Reading: Lesson 2 - Distribution Management

11.2.A - Distribution Management

1. PURPOSES OF DISTRIBUTION

1. Our economic system relies on the successful exchange of products and services between businesses and consumers. But no matter how good a product is, this exchange will not occur successfully unless the company fills orders correctly and delivers the product undamaged and on time to the correct locations. These functions are all part of effective distribution management. Successful exchanges are not easy. In fact, most of the problems consumers and businesses face in our economy occur during the exchange process. Marketing channel discrepancies are the differences between the business’s offerings and the consumer’s requirements. Marketing managers are concerned about four important marketing channel discrepancies:
   
   1. Differences between the types of products produced and the types consumers want.
   2. Differences between the time of production and the time consumers want the products.
   3. Differences between the location where products are produced and the location where consumers want them.
   4. Differences between the quantities produced and the quantities consumers want.
   
   
2. Producers manufacture large quantities of one or a very few products; consumers want small quantities of a variety of products. Producers manufacture products at a specific time and in a particular location; that time and location do not typically match the time and place consumers need the product. Distribution systems are designed to get the types and quantities of products customers want to the locations where and when they want them.
   
3. Businesses create customer satisfaction by providing economic utility. Economic utility is the amount of satisfaction received from using a product or service. Businesses create economic utility and customer satisfaction by designing the form, time, place, and possession of a product. 
   
4. Businesses create form utility by designing a product that is better or easier to use. Creating a product that is durable, has important features, or is sold in the size or quantity desired enhances form utility. Distribution creates both time and place utility. Time utility is created when consumers are able to purchase a product when they need it. Time utility is enhanced when a customer can obtain a product at a convenient time and does not have to wait for delivery. Distribution creates place utility by having products and services available at a convenient location so customers do not have to drive a long distance to find them or are unable to purchase several related items at the same location. Possession utility is created by developing a product that consumers can afford to purchase. Businesses can increase possession utility by extending credit, allowing the customer to make several payments for the purchase over a period of time.
   

2. CHANNELS OF DISTRIBUTION

1. The routes products follow while moving from producer to consumer, including all related activities and participating organizations, are called channels of distribution. Businesses that participate in activities that transfer goods and services from the producer to the user are called channel members. Channel members are generally retailers and wholesalers. A retailer sells directly to the consumer. A wholesaler, on the other hand, buys from and sells to other businesses or organizations rather than to final consumers. Wholesalers, retailers, and other channel members serve important and specific roles in the exchange process. Determining the number and type of businesses and the activities they will perform in a channel of distribution is an important decision. Adding businesses to the channel makes the channel more complex and difficult to control. However, using businesses that have particular expertise in transportation, product handling, or other distribution activities may result in improved distribution or actual cost savings. The activities that need to be performed as a product moves from producer to consumer help to determine the number and types of businesses in the channel. 
   
2. Customers influence the development of a distribution channel. When developing a channel, businesses must consider the location of customers, the number of customers wanting the product, and the ways in which customers prefer to purchase and consume the product. Producers need distribution channels whether they make products for consumers or for other businesses. The channels that products follow may be quite simple and short or long and complex. The shortest path is for the producer to sell directly to the user; the longest path can include a retailer, a wholesaler, and even other businesses. When producers sell directly to the ultimate consumer, it is called direct distribution. When distribution takes place through channel members, it is called indirect distribution. The Figure below illustrates different types of distribution channels. 
   

   
   

3. Direct distributors do not use a wholesaler or another type of channel member, such as a retailer, to reach customers. However, direct distributors do need a means of communicating and selling to customers. Industrial sales, such as General Electric, often occur directly from a manufacturer to another business through a sales force. Avon, Amway, and Mary Kay are multibillion dollar companies that sell products directly to consumers through personal sales. In addition to a sales force, direct distributors often use direct marketing to communicate to customers. Direct marketing offers products to customers through media such as catalogs, direct mail, telemarketing, email marketing and websites. One of the most popular methods of facilitating direct marketing sales is through e-commerce. By allowing customers to purchase online, manufacturers can sell directly to customers without a sales force. Dell Computer started by placing direct marketing print advertisements and grew over time to become the largest online computer sales company.
   

4. Direct distributors don’t always rely solely upon one direct channel. Dell not only sells online, but it also sells its computers in many retail outlets. Avon, which primarily sells through a direct sales force, also sells to consumers through its website. Both of these businesses follow a multi-channel strategy, selling through direct and indirect channels. Direct distributors do not have other channel members to provide service or help solve customer problems. Many firms employ call centers to provide telephone support. Call centers take incoming calls to fulfill sales orders and to handle customer problems. Call centers can also be involved with outgoing sales calls, a process called telemarketing. Telemarketing is the marketing of goods and services by telephone. Call center operators use computer technology to look up customer records and record sales information.
   

