED-SERVICE
WHOLESALERS CHANNEL FORMATS
WHOLESALERS
– Rack Jobbers: This format normally provides highly advertised, brand-
name nonfood products and accompanying services to grocery,
convenience, and drug stores. Examples of products supplied by rack
jobbers are toys, paperback books, greeting cards, hardware items, and
health and beauty aids. Rack jobbers are responsible for delivery of the
product to the retailer, product setup and display, pricing, item rotation,
effectivity dating, and inventory maintenance. Inventories are stocked in
consignment: that is, the rack jobber retains title to the inventory, billing
the customer only for the goods sold since the last visit.
– Mail-order wholesalers: They depend on the sale of products from a
catalog. Customers range from industrial and retail to institutional.
Products are selected from the catalog by the customer. Once the order
has been placed with the wholesaler, it is then delivered by mail, truck, or
other means of transportation from a centralized distribution center. The
main customers of this format are located in rural or geographically
isolated regions.
2.2.3 DISTRIBUTION
SERVICE CHANNEL FORMATS
This channel format differs from merchant wholesalers in two
important regards: they do not take ownership of inventory
and they offer their customers a limited number of services.
They facilitate the buying and selling of products between
suppliers and customers. Similar to merchant wholesalers,
they generally specialize by product line or customer
segment.
• Brokers: They serve as intermediaries, matching buyers
with sellers and assisting in price, product, and delivery
negotiations. They are usually contracted by manufacturers
and their sales forces focus on a specific product line and a
narrow customer market segment. Brokers do not take
possession of inventories, assume risk, or provide financing.
SEVERAL TYPES OF AGENTS
– Manufacturer’s agents: Usually represent two or more manufacturers
that produce complimentary product lines. Normally, they enter into a
formal written agreement with each manufacturer relating to exclusivity,
pricing policies, territories, order handling procedures, delivery service,
warranties, and commission rates.
– Selling agents: Selling agents are contracted by a manufacturer to sell
the firm’s entire production output.
– Purchasing agents: Normally a product expert who, besides obtaining
for the customer the best goods and prices available, provides
consultative services. Purchasing agents generally have a long-term
relationship with their customers, often purchasing, receiving, inspecting,
warehousing, and shipping the goods to customers based on agreement
with company buyers.
– Commission merchants: Also termed commission houses, this type of
2.2.4 DISTRIBUTION RETAIL
FORMATS
This distribution format consists of retailers who perform the
functions of sales and distribution with the assistance of a
manufacturer or independent wholesaler. Organizations in
this category operate either as wholly owned and operated
storefronts or belong to a large corporation. Retail channel
formats are described as follows:
• Franchise: Product, brand recognition, and marketing
expertise are sold to small entrepreneurs who in turn execute
the functions of sales & delivery.
• Buying clubs: Provides manufacturers with the
opportunity to penetrate certain niche markets or experiment
with product variations. Normally, selection is limited and
2.2.4 DISTRIBUTION RETAIL
FORMATS
• Department stores: These types of national retailers
stock a broad mix of soft goods (clothing, food, and linens)
and hard goods (appliance and hardware). Having stores on a
national basis motivates these types of retailers to structure
their own distribution channels. These distribution centers act
as receivers and consolidators, often with a direct link with
the manufacturer.
• Mass-merchandisers: Similar to department stores,
except product selection is broader and prices are usually
low. Examples Wal-Mart, Kmart, and Target.
• Specialty stores: Offer a deep selection of merchandise in
one line, such as women’s apparel or electronics. Because the
2.2.5 EXPORTING AND
IMPORTING CHANNEL FORMATS
Cutting across supply chain participants are exporting and
importing formats that specialize in international distribution.
The strategy of some multinational organizations is to
develop and maintain their own international supply
channels, complete with foreign sales offices and
warehouses. Others choose to engage in global trade by
using an international distributor. Distributors in this category
are described below.
• International Trading Company: Purchasing and selling
of goods, arrangement of logistics services between
exporters and importers, managing currency conversion and
rate fluctuations, providing consulting advice, and other
marketing and logistics issues.
2.2.5 EXPORTING AND
IMPORTING CHANNEL
FORMATS
• Export Merchants: Export merchants act as a form of
international wholesaler. Similar to domestic merchant
