Reading: Lesson 3 - Channel Design

11.3.A - Channel Design

1. DESIGNING A CHANNEL OF DISTRIBUTION

1. From the available channels of distribution, ranging from direct and simple to indirect and complex, distribution managers must decide which channel or channels will best fit their needs. Companies generally prefer to use as few channels and channel members as possible. Sometimes companies need to use more than one channel to get the widest distribution for their product. Products such as books, candy, pens, and soap are purchased by many people in a variety of locations. Such items require several channels to reach all of the possible consumers. The manufacturers may sell directly to national discount stores that can sell large quantities of the product. To reach other markets, the manufacturers may sell to large wholesalers that, in turn, sell to supermarkets, convenience stores, vendors, or other types of businesses. Selling to different types of customers requires different channels of distribution. For example, a computer game producer may sell games through retail stores and game rental companies, as well as through the Internet as direct downloads. The Figure below
   illustrates these different channels.
   

   
    

2. Distribution managers must consider many factors when deciding which channel or channels to select for distributing their products. Some of the main factors are:
   
   • Perishability of the product. Highly perishable articles, such as bread, fresh flowers, and ice cream, require rapid and careful handling. Those products are usually marketed directly to the consumer or through very few channel members.
   
   • Geographic distance between producer and consumer. Many products are now sold internationally as well as throughout the country in which they are produced. If the market is very close to the point of production, there is less need for channel members. Generally, more businesses participate in handling a product as the distance from producer to consumer increases.
   
   • Need for special handling of the product. If the product requires costly procedures or equipment for handling, it is likely to pass through as few channel members as possible. Gasoline, which requires pipelines, special tanks, and trucks for handling, is moved from the refiner to the retailer as directly as possible. Refiners own some gasoline retail outlets. Products that are highly complex and need experts to install and repair also require short channels. Manufacturers of large computer systems, for example, sell directly to users.
   
   • Number of users. The greater the number of users of a product, the more channel members there probably are. For instance, a manufacturer of steel is likely to sell directly to a few large users, whereas a shoe manufacturer may sell to wholesalers that then distribute to a variety of retail businesses.
   
   • Number of types of products manufactured. A producer with only one product, such as pottery, will probably sell to a wholesaler. It is too expensive to maintain a sales force large enough to contact all retailers in the country. But if a producer manufactures a large number of electrical products, such as coffeemakers, clocks, heaters, and toasters, it might sell directly to large retailers that handle all of these products. The marketing costs can be distributed over many products.
   
   • Financial strength and interests of the producer. Large companies that are strong financially are better able to perform the marketing activities required to move goods from producer to consumer through the least number of channel members. They may find it more profitable to handle the marketing activities within the company rather than use other businesses. They also have more control over the channel rather than relying on others to perform many of the activities.
   

1. Selecting the channel members that will help sell the product to the consumer is only one of the decisions a distribution manager must make. Another important decision is how to physically transport the products from producer to consumer. Buyers and sellers face several common problems related to transportation. One problem deals with the types of products to be shipped. Factors to consider in shipping include the size, shape, and weight of the goods. Also, certain goods are fragile and may need special care in handling. Transporting 100 tons of steel, for example, requires very different treatment from that required to move a carton of glassware. Another transportation problem is the time needed for delivery. Some buyers expect or need shipment within a matter of hours, and others may not need or expect delivery for several weeks. Still another shipping problem is cost. In addition to the basic transportation charges, there are the costs of packaging products for shipment, insurance, and often storing products before, during, and after delivery to the buyer. Producers that do not perform their own shipping activities must first decide on their products’ distribution requirements and then select the transportation method and companies that meet these requirements. Both consumers and businesses are concerned about the quality of products at the time of purchase. They also want products available where and when they need them and at a reasonable cost. Because distribution activities affect all of these concerns, businesses plan them carefully.
   
