Distribution channel activities

1. Definition and function

1.1. Definition
A distribution channel (or marketing channel) is a system of organizations, individuals and
processes established to ensure the transportation of goods or services from the manufacturer to
the final consumer. The distribution channel plays a key role in the supply chain, ensuring the
circulation of goods and information between participating parties, from manufacturers,
wholesalers, retailers, to consumers. The distribution channel includes not only the physical
activities related to the transportation and storage of products, but also includes marketing,
promotion and negotiation activities between parties.
1.2. Function

Information Collection: This is the process of collecting data, market information, and
customer feedback to help businesses understand market needs and consumer trends. This
information plays an important role in making strategic decisions and adjusting products or
services accordingly.
Produc promotion: This function involves communicating and marketing products to
potential customers through distribution channels. The goal of product promotion is to create
awareness, stimulate demand, and promote purchase behavior.
Finance: The distribution channel plays an important role in managing financial resources,
including trade credit, payment terms, and the movement of money within the distribution system.
This helps ensure that the flow of money between supply chain participants is maintained
efficiently.
Product Adjustment: This function involves changing or customizing products to suit
specific customer needs or market conditions in each distribution area. Product customization may
include changing product size, packaging, or features.
Negotiate: This is the process by which parties involved in the distribution channel negotiate
to determine contract terms, prices, and other commercial conditions. Negotiation helps ensure the
interests of both parties and creates an environment for long-term cooperation.
Distribution: The distribution function encompasses all activities of transporting, storing,
and delivering products from the manufacturer to the end consumer. This requires close
cooperation between logistics service providers and distribution channels.
Contact customer: Distribution channels play an important role in maintaining and
developing customer relationships. Customer contact and care through distribution channels not
only helps increase customer loyalty but also facilitates product feedback and improvement.
Risk management: This is a function that involves anticipating, identifying, and managing
risks that may arise during the distribution of products. These risks may include transportation
problems, market fluctuations, or product quality issues.

2. Distribution channel levels

Level 0 (Direct distribution channel):

In the zero-level distribution model, the manufacturer delivers the product directly to the
customer without any intermediaries. This is a form of direct distribution in which the
manufacturer is fully responsible for sales, shipping, and customer care. This form is often used in
service industries or highly exclusive products where a direct relationship between the
manufacturer and the consumer is important. A common example is the manufacturer of software,
consulting services, or handmade products.
Level 1 (Indirect distribution channel with one intermediary):
In this model, the manufacturer does not sell directly to consumers but through a Retailer.
The Retailer is the only intermediary in the distribution chain and is responsible for supplying the
product to the end consumer. This level of distribution is common in fast-moving consumer goods
(FMCG) and products with short life cycles. The manufacturer relies on retailers to reach the end
customer quickly and efficiently. For example, products such as household appliances or food are
often distributed using this model.
Level 2 (Indirect distribution channel with two intermediaries):
At level 2, the distribution chain involves two intermediaries: Wholesalers and Retailers.
The manufacturer supplies goods to the wholesaler, who then distributes them to retailers. Finally,
the retailer sells the products directly to customers. Using wholesalers in the distribution chain
helps the manufacturer reduce the burden of inventory management and expands the market reach
through the wholesaler's large retail network. This level is suitable for popular consumer products
that require widespread distribution, such as electronics, clothing, or furniture.
Level 3 (Indirect distribution channel with three intermediaries):
At this level, the distribution channel involves three intermediaries: Wholesaler, Jobber (also
known as small wholesaler), and Retailer. The manufacturer supplies goods to the wholesaler, who
then distributes them to the jobber. The jobber then supplies the products to the retailer, and the
products are finally sold to consumers. This level is often applied to products with complex
distribution needs, large market size, or in industries that require high specialization in distribution.
The role of the jobber is very important in reaching small retailers or difficult-to-reach market
areas.

3. Select warehouse location

3.1. Factor-rating method
The warehouse location selection criteria ranking method is a systematic analytical process to
evaluate and compare potential locations to select the optimal location for the warehouse. The goal
of this process is to identify a location that ensures cost optimization, operational efficiency, and
meets the needs of customers and businesses.
Please refer to Slide Chapter 4 for implementation steps.
3.2. Weber method
The Weber method is an important analytical tool in warehouse location selection, used to
determine the optimal point to minimize transportation costs. Developed by economist Alfred
Weber, this method is based on the principle of finding the central location with the lowest
transportation costs between the supply sources and the consumption points. This method is very
useful in the context of businesses needing to choose strategic warehouse locations in the supply
chain system.
Please refer to Slide Chapter 4 for implementation steps.
 3.3. Break-even analysis method
Break-even analysis is one of the financial analysis tools commonly used in warehouse
location decision making. It helps businesses compare cost options, based on fixed and variable
costs, to determine the point at which the total costs of the options become balanced. This allows
businesses to determine the minimum volume or production level needed to avoid losses and
thereby optimize warehouse locations to ensure the highest financial efficiency.
Please refer to Slide Chapter 4 for implementation steps.