wholesalers, they purchase goods from manufacturers and
wholesalers and then ship them to distribution points in
foreign markets. Although some export merchants have
facilities located in foreign countries close to the target
market.
• Resident Buyers: Large international firms often locate
their own buyers directly in an exporting country. They locate,
purchase, and ship goods back to their home country or to
company distribution facilities across the globe.
• Export Commission House: This type of channel format
2.2.5 EXPORTING AND
IMPORTING CHANNEL
FORMATS
• Allied Manufacturer: In this format, firms export and
import products by using a foreign business partner.
Normally, both companies will negotiate to “piggyback” their
products through the international distribution channel. There
are a number of advantages. By carrying each other’s
products, both firms can improve market share by presenting
markets with extended product lines and achieving high
logistics utilization. The end result is that both companies can
enjoy the benefits of a mature global distribution system
without the investment.
• Export Management Company: This channel
intermediary acts as a product line or foreign market
specialist who represents that export for one or a group of
2.2.6 BUYER-INITIATED
FORMATS
This group of intermediaries is based on sellers grouping
together to sell in large quantities to gain better prices and
reduced logistics costs such as storage, transportation, and
marketing to sellers. Examples include the following:
• Producers’ cooperatives: Formed by companies, usually
in the same industry, that create an organization in which
each member is a shareholder. The organization uses the
combined strength of the members to leverage economies of
scale so that smaller companies can compete with larger
businesses. The profits from sales are distributed to the
members at year’s end.
• Buying groups: Similar to a producer’s co-op, but less
2.2.7 E-BUSINESS FORMATS
Major distributors have responded by launching multi-channel
strategies. e-Business formats are described as follows:
• Business-to-business (B2B) channel formats:
Concerned with the sale of goods and services between
businesses. Channel includes: Independent Trading
Exchanges (ITX), Private Trading Exchanges (PTX) and
Consortia Trading Exchange (CTX).
• Consumer-to-consumer (C2C): Internet sites that allow
customers to buy from each other. Example, eBay.com.
• Consumer-to-business (C2B): Any consumer that utilizes
the Internet to sell products or services directly to a business.
This area is also expected to be dramatically impacted by the
2.2.7 E-BUSINESS FORMATS
• Business-to-customer (B2C) channel formats: These
channel intermediaries are any business that uses the
Internet to sell products and services directly to the customer.
Channel formats include:
– e-Stores or e-tailers: The goal of this format is to simulate an actual
shopping experience where consumers browse through catalogs or use
search mechanisms to locate, price compare, and order goods to be
shipped directly to their homes. like Amazon.com.
– Third-party catalog services: This channel format is composed of
multiple suppliers that provide a catalog for a group of customers
frequenting a certain place, such as airline in-flight magazines and
catalogs and in-room hotel publications.
2.2.8 DELIVERY NETWORK
FACILITATORS
• Financial Institutions: They provide a wide-range of
banking functions ranging from cash management and
lending to taxes, currency exchange, and payment. Other
specialists in this area handle other services like insurance,
freight rating, and inventory buying and selling.
• Marketing and Advertising Agencies: Contracting a
specialist, network intermediaries gain access to
sophisticated marketing analysis and media outlets without
direct investment in such resources.
• Technology Services: Delivery channel intermediaries
must deploy increasingly sophisticated technology tools that
support ease of information transmission through the
2.2.8 DELIVERY NETWORK
FACILITATORS
• Logistics Service Providers. Intermediaries simply cannot
stay competitive without the support of logistics service
providers (LSPs), often termed third-part logistics (3PL)
providers. These services are divided into five service areas:
1. Logistics – global trade services, inbound/outbound delivery, supplier
management, inventory management, and payment.
2. Transportation – small package delivery; intermodal transportation;
ocean, rail, and bulk transport; track and trace; fleet management; and
equipment and personnel leasing.
3. Warehousing – storage, pick/pack functions, assembly, cross-docking,
customer order management, and delivery fulfillment.
4. Special services – direct delivery to customer (UPS),
import/export/customs functions, reverse logistics, market and customer
management, consulting, and financial services.
ROLE OF DISTRIBUTION
CHANNELS
Distribution channels are formed to solve three critical distribution problems:
functional performance, reduced complexity, and specialization.

