Distribution Channels and Logistics

Management
Objective: examining the nature and role of the
channels in attracting and satisfying customers
 The Nature of Distribution
Channels
 Distribution channels are intermediaries used by the
producers to bring their products to the market.
 Why? Because the use of intermediaries bring greater
efficiency in making goods available to target
markets. In other words, they match the supply with
the demand.
 Most important benefit of using intermediaries is that
they provide economies. They reduce the amount of
work that must be done by both producers and
consumers.
 How a distributor reduces the
number of channel transactions


A. Number of contacts B. Number of contacts

without a distributor with a distributor
 Distribution Channel Functions
 A distribution channel moves goods from producers to
consumers. Therefore they;
 give information about the product and consumers
 promote the offer
 contact with the consumers
 match the offer with the consumer’s needs
 negotiate with the buyers about the price and offer
 physically distribute (transport) the product
 may finance the manufacturer to cover the costs of the channel work
therefore may take risk.
 All these functions can be carried out by the manufacturers but
they then increases their costs and prices.
 Number of Channel Levels
 The number of intermediary levels used by the
producers vary;
 a direct marketing channel; has no intermediary
levels. Here, the producer sells directly to
consumers e.g. Avon sells their products door to
door or through home parties.
 An indirect marketing channel ; contains 1
(retailer) ,2 (wholesaler + retailer) or 3
(wholesaler + jobber + retailer) intermediary
levels.
 Channel Behavior
 All channel firms should work together to be
successful. Each channel member is dependent on the
others e.g. a Ford dealer (retailer) depends on the
Ford Motor Company to design cars that meet
consumer needs. In turn, Ford depends on the dealer
to attract consumers, persuade them to buy Ford cars,
and service cars after the sale. The Ford dealer also
depends on the other dealers to create a good overall
reputation for the entire distribution channel.
 Although channel members are dependent on one
another, they often concentrate on their short-term
benefits. Channel conflict occurs when
disagreement among channel members on goals and
roles - who should do what and for what rewards.
 Horizontal conflict; occurs among firms at the same level
of the channel. In other words, one dealer may complain
about the other.
 Vertical conflict; occurs among different levels of the
same channel. In other words, the producer may
complain about its dealers or vise versa.
 Conflict may be healthy or damaging for the
channel. Healthy competition would encourage
dealers to improve their services.
 Vertical Marketing Systems
 Vertical Marketing Systems (VMS) consists of
producers, wholesalers, and retailers acting as a
unified system - that seek to maximize profits for the
whole channel.
 Here, one channel members owns the others, has
contracts with them or use so much power that they
all cooperate.
 Such systems occur to control channel behavior and
manage channel conflict.
 There are three major types of VMSs which has
different means for setting up leadership and
power in the channel;
 Corporate VMS
 Contractual VMS
 Wholesaler-sponsored voluntary chains
 Retailer cooperatives
 Franchise organizations
 Administered VMS
Types of Vertical Marketing Systems
V ertic al
m ark etin g
s ys tem s (V M S )