2. The most commonly used methods of transporting goods are by railroad, truck, and airplane. A business may use more than one type of transportation, depending on the requirements for the shipment. Railway transportation is one of the most common forms of shipping in the United States. Almost 40 percent of the ton-per-mile volume of products shipped in the United States goes by rail car. The principal advantage of rail transportation is the low cost of moving heavy and bulky items long distances. However, products move slowly on long train routes as railroad cars are added or dropped off. For bulky products or large quantities, the cost of shipping by rail is usually lower than by other methods. Trucks are frequently used for short-distance shipping. Trucks are essential to smaller communities and rural areas that other transportation methods do not serve. Industries such as agriculture, mining, and lumber depend on trucks to move products from the source of production to the processing location.
   
3. Much long-distance shipping is also done by truck. For products that need to be moved rapidly, in smaller quantities than can be economically shipped by rail, or where rail is not accessible, trucks are the typical transportation choice. Some transportation companies use a piggyback service, whereby truck trailers are loaded and placed on railroad cars to be shipped close to the final destination. Most trucking companies now use computer systems to track customer orders and reroute trucks for rapid pickup and delivery. This flexibility is important for businesses that are trying to keep inventories low while maintaining high service levels. Airplanes provide the most rapid form of transportation, but their rates are much higher than those for other methods. Airplanes can move products quickly over long distances. Items can move across a country in a few hours and around the world in a day, if necessary. The majority of air shipments involve items of relatively small bulk, high value, or quick perishability. Packages and mail are moved regularly on passenger airlines as well as by air parcel companies. Airlines are also used for shipping cut flowers, high-fashion clothing, seafood, vegetables, and jewelry. Air shipments are very important for items needed in emergencies, such as medicine and blood, parts for machines needing quick repairs, or important documents.
   
4. Increasingly, businesses are shipping large and bulky items on special cargo planes designed for easy loading and unloading. Regional air freight terminals are being constructed so products can be moved rapidly into and out of airports without interfering with passenger travel. As rapid and efficient transportation becomes more important to businesses and consumers, more products are being shipped by air, even though the cost is higher. People pay more for the transportation that meets their requirements.
   
5. In the United States, as well as in many other countries, networks of thousands of miles of pipelines have been built. Pipelines mostly transport petroleum and natural gas. In many countries, however, pipelines are important methods of moving water for irrigation and human consumption. Water transportation (ocean, lake, and river) is the slowest method of transporting goods. However, it is also the cheapest for bulky goods, such as coal, iron ore, oil, lumber, grain, and cotton. Those are the principal items transported by water. Many products that are produced in large volume for international markets, such as automobiles and large pieces of equipment, are shipped across the oceans. At any large harbor on a coast you can see hundreds of types of products being loaded and unloaded from ships.
   
6. One way to improve shipping services is through containerization, a process in which products are packed in large shipping containers at the factory and are then shipped by a number of transportation methods before being unpacked. The containers can easily be loaded and unloaded from trucks to rail cars, ships, and cargo planes, and back to trucks. This method reduces the amount of product handling and product damage.
   

3. PRODUCT HANDLING 

1. Lost, late, or damaged products are of little value to customers. Product handling is an important part of the distribution process. Most products are handled several times on their way from producer to consumer. Each time a product is handled adds to the cost of distribution, increases delivery time, and increases the chances that damage will occur. Businesses evaluate their product-handling procedures to find ways to improve the process. Improvements may include more secure packaging, more efficient procedures for packing and unpacking, and better equipment for handling and storing products.
   
2. An important part of product handling is keeping track of the products. Businesses and customers want to know where products are in the distribution channel and when they will be delivered. The record keeping required is often a very time-consuming task. Businesses now use bar coding to track products during distribution. Bar codes are product identification labels containing a unique set of vertical bars that computer scanning equipment can read. Each product or container has a bar code. The scanning equipment can read the code at any time during distribution to track the product’s progress.
   
