THE DISTRIBUTION Arslan Haider

MANAGEMENT arslan.haider@lbs.uol.edu.pk
Week 3
ENVIRONMENT
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 process by forming alliances with
wholesalers and retailers.
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
• Manufacturer’s outlets • License
• Consignment-locker inventories
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 serving the parent’s markets. Form the
connecting link between a company’s manufacturing and distribution
operations. These distribution formats will also distribute the products of other
manufacturers.
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 pass until the goods are consumed. A
drawback of this format is possible obsolescence and damage that must be
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 the fact that they
offer a limited range of products and services to their customers.
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 customer.
Drop shippers assume title and risk for the inventory from the moment the order is placed
with the supplier until the time it is delivered to the customer.
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. They are usually paid for
their services by the party that contracted them.
• Agents: There are several types of agents who represent buyer and seller.
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 agent takes
possession of goods from the producer and then sells them in the marketplace for the best
price. After deducting a fee covering the commission and miscellaneous expenses, the
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 products are usually sold in bulk quantities.
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 product line is often seasonal,
close relationships with manufacturers or upstream distributors is essential.
Suppliers normally ship in predetermined store assortments and usually price
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 performs the
same functions as a resident buyer, except that the buyer is not a company
employee but rather a contracted agent empowered to negotiate, buy, and ship
products located in foreign markets. In return, the agent is paid a commission
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 noncompeting manufacturers and/or distributors. Although most
act as selling agents for the companies they represent, some of the larger
firms will stock inventories for resale.
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 structured. Members
can belong to multiple buying groups. A group can buy direct through
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 growth of online tools like Facebook, twitter.
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 availability of wide-band data, voice, video, and text
information transfer.
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.
5. Technology – electronic data interchange (EDI), satellite/wireless communications, web
enablement, and software solutions hosting.
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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