C orp orate C on trac tu al A d m in is tered

VMS VMS VMS

W h oles aler- R etailer F ran c h is e

s p on s ored c oop eratives org an iz ation s
volu n tary
c h ain s
 Corporate VMS
 In a corporate VMS, production and
distribution stages are combined under single
ownership, in order to manage cooperation and
conflict management e.g. AT&T markets its
products through its own chain of distributors.
 Contractual VMS
 A contractual VMS consists of independent firms at
different levels of production and distribution who
join together through contracts to obtain more
economies or sales impact than each could achieve
alone.
 There are three types of contractual VMSs;
 wholesaler-sponsored voluntary chains; are contractual
marketing systems in which wholesalers organize
voluntary chains of independent retailers to help them
compete with large corporate chain organizations.
 retailer cooperatives; are contractual marketing systems
in which retailers organize a new, jointly owned business
to carry on wholesaling and possibly production.
 franchise organizations; are contractual marketing
systems in which a channel member, called a franchiser,
links several stages in the production-distribution process.
There are three forms of franchisees;
 manufacturer-sponsored retailer franchise system e.g. Ford
licenses dealers to sell its cars. The dealers are independent
businesspeople who agree to meet various conditions of sales and
service.
 manufacturer-sponsored wholesaler franchisee system e.g. Coca-
Cola licenses bottlers (wholesalers) in varius markets who buy
Coca-Cola syrup concentrate and then carbonate, bottle and sell
the finished product to retailers in local markets.
 service-firm-sponsored retailer franchise system in which a
service firm e.g. Hertz, Avis, McDonald’s, Burger King,
Holiday Inn, Ramada Inn licenses a system of retailers to bring
its service to consumers.
 Administered VMS
 A vertical marketing system that coordinates
production and distribution stages, not through
common ownership or contractual ties, but through
the size and power of one of the parties e.g. Procter &
Gamble, Kraft, Campbell Soup (or retailers like Wal-
Mart, Toys `R` Us) are very strong that they can
command special displays, shelf space, promotions
and prices form the other parties.
Horizontal Marketing Systems
 Horizontal marketing systems is a channel arrangement
in which two or more companies at one level join
together to follow a new marketing opportunity.
 The major benefit is that companies combine their
capital, production capabilities, marketing resources
and therefore accomplish more.
 Companies might join forces with competitors or
noncompetitors. They might work with each other on a
temporary or permanent basis or they may create a
separate company.
 E.g. Coca-Cola and Nestle formed a joint venture
to market ready-to-drink coffee and tea
worldwide. Coke provided worldwide experince in
marketing and distribution beverages and Nestle
contributed two established brand names - Nescafe
and Nestea.
 Hybrid Marketing Systems
 Hybrid marketing systems is also called
multichannel distribution systems where the
company uses several marketing channels (e.g.
direct mail - telemarketing, retailers, distributors,
dealers, own sales force) to sell its products to
different customer segments.
 E.g. IBM uses its own sales force + IBM direct
which is the catalog and telemarketing operation of
IBM + independent IBM dealers + IBM dealers for
business segments + large retailers like Wal-Mart.
 The major benefit is that when the company has
large and complex markets (consumers) the
company can expand its sales and market
coverage by providing services to the specific
needs of diverse customer segments.
 The disadvantage is that they are harder to control
and generate more conflict.
 Channel Design Decisions
Designing a channel system include;
 analyzing consumer service needs

 setting the channel objectives and constraints

 identifying the major channel alternatives

 evaluating the major alternatives

 Analyzing Consumer Service Needs

 Designing the distribution channel begins with

determining what (e.g. convenient location to
buy the products, immediate delivery, credit,
repairs, long-term warranty…) the consumers
want from the channel.
 The company must balance the consumer
service needs with the feasibility and costs
plus prices.
 Setting the Channel Objectives and
Constraints
 The company must decide which segments to target
and the best channels to use in each segment. Here, the
objective of the company is to minimize the total
channel cost.
 Besides the target market, the company’s channel
objectives are influenced by;
 the nature of its product, e.g. perishable products require
more direct marketing to avoid delays and too much
handling.
 company characteristics, e.g. the company’s size and
financial situation determine which functions it can
 handle, how many channels it can use, which transportation can be
used…
 characteristics of intermediaries, intermediaries differ in their
abilities to handle promotions, customer contact, storage and credit
e.g. the company’s own sales force is more intense in selling.
 competitors’ channel, some companies may prefer to compete in
or near the same outlets that carry competitors’ products, some
may not e.g. Burger King wants to locate near McDonald’s
 environmental factors, economic conditions and legal constraints
affect channel design decisions e.g. in a depressed economy,
producers want to distribute their goods in the most economical
way, using shorter channels.
 Identifying Major Alternatives

After the channel objective have been determined, the

company should identify its major channel
alternatives in terms of (1) types of intermediaries,
(2) number of intermediaries, and (3) the
responsibilities of each channel member.
 Types of Intermediaries
A firm should identify the types of channel members
that are available to carry out its channel work.
 Number of Marketing Intermediaries
Companies must also determine the number of
channel members to use. There are three strategies;
 intensive distribution; is a strategy in which companies
stock their products in as many outlets as possible.
Convenience products and common raw materials must
be available where and when consumers want them e.g.
toothpaste, candy… Procter & Gamble, Coca-Cola
distributes its products in this way. Here, the advantages
are maximum brand exposure and consumer
convenience.
 exclusive distribution; is a strategy (opposite to intensive
distribution) in which the producer gives only a limited
number of dealers the exclusive right to
  distribute its products in their territories. Often found in
new automobiles and prestige women’s clothing e.g.
Rolls-Royce. Here, the advantages are establishing
image and getting higher markups.
 selective distribution; (is between intensive and
exclusive distribution) is a strategy in which the
company uses more than one but fewer than all of the
intermediaries. Most television, furniture brands are
distributed in this way. Here, the advantages are; it
provides good market coverage with more control and
less cost than intensive distribution + it does not spread
its efforts over many outlets as in intensive distribution.
 Responsibilities of Channel Members
The producer and intermediaries must agree on
price policies, discounts, territories, and services
to be performed by each party. E.g. McDonald’s
provides franchisees with promotional support,
training, management assistance, in turn,
franchisees must meet company standards for
physical facilities, buy specific food products...
 Evaluating the Major Alternatives

