Transportation & Distribution Planning

Lecture 4
Channels of Distribution

INSTRUCTOR: SAYDA UZMA TAHIRA

UZMA.TAHIRA@UCP.EDU.PK

UCP Business School, University of Central Punjab Lahore

Outline

 The Concept of Physical Distribution Channel

 Physical distribution channel types and structures
 Channel Alternatives
 The Role of Distribution in the Supply Chain

 Distribution – the steps taken to move and store a product from

the supplier stage to the customer stage in a supply chain
 Drives profitability by directly affecting supply chain cost and
the customer experience
 Choice of distribution network can achieve supply chain
objectives from low cost to high responsiveness
 Physical Distribution Channel
 Physical distribution channel is the term used to describe the method and
means by which a product or a group of products are physically
transferred, or distributed, from their point of production to the point at
which they are made available to the final customer.
 In general, this end point is
 a retail outlet,
 shop or factory
 the customer’s house
Design Options for a Distribution Network

Distributionnetwork choices from the manufacturer to

the end consumer
Two key decisions
1. Will product be delivered to the customer location or picked
up from a prearranged site?
2. Will product flow through an intermediary (or intermediate
location)?
Factors Influencing Distribution Channel Design

 Distribution channel performance is evaluated

along two dimensions;
1. Customer needs that are met
2. Cost of meeting customer needs
Elements of customer service influenced by network
structure
Response time
Product variety
Product availability
Customer experience
Order visibility
Returnability
Supply chain costs affected by network structure:

Inventories
Transportation
Facilities
and handling
Information
 Desired Response Time and Number of
Facilities

 Increase in number of facilities (Depots or

DCs) will improve the response time
towards customers
 More facilities will help to reduce the lead
time to deliver products
 In other words more facilities will be
required to reduce response time to the end
customers
Inventory Costs and Number of Facilities

 More number of facilities increase

inventory management cost;
 Order cost
 Holding Cost
Transportation Costs and Number of Facilities

 Increasing number of facilities reduces

transportation cost as the distance
between buyer and supplier decreases
Facility Costs and Number of Facilities

 More number of facilities

increases facility
management cost
Logistics Cost, Response Time, and Number of
Facilities

 More number of facilities improve

customer service by reducing
response time but increase total
logistics cost
 An optimum level must be identified
between customer service and
logistics cost
Distribution Channels
Channel alternatives: manufacturer-to-retail

1. Manufacturer direct to retail store

 The manufacturer or supplier delivers direct from the
production point to the retail store, using its own vehicles.
 As a general rule, this channel is only used when full vehicle
loads or full truck loads are being delivered
 For example cars and refrigerators are sold through retail
outlets.
Channel alternatives: manufacturer-to-retail

2. Manufacturer via manufacturer’s distribution operation to retail store.

 Used to be one of the classic physical distribution channels
 The manufacturer or supplier holds its products in a finished goods warehouse, a
central distribution center (CDC) or a series of regional distribution centers (RDCs).
 The products are trunked (line-hauled) in large vehicles to the sites, where they are
stored and then broken down into individual orders that are delivered to retail stores
on the supplier’s retail delivery vehicles.
 All of the logistics resources are owned by the manufacture.
 For example Coca Cola
Channel alternatives: manufacturer-to-retail

3. Manufacturer via retailer distribution center to retail store.

 This channel consists of manufacturers either supplying their products to national
distribution centers (NDCs) or RDCs for final delivery to stores,
 or supplying them to Consolidation Centers, where goods from the various
manufacturers and suppliers are consolidated and then transported to either an NDC or
RDC for final delivery.
 These centers are run by the retail organizations or by their third party contractors.
 The retailers then use their own or third party delivery vehicles to deliver full vehicle
loads to their stores.
 For Example Nestle
Channel alternatives: manufacturer-to-retail

4. Manufacturer to wholesaler to retail shop

 Wholesalers act as the intermediaries in distribution chains
 Provide the link between the manufacturer and the small retailers’ shops.
 wholesalers use their own distribution centers and vehicle fleets.
 For example grocery items
Channel alternatives: manufacturer-to-retail

5. Manufacturer to cash-and-carry wholesaler to retail shop.

 These are usually built around a wholesale organization and consist of
small independent shops collecting their orders from regional
wholesalers, rather than having them delivered.
 The increase in cash-and-carry facilities has arisen as many suppliers
will not deliver direct to small shops because the order quantities are
very small.
Channel alternatives: manufacturer-to-retail

6. Manufacturer via third-party distribution service to retail store.

 Third-partydistribution or the distribution service industry has grown
very rapidly due to the extensive rise in distribution costs and the
constantly changing and more restrictive distribution legislation
 These companies consist of those offering general distribution
services as well as those that concentrate on providing a ‘specialist’
service for one type of product
Channel alternatives: manufacturer-to-retail

