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CHAPTER 8
Distribution Channels and
Logistics Management
Objective: examining the nature and role of the
channels in attracting and satisfying customers
The Nature of Distribution
Channels
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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
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A. Number of contacts
without a distributor
B. Number of contacts
with a distributor
Distribution Channel Functions
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A distribution channel moves goods from producers to
consumers. Therefore they;
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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
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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.
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Channel Behavior
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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.
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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.
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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
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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.
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There are three major types of VMSs which has
different means for setting up leadership and power
in the channel;
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Corporate VMS
Contractual VMS
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Wholesaler-sponsored voluntary chains
Retailer cooperatives
Franchise organizations
Administered VMS
Types of Vertical Marketing Systems
Vertical
marketing
systems (VMS)
Corporate
VMS
Contractual
VMS
Administered
VMS
Wholesalersponsored
voluntary
chains
Retailer
cooperatives
Franchise
organizations
Corporate VMS
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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
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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;
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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.
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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;
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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. CocaCola 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.
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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
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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 WalMart, Toys `R` Us) are very strong that they can
command special displays, shelf space, promotions and
prices form the other parties.
Horizontal Marketing Systems
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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.
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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
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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.
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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
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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
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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;
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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
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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
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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.
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Number of Marketing Intermediaries
Companies must also determine the number of
channel members to use. There are three strategies;
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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
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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
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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
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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
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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
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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,
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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
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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
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The major logistics functions include;
order processing
warehousing
inventory management
transportation
Order Processing
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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
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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;
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bring more control
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ties up capital
is less flexible if locations change
On the other hand, public warehouses;
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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.
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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
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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
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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.
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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
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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), highvalue, low-bulk items (technical instruments, jewellery).
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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.