Distribution Management

Session - 6
Today’s session:

•Physical Distribution Channels

•Types of Flows
•Channel Management
•Why distribute through intermediaries
•Channel Structure
•Channel Design models
Channels of distribution
Physical Distribution Channel:

•The method by which

•a product is physically transferred
•from the point of production
•to the point where they are
•available to the customer for purchase

Retailer Factory Customer’s

Home
 Physical distribution channels

Manufacturer Manufacturer Manufacturer Manufacturer

Agent/ Broker

Wholesaler Wholesaler

Retailer Retailer Retailer

Consumer Consumer Consumer Consumer

Physical Ownership of Goods

Physical distribution channels

Factory

RDC

Manufacturer/ Company DC Transfer of

ownership of
External organizations
Wholesaler product

Retailer

Consumer

Not just physical product flow – other flows as well

 Distribution channels
NEGOTIATIO
PHYSICAL OWNERSHIP INFORMATION PROMOTION
N
Manufacturer Manufacturer Manufacturer Manufacturer Manufacturer

Transporter Transporter Agencies

WS/ Distr. WS/ Distr. WS/ Distr. WS/ Distr. WS/ Distr.

Transporter Transporter

Retailer Retailer Retailer Retailer Retailer

Consumer Consumer Consumer Consumer Consumer

Five different types of flows

 Distribution channels – Types of Flows
PHYSICAL

Physical product flow: Manufacturer

•Actual physical movement of product
•From manufacturer to consumer Transporter
•Includes all those who take physical
possession of the product. WS/ Distr.

Transporter

Retailer

Consumer
 Distribution channels – Types of Flows
NEGOTIATIO
Negotiation flow: N
•This flow represents the discussions between Manufacturer
the buying and selling functions of the channel
members.
•This discussion is associated with the transfer
of title. WS/ Distr.
•Transportation firm is not included in this flow
– No participation in negotiation
•Arrows point in both directions – mutual
exchange between buyers & sellers at all levels
Retailer

Consumer
 Distribution channels – Types of Flows
OWNERSHIP
Ownership flow:
•Movement of title refers to the flow of the title to Manufacturer
the product – from manufacturers to consumers
•Transportation firm again not included – does not
take transfer of title.
WS/ Distr.

Retailer

Consumer
 Distribution channels – Types of Flows
INFORMATION
Information flow:
•All parties involved in movement of information Manufacturer
•Information moves in both direction – bi-
directional arrows Transporter
•Some information may by-pass the transporter –
not of importance to the transport role. WS/ Distr.

Transporter

Retailer

Consumer
 Distribution channels – Types of Flows
PROMOTION
Promotion flow:
•Movement of persuasive communication like Manufacturer
advertising, personal selling, sales promotions,
publicity. Agency
•A new type of firm – agency may be involved.
•Agency involved in providing and maintaining the WS/ Distr.
promotion flow.
•Informational exchange between manufacturer
and agency bi-directional
•All other information flows in one direction only.
Retailer

Consumer
 Channel Management v/s Physical distribution
management
INFORMATIO
PHYSICAL NEGOTIATION OWNERSHIP PROMOTION
N
Manufacturer Manufacturer Manufacturer Manufacturer Manufacturer

Transporter Transporter Agencies

WS/ Distr. WS/ Distr. WS/ Distr. WS/ Distr. WS/ Distr.

Transporter Transporter

Retailer Retailer Retailer Retailer Retailer

Consumer Consumer Consumer Consumer Consumer

Physical distribution management - only concerned with movement of the

physical product
Channel management - concerned with not just movement of the physical
product but all other flows. Broader concept.
Channel Management

Channel management much broader than the management of

just the physical product flow

It involves management of :
•Physical product flow
•Ownership flow
•Negotiation flow
•Information flow &
•Promotion flow
to achieve the firm’s distribution objectives
Why distribute through intermediaries?
Why not reach the product directly
from Manufacturer to Consumer
M

1. Specialization & Division of Labour:

W/ D
What holds true for manufacturing holds true for the
complex task of distribution R
•Break down complex task into smaller tasks
•Each task less complex than the whole task C
Adam
•Allocate these small tasksSmith – Thewho
to parties father
willof Modern
specialize at doing Economics
these tasks
•Greater efficieny can thus be achieved
Pin Factory example – The Wealth of
Nations - Specialization of labour
Why distribute through intermediaries?
2. Improve efficiency in the exchange process
Barter Exchange Economy:
•Each producer needs all
other producer’s products
Producer 1 Hats •Total of ten exchanges
needed to satisfy all.
Producer 2 Sticks