4. Distribution channel network design

4.1. Some types of matrices
Network design matrix

This matrix aims to provide an overview of the relationship between production options and
three key factors related to distribution channels: market penetration intensity, distribution
integration intensity, and distribution intensity. The construction and analysis of this matrix not
only helps businesses better understand distribution activities but also supports in making strategic
decisions to optimize business performance.
Production Options
In this matrix, 4 production options are specifically identified as follows:
Project: This is a production option designed to approach the market with low market
penetration intensity, while the intensity of distribution integration is assessed as very high. This
shows that, although it cannot easily capture the market, this option has the potential to optimize
the coordination of activities in the supply chain.
Factory: This option has low market penetration intensity, low distribution intensity, but high
distribution integration intensity. This may indicate that although the ability to distribute goods is
limited, the integration of activities can bring efficiency in the processing and production of goods.
 Mass Production: This option has a medium market penetration intensity, and the intensity
of integration and distribution is determined as medium/high. This shows that mass production has
the potential to capture the market and ensure efficient distribution of goods. Mass Production:
With a very high market penetration intensity, but low integration and distribution intensity, this
option can create a large volume of products but has difficulty in distributing them to consumers.
Analytical factors
The matrix provides 3 main analysis elements:
Market Penetration Intensity: This is an indicator of a company's ability to reach and capture
the market. Low market penetration intensity indicates difficulty in building and maintaining
customer relationships, while high intensity indicates good competitiveness.
Distribution Integration Intensity: This measures the degree of integration of distribution
activities in the supply chain. High integration intensity indicates good coordination between
stages in the supply chain, from production to distribution, helping to reduce costs and increase
operational efficiency.
Distribution Intensity: This is an indicator of a company's ability to get goods to the end
consumer. Low distribution intensity can lead to goods not reaching the target market, negatively
affecting revenue and profits.

Through the distribution channel design matrix:

Evaluate and Select the Appropriate Production Option: By comparing factors between
production options, businesses can determine which option brings the best distribution efficiency,
thereby optimizing business operations.
Determine Effective Distribution Strategy: Businesses need to base on the intensity of
distribution integration and distribution intensity to adjust their distribution strategy to suit actual
conditions and market needs.
Make Smarter Decisions: Using this matrix supports businesses in choosing production
options, helping them make accurate strategic decisions, thereby improving their competitiveness
in the market.
Distribution channel/service level design matrix

Distribution channels are divided into three main categories based on market penetration,
distribution integration, and distribution intensity. Each type of distribution channel is evaluated
based on four main criteria: order separation, space convenience, delivery time, and product
variety. Here is a detailed analysis:
Market Penetration
Order splitting: High, meaning the ability to split and deliver to multiple points of
consumption is high. This shows flexibility in meeting customer needs in different areas.
Spatial utility: Very high, meaning the ability to easily access products in many different
locations, thereby optimizing the customer shopping experience.
Delivery time: Very high, meaning fast delivery speed, often serving customers with urgent
needs or requiring short delivery times.
Product diversity: High, ensuring a rich range of products, suitable for many customer
groups.
Intensity of distribution integration
Order Splitting: Medium, meaning that the ability to split orders is not as high as the market
penetration channel, but still enough to meet demand in some strategic areas.
Space Utility: Very High, with distribution in strategic locations to optimize customer access.
Delivery Time: Very High, demonstrating a commitment to fast delivery, suitable for areas
with medium or high demand.
Product Diversity: High, similar to the market penetration channel, ensuring a wide range of
products to meet different customer needs.
Distribution intensity
Order Fragmentation: Low, limited ability to split orders, focused on a small number of
points of sale or distribution areas.
Space Utility: Medium, meaning less easy access to products than other distribution
channels, suitable for high-value products or those requiring selective distribution.
Delivery Time: Low/Medium, delivery speeds may be slower, especially when focusing on
exclusive distribution or in selective areas.
Product Variety: Low/Medium, the number of products distributed tends to be limited,
focused on a few specialty products, often for a specific customer group.
4.2. Distribution channel positioning
Direct Shipping

In this model, the manufacturer plays a dominant role in distributing the product, completely
eliminating intermediary channels such as distributors, wholesalers, or retailers. Goods are shipped
directly from the manufacturer to the end customer.
Advantages: Greater control over product quality, reduced costs associated with
intermediaries, and maintaining absolute control over the distribution process.
Disadvantages: Potential challenges related to complex logistics management, possible long
delivery times, and limited flexibility in meeting diverse product needs.