5. When producers cannot or choose not to perform all marketing activities, they need an indirect channel of distribution. Manufacturers can simplify many of their marketing operations by selling to retailers. They will need fewer salespeople, because they sell to a small number of retail customers rather than to a very large number of final consumers. They can share advertising with the retailers, and the retailers will be responsible for much of the product storage, consumer credit management, and other activities. Retailers specialize in marketing activities, and this allows producers to specialize in manufacturing activities. Specialization leads to improved efficiency, which benefits consumers through lower prices and added or improved services. Retailers benefit consumers in several ways. Unlike producers, retailers can be conveniently located near consumers and can provide the products of many manufacturers in one place, thereby permitting consumers to make comparisons among a variety of types and brands of products. Furthermore, retailers can offer several kinds of products that consumers may need, making it possible for consumers to do all their shopping at one or a few locations. Retailers offer convenient shopping hours, credit terms, merchandise exchanges, and other special services to encourage customers to shop in their businesses.
   

6. Retail businesses range from large department stores that stock a broad variety of merchandise to small retailers specializing in a limited variety. Also, there are a number of nonstore retailers. They sell products to customers in a number of ways that do not require a shopping trip to a store. Those ways include vending machines; direct marketing by retailers through telephone, catalog, or online ordering services; in-home parties and sales presentations; and shopping channels on cable television. Producers prefer to sell products to retailers that buy in large quantities, such as department and discount stores and supermarkets. Smaller retailers are usually not able to deal directly with the manufacturer, so they must buy from other channel members. They turn to wholesalers, who consolidate the orders of a number of smaller businesses and then place the larger orders with manufacturers. Also, many wholesalers offer credit terms to retailers and provide help in planning promotions and sales strategies. Wholesalers sell business products as well as consumer products. Many small businesses cannot purchase in the quantities required by large manufacturers or meet their terms of sale. They seek the service of a wholesaler, often called an industrial distributor, to purchase the products they need. Wholesalers are an important part of international marketing today. Those that have developed international customers and distribution systems offer an effective way for companies to enter those markets. International wholesalers can also import products from other countries to sell to their customers. Wholesalers provide valuable services that producers may not provide. They sell to retailers in small quantities and can usually deliver goods quickly.
   

7. To minimize costs, managers design distribution systems to create channel efficiency. Channel efficiency is obtained when a business is able to perform all necessary channel functions at the lowest total cost. Often, the lowest distribution cost can be obtained by using channel intermediaries. An intermediary is a business that supports channel functions between channel members. Intermediaries are often called middlemen. The Figure below shows two different distribution systems. In Alternative 1 each producer distributes their products to every customer. In this example, there are fifteen (3 × 5) different distribution channels that need to be developed, each with its own associated costs. In addition to the distribution channel, each producer needs to provide form utility by providing service, time and place utility by having the needed product available at the right location when the customer is willing to purchase, and possession utility by offering credit. Alternative 2 in the Figure below shows that the addition of one channel intermediary has created efficiency in the distribution system. The number of distribution channels has decreased to eight (3 + 5). In addition, the intermediary can add economic utility by storing products at a location that provides both time and place utility for the customer. The intermediary can also provide form utility by providing additional product services and increase possession utility by extending credit. A number of businesses perform intermediary functions. These include merchant wholesalers, who take title or ownership to goods, and retailers, who sell to the ultimate user. Intermediaries lower risk to all producers in the channel. The producers can break the bulk of their production by selling inventory. This lowers the financial risk of creating products and holding inventory while providing funds for additional production.
   

   
   

8. Usually the businesses involved in a channel of distribution are independent businesses. They make their own decisions and provide the activities they believe their customers want. It is not unusual for businesses in a distribution channel to have conflicts with each other. One way for channels to work together more effectively is for a large business in the channel to take responsibility for planning, coordination, and communication. The business organizes the channel so that each participant benefits and helps the other businesses perform their functions successfully. An administered channel is one in which one organization takes a leadership position to benefit all channel members. Cooperation is difficult among businesses that operate at different levels of a channel and have very different responsibilities. Some very large businesses attempt to solve that problem through channel integration. Channel integration occurs when one business owns the organizations at other levels of the channel. A manufacturer may purchase the businesses that provide wholesaling or retailing functions. A large retailer may decide to buy a wholesaler or even several small manufacturing businesses. Each business can still perform the specific functions needed for a successful channel, but having one owner for all businesses avoids the conflicts that occur in other channels.