In order to select the channel that satisfy the company

objectives in the best way, each alternative should be
evaluated by using;
 economic criteria; the company compares the
projected profits and costs of each channel.
 control issues; the company prefers to keep the
channel where it has the highest control.
 adaptive criteria; the company prefers to keep the
channel which is the most flexible to the changing
marketing environment.
 Designing International Distribution
Channels
 Channel systems can vary from country to
country. Each country may have its own
unique distribution system. International
marketers have to adapt their channel
strategies to the existing structures within each
country.
 Physical Distribution and
Logistics Management
 Companies must decide on the best way to
store, handle and move their products and
services so that they are available to customers
in the right amount, at the right time, and in
the right place.
 Logistics effectiveness has a major impact on
(1) customer satisfaction and (2) company
costs (15% of the product’s price).
 Nature and Importance of Physical
Distribution and Marketing
Logistics
 Physical distribution or marketing logistics includes
planning, implementation, and controlling the
physical flow of materials, final goods, and related
information from points of origin to points of
consumption to meet customer requirements at a
profit.
 Market logistic thinking starts with the marketplace
and works backwards to the factory. Logistics deal
with (1) outbound distribution - moving products
from the factory to customers,
 and (2) inbound distribution - moving products
and materials from suppliers to the factory.
 The logistics manager’s task is to coordinate the
whole-channel physical distribution system - the
activities of suppliers, purchasing agents,
marketers, channel members and customers.
 Goals of the Logistics System
 The goal of the marketing logistics system should be
to provide a targeted level of customer service at the
least cost.
 Here, the objective is to maximize profits, not the
sales. So, the company must compare the benefits of
providing higher levels of service with the costs.
Some companies may offer less services and charge
less, but others may offer more services than its
competitors and charge higher prices to cover their
costs.
 Major Logistics Functions
The major logistics functions include;
 order processing
 warehousing
 inventory management
 transportation
 Order Processing

 Orders can be submitted in many ways; by

mail, telephone, through salespeople, or via
computer.
 Order processing systems prepare invoices and
order information. The warehouse receives
instructions to pack and ship the ordered
items. And bills send out.
 Warehousing

 Every company stores its goods while they wait to be

sold.
 A company must decide on (1) how many and (2)
what types of warehouses it needs and (3) where they
will be located.
 The company might own private warehouses or rent
space in public warehouses or both.
 Both has advantages and disadvantages. Owning a
private warehouse;
 bring more control
  ties up capital
 is less flexible if locations change
On the other hand, public warehouses;
 charge for rented space
 provide additional services for inspecting, packaging,
shipping and invoicing goods but at a cost
 offer wide choice of locations and warehouse types
 Basic types of warehouses are; (1) storage
warehouses and (2) distribution centers.
 storage warehouses store goods for moderate to long
periods
 distribution centers are designed to move goods rather
than just store them. They are large and automated
warehouses desinged to receive goods from suppliers, take
orders and deliver goods to customers.
 Inventory
 Inventory decisions involve (1) when to order and (2) how
much to order.
 In deciding when to order, the company must think of the risks
of running out of stock and costs of carrying too much.
 In deciding how much to order, the company must think of
order-processing costs and inventory-carrying costs.
 Just-in-time logistic systems are used by some companies in
which the producers carry only small inventories only enough
for a few days of operations. Such systems result in savings in
inventory carrying and handling costs.
 Transportation
 The choice of transportation carriers affects (1) the
pricing of products, (2) delivery performance, (3)
condition of the goods when they arrive - all affect
customer satisfaction.
 In shipping goods, there are five transportation modes:
rail, water, truck, pipeline, and air.
 Rail; is the most cost-effective mode for shipping large
amounts products e.g. coal, farm and forest products over
long distances.
 Truck; trucks are very flexible in their routing and time
scheduling. They can move goods door to door, saving
 the need to transfer goods from truck to rail and back
again. They are efficient for short hauls of high-value
products. They can offer faster service.
 Water; the cost is very low for shipping bulky, low-
value, nonperishable products e.g. coal, oil, metallic
ores. It is the slowest mode and affected by the
weather.
 Pipeline; are specialized means of shipping petroleum,
natural gas and chemicals from sources to markets. It
costs less than rail but more than water.
 Air; costs higher than rail and truck but ideal when
speed is needed and distant markets have to be reached.
Products are perishables (fresh fish, cut flowers), high-
value, low-bulk items (technical instruments,
jewellery).
 In choosing a transportation mode, shippers
consider five criteria; (1) speed - door to door
delivery time, (2) meeting schedules on time, (3)
ability to handle various products, (4) number of
geographic points served, (5) cost per tone-mile.