Distribution elements in the Direct Shipping model:

Market penetration intensity:
The manufacturer has full control over distribution and market penetration, thereby
optimizing decisions on distribution volume and scope. This helps the manufacturer effectively
manage supply and demand as well as adjust business strategies to suit each specific market area.
Enhanced control of the supply chain and improved ability to meet customer needs in different
markets.
Distribution integration intensity:
The manufacturer is fully responsible for the entire logistics process, including
transportation, warehousing (if any), and related costs. This can reduce complexity due to the
absence of intermediaries, while helping to reduce costs and increase efficiency when directly
managed. Tight control over logistics costs and processes, increasing the ability to optimize
resources and minimizing risks related to third parties.
Distribution intensity:
No involvement of any intermediary distribution channels. Products are shipped directly
from the manufacturer to the customer, eliminating intermediaries and associated costs.
Distribution costs are minimized and the limitations of relying on third parties in the distribution
process are avoided.
 Service output in Direct Shipping model:
Split orders: Manufacturers can distribute in large or small orders, depending on customer
requirements. The ability to split orders can help optimize distribution costs and focus on large
orders to minimize transportation costs. Optimize distribution efficiency and minimize costs by
focusing on large orders.
Space utility: Manufacturers often deliver directly to end customers, bypassing
intermediaries. This creates space management convenience, as there is no need for warehousing
or distribution through intermediaries. Minimizing the need for warehousing and optimizing the
delivery process from manufacturer to customer.
Delivery time: Delivery times in this model are often longer than in traditional distribution
models. This is because the manufacturer directly handles the entire transportation process, which
can slow down delivery speeds when there is no intermediary channel to support faster distribution.
Longer delivery times can impact the customer experience, especially for urgent items.
Product Variety: Product variety in the direct drop shipping model is typically lower than in
traditional distribution channels. Manufacturers tend to focus on core or niche product lines,
resulting in reduced product variety. The ability to meet customer demand for product variety is
limited, making it difficult to compete with other distribution models that have a broader product
range.

Dropshipping

Dropshipping Model (Distribution through intermediaries without holding inventory)

In the Dropshipping model, retailers do not need to own or manage inventory. Instead, their
main task is to promote products and manage customer relationships. When a customer places an
order, the retailer transfers the order and delivery information to the manufacturer or supplier, who
will take care of the entire logistics process, including packaging and delivering the goods directly
to the end customer. The retailer is not involved in the transportation or handling of goods, only
playing the role of a link.
 Advantages:
No need for large capital investment: Retailers do not need to invest in warehouses or
inventory, which helps reduce financial risks and optimize capital resources.
Easy expansion of product categories: Retailers can sell many different types of products
without worrying about inventory management, easily cooperating with many manufacturers to
diversify products.
Focus on marketing and sales: Retailers can focus their resources on marketing strategies
and expanding their customer base, without being distracted by logistics operations.
Disadvantages:
Loss of quality control and logistics: Retailers are completely dependent on the manufacturer
or supplier to ensure product quality and delivery services. This can impact the customer
experience if problems arise.
Delivery times can be longer: Since products are often shipped directly from the
manufacturer to the customer, delivery times can be longer than if the goods were stored close to
the customer in local warehouses.
Limited margins: Retailers must share profits with the manufacturer or supplier, and they
may face pricing pressure when competing with other retailers using the same manufacturer.
Distribution factors in the Dropshipping model:
Market penetration intensity:
The manufacturer is fully responsible for the production and supply of the product, while the
retailer is responsible for marketing and distribution to customers. The retailer does not need to
invest in warehousing or inventory management, allowing them to reach a larger market without
committing large resources. This model allows the retailer to quickly expand into new markets
without worrying about warehousing and transportation costs.
Distribution integration intensity:
Distribution responsibilities are shared between the manufacturer and the retailer. The
retailer plays a role in promoting and selling the product, while the manufacturer is responsible for
logistics and delivery. This creates integration between the two to optimize the product supply and
distribution process. This creates flexibility in the supply chain, reducing the pressure on logistics
management for the retailer, while allowing the manufacturer to focus on optimizing the
production and delivery process.
Distribution Intensity: The retailer is not involved in the actual distribution of the product.
The product is sent directly from the manufacturer to the customer, minimizing the involvement
of intermediaries in transportation. This model reduces operating costs for the retailer, but at the
same time can reduce the ability to control service quality and delivery times.
Service output in Dropshipping model:
Split orders: Retailers can easily distribute products without having to maintain inventory.
This is especially useful when customers request small orders, because the manufacturer will be
responsible for splitting and shipping directly to customers. This model helps retailers meet
customer needs with flexible order sizes, reducing the risk of backlogs and warehousing costs.
 Space utility: Since retailers do not need to store goods, they can focus on expanding their
business without worrying about warehouse space. The manufacturer takes care of space
optimization, including storing and managing goods before shipment. Retailers can expand their
business on a large scale without being limited by physical infrastructure.
Delivery time: Although retailers can receive orders quickly, delivery time depends on the
logistics capabilities of the manufacturer. If the manufacturer does not have a strong logistics
system, delivery times may be extended. This can affect customer satisfaction, especially in
markets that require fast delivery.
Product Diversity: The Dropshipping model allows retailers to expand their product portfolio
easily without worrying about inventory management costs. However, product diversity depends
on the manufacturer's production and supply capabilities. Retailers can easily experiment with new
products without taking on a lot of risk, but this diversification is also limited if the manufacturer
cannot meet the demand for the product.