3. Manufacturers or channel members often must store products at points along the way from producer to consumer. Usually, consumers do not buy products as soon as they are produced. Producers and channel members may want to accumulate a large quantity of products to make shipping more efficient. Also, consumers buy some products more during one time of the year than another. Lawn mowers, air conditioners, snowmobiles, and skis are examples of such products. Most companies produce those products throughout the year to make production more efficient. They then store the products until they are ready to distribute them for sale. Warehouses are buildings used to store large quantities of products until they can be sold. They are usually large buildings with racks, shelves, or bins for storing products. Warehouse operators may control temperature or humidity if the stored products need special protection. They must carefully handle and store the products to prevent damage. Warehouse personnel keep computerized records of where each product is stored in the warehouse. When they receive an order, the computer displays the quantity of the product available and its location in the warehouse.
   
4. Handling products and storing them for a long time is expensive. Also, moving them around increases the chances for damage. For more efficient handling with less risk of damage, many companies use mechanical equipment and robots to handle the products in their warehouses. Computers control both the equipment and the robots as products are moved into storage and subsequently removed for shipment. Large wholesalers and retailers that handle a variety of products and sell them through a number of outlets have replaced traditional warehouses with distribution centers. A distribution center is a large building designed to accumulate and redistribute products efficiently. A wholesaler or retailer usually buys products from a number of manufacturers. Each manufacturer ships these products to the distribution center in large quantities. Center workers then repackage the products into smaller quantities, combine them with products from other manufacturers, and ship them to stores that sell that bundle of products to consumers. Distribution centers can save businesses a great deal of money. They reduce transportation and storage costs and provide individual stores with the products they need quickly. Individual stores can order smaller quantities than if they had to order merchandise from each manufacturer, so products will not become outdated as easily.
   
5. Customers place orders in person or by mail, telephone, computer, or fax. When an order reaches the business, employees must process the paperwork to fill the order and bill the customer. If customers have questions or problems with the order, employees must handle them in a friendly and courteous fashion. Some employees are responsible for tracking orders until they reach the customers to make sure the customers receive what they expect. Most companies have automated some or all of the order-processing system. Orders entered into a computer system can be easily tracked. Some companies make computer records available to channel members and customers so they can also track orders at any time from their own computers. 
   
6. An important part of product handling is assessing the effectiveness of the current channels of distribution to see if changes are needed. Distribution managers are responsible for developing channel strategies. These strategies need to be updated when there are changes in channel members, such as the addition of new suppliers, new customers, or new intermediaries. Strategies also need to be updated when there are major changes in transportation modes. Although these types of changes are less common, in the past, containerized shipping revolutionized ocean freight and piggyback transformed shipping by truck. A newly proposed shipping canal across Nicaragua would allow ocean freight ships, too large to pass through the Panama Canal, to travel from the Pacific to the Atlantic. This new canal could require a change in channel strategies throughout the Americas.
   
7. The Figure below below shows the channel design strategy for a regional store chain that serves the South and Midwest in the United States. Stores are served from company-owned warehouses for both hard goods, such as sports Why might a distribution equipment, and soft goods, such as clothing. The company also has a series of manager have to develop a new cold storage warehouses for perishable goods. The company uses many shipping routes and modes. Hard and soft goods arrive from China to ports in California, and from Mexico and South America to Houston, Texas. Perishable goods use air freight flown from Mexico and South America to Dallas, Texas. Once at the main distribution centers in Houston or Dallas, items are shipped by train or truck to regional warehouses in Kansas City, Missouri, and Atlanta, Georgia. From there, items are shipped by truck to regional stores. The store chain is considering expanding into California. Strategic planning needs to consider how a new warehouse would impact the operations of the existing distribution system. Since perishable items are currently processed in Dallas, the distribution managers need to determine whether processed goods will be flown from Dallas or whether a new cold storage processing warehouse needs to be built in California. Distribution managers need to understand the full complexity of product development and distribution. This includes all alternative channel structures and transportation modes, as well as the costs involved.