7. Manufacturer via small parcels carrier to retail shop.

 These companies provide a ‘specialist’ distribution service
where the ‘product’ is any small parcel.
 Small parcels companies, specialize particularly in next-day
delivery.
 Small parcels carriers also undertake many home deliveries,
 For example TCS
Channel alternatives: manufacturer-to-retail

8. Manufacturer via broker to retail store

 Thisis a relatively rare type of channel, and may sometimes be a trading channel and not a
physical distribution channel.
 A broker is similar to a wholesaler in that it acts as intermediary between manufacturer and
retailer.
 Itsrole is different, however, because it is often more concerned with the marketing of a series of
products, and not really with their physical distribution.
 Thus, a broker may use third-party distributors, or it may have its own warehouse and delivery
system.
 An insurance broker, who sells insurance products from many companies to businesses and
individuals
 Channel alternatives: Direct Deliveries

1.Mail order
Goods are ordered by catalogue, and delivered to the home by post or parcels carrier.
2.Factory direct to home
 It can occur by direct selling methods, often as a result of newspaper advertising.
 It is also commonly used for one-off products that are specially made and do not need to be stocked in a warehouse to
provide a particular level of service to the customer.
3.Internet and shopping from home
These are almost all run by third-party companies.
4.Factory to factory/business to business (B2B)
 vary according to the type and size of product and order, may range from full loads to small parcels,
 may be undertaken by the manufacturers themselves or by a third party.
Channel Characteristics

Market characteristics
Product characteristics
Competitive characteristics
 Market characteristics

 The size, spread and density of the market is important.

 Ifa market is a very large one that is widely spread from a geographic
point of view, then it is usual to use ‘long’ channels.
 A long channel is one where there are several different storage points
and a number of different movements for the product as it is transferred
from the point of production to the final customer.
 Where a market has only a very few buyers in a limited geographical
area, then ‘short’ channels are used.
Long vs Short Channels of Distribution
 Product characteristics

 High-value items are more likely to be sold direct via a short channel,
because the high
 gross profit margins can more easily cover the higher sales and distribution
costs that are usual from short channels.
 The security aspects of highly priced items (e.g. jewelry, watches, CDs,
etc.) make a short channel much more attractive because there is less
opportunity for loss and theft than with a long channel.
 Short channels also reduce the requirement for carrying inventory of high
value goods and the associated poor use of working capital.
 Product Characteristics

 Complex products often require direct selling because any intermediary may not be
able to explain how the product works to potential customers.
 New products are often distributed via a third party channel because final demand is
unknown and supply channels need to be very flexible to respond to both high and low
demand levels.
 Time-sensitive products need a ‘fast’ or ‘short’ channel, for shelf life reasons in the
case of food products such as bread and cakes, and relevance in the case of newspapers
and tender documents.
 Products with a handling constraint may require a specialist physical distribution
channel, e.g. frozen food, china and glass, hanging garments and hazardous chemicals.
 Competitive characteristics

 Competitive characteristics that need to be considered concern the activities of any

competitors selling a similar product.
 Initial channel decisions are whether to sell the product alongside these similar
products, or whether to try for different, exclusive outlets for the product to avoid
the competition and risk of substitution
 But of particular significance is the service level being offered by the competition.
 It is essential that channel selection is undertaken with a view to ensuring that the
level of service that can be offered is as good as, or better than, that which is being
provided by key competitors
Company Resources and Channel Selection

 The size and the financial strength of the company is most important in
determining channel strategy.
 Only a fairly large and cash-rich company can afford to set up a
distribution structure that includes all of its own distribution and
transport facilities.
 Smaller and less financially secure companies may have to use
intermediaries or third-party organizations
Designing a channel structure
 Outsourcing Channel

 A partnership approach. To create a more positive and co-operative alliance between the user and the
contractor and to eliminate the combative culture that has evolved in some relationships.
 The use of incentivized contracts. Th e contract is drawn up with clearly defined opportunities for the
service provider to identify and introduce methods of service improvement or cost reduction.
 The creation of integrated global contractors who are able to offer a full logistics service across all
regions rather than just partial services.
 A move to a much more rigorous selection of contractors.
 The creation of an additional enterprise or organization to oversee and take responsibility for all the
outsourced operations a user might have. Th is has become known as fourth-party logistics
 Conclusion

 Alternative channels of physical distribution: the many channels from

manufacturer to- retailer and via direct delivery were described. Th e
different channel structures were introduced.
 Channel selection: the objectives of good channel selection were
discussed taking into account the relative market, channel and
competitive characteristics, and the available company resources
 Outsourcing: the question of whether to use own account or outsourced
operations was introduced and the importance and development of
outsourcing was considered.