Producer 3 Baskets •With a distributor only five

DISTR
exchanges needed.
Producer 4 Pots

Producer 5 Knives Efficiency created in distri-

bution due to use of an
intermediary = 10/5 = 2
In general:
Without distributor With distributor Efficiency created

No of transactions: No of transactions: (n(n-1)/2)/n

= n(n-1)/2 =n =(n-1)/2
n-No. of producers n-No. of producers
Why distribute through intermediaries?
2. Improve efficiency in the exchange process

A distribution channel with intermediaries reduces the number of

transactions needed – brings in efficiencies
Why distribute through intermediaries?
3. Lack of resources to reach all consumers directly

Consider this:
•Maruti has 800+ dealerships
•Cost of setting up a dealership (not counting stocks) – 15 cr
•12000 cr needed to set up these dealerships
•Even Maruti will find it difficult to invest that kind of money
Why distribute through intermediaries?
4. Perform Specific Distribution Tasks

•Collect output of various producers

•Manufacturer – Production in bulk – Break-Bulk role
•Hold product till customer needs it
•Disperse the product to places where customers can buy it

Creating Form, Place, Possession & Time utilities

Why distribute through intermediaries?
5. Perform the distribution tasks faster & cheaper than manufac-
turers can.

•Knowledge of local requirement

•Local contacts
•Sharing of services for several manufacturers
Channel Structure?
Channel Structure is the group of channel members to which a
set of distribution tasks has been allocated

CHANNEL STRUCTURE
M
DIRECT
C
INDIRECT

VERTICAL

HORIZONTAL

MULTI-CHANNEL
Channel Structure?

CHANNEL STRUCTURE
M
DIRECT
W/ D

INDIRECT R

VERTICAL C

HORIZONTAL

MULTI-CHANNEL
Channel Structure?

CHANNEL STRUCTURE M

W/ D
DIRECT

R
INDIRECT
C
VERTICAL
••Each member of
Each members of the
the distribution
distribution
channel works in
channel operates a co-operative
independently
HORIZONTAL
arrangement
•Each member seeks to maximize
•its
Maximize
profit. benefits for all members
MULTI-CHANNEL ••Objective is to of
At the expense reduce
othersthe cost of
the product
•Conflicts canor to provide greater
arise
control
•Will reduce profit of the entire chain
Channel Structure? Types of VMS:
1. Corporate:
•A firm may also own firms at
CHANNEL STRUCTURE subsequent or previous levels.
•It can own the entire channel also.

DIRECT

INDIRECT
Rubber Plantations - Liberia

VERTICAL Factories

HORIZONTAL Retail outlets

•Stable source of supplies

MULTI-CHANNEL •Hard to be good at
•Better control over quality.
Disadvantages:
Advantages: running
•BetterManufaturing,
cost chain
Retialing, Wholesaling
•Lower overheads
Channel Structure? Types of VMS:
2. Contractual:
•Business firms in a supply chain
CHANNEL STRUCTURE enter into an agreement
•To cooperate with each other on a
binding basis.
DIRECT
•Reduce costs and improve
efficiencies
INDIRECT
Franchising
a. Manufacturer sponsored
retail franchise:
VERTICAL

HORIZONTAL

MULTI-CHANNEL
Channel Structure? Types of VMS:
2. Contractual:
•Business firms in a supply chain
CHANNEL STRUCTURE enter into an agreement
•To cooperate with each other on a
binding basis.
DIRECT
•Reduce costs and improve
efficiencies
INDIRECT

2. Manufacturer sponsored
VERTICAL wholesale franchise:

HORIZONTAL

MULTI-CHANNEL
Channel Structure? Types of VMS:
2. Contractual:
•Business firms in a supply chain
CHANNEL STRUCTURE enter into an agreement
•To cooperate with each other on a
binding basis.
DIRECT
•Reduce costs and improve
efficiencies
INDIRECT
3. Service firm sponsored
retail franchise :
VERTICAL

HORIZONTAL

MULTI-CHANNEL
Channel Structure? Types of VMS:
3. Administered:
•The dominant brand in the
CHANNEL STRUCTURE channel coordinates efforts
•By virtue of its market power
•Guide the entire channel as
DIRECT
‘Channel Captain”
•No formal agreement or
INDIRECT ownership

VERTICAL

HORIZONTAL

MULTI-CHANNEL
Channel Structure?