an intermediary can substantially reduce the number of transactions, information,

and product flows between producers and customers. For example, a small
marketing channel exists where three producers trade directly with five customers.
To calculate the number of trading links, the number of producers is multiplied by the
number of customers.

As illustrated in Figure 2.2, this means that there is a maximum of 15 exchange

transactions in the channel. The presence of an intermediary, however, would reduce
the number of transactions from 15 to 8.
Supply chain intermediaries also increase functional performance by facilitating
channel
product and service search.
Assist in the routinization of business functions and product sorting.

Routinization refers to
the establishment of policies and procedures that provide channel members with
common
goals, channel arrangements, and expectations that enable supply network exchange
mechanisms to facilitate transactional efficiencies.

Sorting is defined as a group of activities associated with transforming products and

product quantities acquired from producers into the assortments and lot sizes
demanded by the marketplace. The “sorting” process can be broken down into four
primary functions:
Sorting out. This process is defined as separating a heterogeneous group of products,

often acquired from multiple suppliers, into homogeneous subgroups. An example

would be a poultry distributor that sorts eggs by grade and size and then assigns them
to inventory lots.

Accumulation. In this form of sorting, the channel intermediary combines

homogeneous stocks of products into larger groups of supply. An example is a home
electronics distributor who combines the televisions of different manufacturers into a
single product line.

Allocation. This form of sorting breaks down large lots of products into smaller lots for

sale. A hardware distributor may, for example, purchase items in large and then

repackage them into a variety of small lot quantities.

Assorting. In this form of sorting, distributors mix similar or functionally related items

into assortments to meet customer demand. For example, an automotive distributor

may package the components necessary for brake repair into a kit.
CHANNEL SERVICE OUTPUTS
Bulk-breaking
Spatial convenience
Length of waiting and delivery time
Product variety
OTHER FUNCTIONS OF DISTRIBUTION CHANNELS
Selling and promoting
Postponement
Transforming semi finished goods derived from the producer into
their final form through the processes of sorting, labelling, blending,
kitting, packaging, and light final assembly when the order is placed.
EXAMPLE :
A large apple juice producer, for example, bottles product in nine
different unmarked container sizes. This unlabelled product is then
shipped to distribution warehouses across the Midwest. As orders from
grocery retailers and wholesalers are received, the appropriate brand
and store labels are fixed on the Containers.

This practice enables the company to carry a great deal less product in
the pipeline, shrink warehousing and handling, and significantly reduce
product obsolete.
POSTPONEMENT
Postponement provides the following advantages:
---Reduced Channel Costs
---Lead-Time Reduction
--- Inventory Reduction
---Customer Response and Flexibility
---Material Handling
---Unitization
OTHER FUNCTIONS OF
DISTRIBUTION
Transportation
Warehousing
Sequencing
Merchandizing
Marketing information
DISTRIBUTION CHANNEL
TRANSACTION FLOWS
DISTRIBUTION CHANNEL
INVENTORY FLOWS
REFERENCE
Distribution Planning and Control: Managing in the Era
of Supply Chain Management (3rd Edition) David Frederick
Ross, Springer 2015

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