CHANNEL STRUCTURE
•Two or more unrelated busi-
DIRECT
nesses, put together their
efforts to exploit a market opp-
INDIRECT ortunity.
•A product or service is pro-
moted to potential customers.
VERTICAL •This brings benefit to both the
businesses
HORIZONTAL

MULTI-CHANNEL
Horizontal Marketing System?
Channel Structure?

•Different channels used to reach

CHANNEL STRUCTURE the same of different consumer
groups
DIRECT

INDIRECT Web Customers

VERTICAL Small
DELL Retail
Customers
HORIZONTAL

Large
MULTI-CHANNEL Customers
Channel Structure?

•Different channels used to reach

CHANNEL STRUCTURE the same of different consumer
groups
DIRECT

INDIRECT Web Information

VERTICAL
Dell Sales Outlet Purchase

HORIZONTAL
Call Center Tech
Support
MULTI-CHANNEL
Channel Design Model

Designing a suitable channel system requires defining :

1. Understand factors influencing channel design,

2. Identify Factors that will have the most impact on the design
3. Create a matrix based on these key factors o understand their interaction
4. Decide which type of channel is suitable

32
Channel Design
Factors that influence channel design:
•Frequency of purchase
Consumer Habits
•Purchasing Effort
•Rapidity of Consumption
Product
•Significance of purchase
Characteristics
•Waiting time

Market Factors

Company
Factors

33
Channel Design
Factors that influence channel design:

Consumer Habits
•Replacement rate
•Gross Margin
Product
Characteristics
•Adjustment
•Searching time
•Unit Value
Market Factors
•Product Complexity
•Product life-cycle stage
Company
Factors •Volatility of demand
•Brand positioning on quality
•Perishability

34
Channel Design
Factors that influence channel design:

Consumer Habits

Product
Characteristics •Focus on mass market
•Rate of technological change
Market Factors •Intensity of competition
•Geographic concentration of
Company market
Factors

35
Channel Design
Factors that influence channel design:

Consumer Habits

Product
Characteristics
•Range of Products
Market Factors •Order Size
•Market Share
Company •Desire of control
Factors •Retailer investment
•Number of support programs
•Promotion budget
•Size of firm
36
Channel Design Model

Designing a suitable channel system requires defining :

1. Understand factors influencing channel design,
2. Identify Factors that will have the most impact on the design
3. Create a matrix based on these key factors to understand their interaction
4. Decide which type of channel is suitable

Market Concentration
Availability of capital
Customer Service Level
Asset Specificity

37
Channel Design Model
Understanding Asset Specificity:

It is the aspect or feature of an asset (such as a specialized machine)

that makes it useful for one or few specific purposes and which,
therefore, cannot easily be sold off quickly.

Six main types of asset specificity:

•site specificity
•physical asset specificity
•human asset specificity
•brand names
•dedicated assets
•temporal specificity

38
Channel Design Model
Understanding Asset Specificity:

Questions to be asked to judge specificity:

•Is it difficult for an outsider to learn how to do the sell this product.
•Does the salesman need to be given elaborate training to sell this product
•Does the customer have to be trained elaborately to use this product
•Do the salesmen need to have some technical education to sell the product
•Will a salesman's inside information on our procedures would be very helpful
to our competitors.
•Are specialized facilities needed to sell the this product.
•Is a large investment in equipment and facilities needed to sell this product

39
Channel Design Model

Designing a suitable channel system requires defining :

1. Understand factors influencing channel design,
2. Identify Factors that will have the most impact on the design
3. Create a matrix based on these key factors to understand their interaction
4. Decide which type of channel is suitable

40
 Channel Design Model
3. Create a matrix based on these key factors to understand their
interaction
Capital avl. – High
Customer Serv. – High
Market concen. – High
Asset Specificity - Low

41
Channel Design Model

Designing a suitable channel system requires defining :

1. Understand factors influencing channel design,
2. Identify Factors that will have the most impact on the design
3. Create a matrix based on these key factors to understand their interaction
4. Decide which type of channel is suitable

42
Distribution Scope Strategy

43