Distribution Channels (Marketing

Channels/ Intermediaries)
& Logistics Management
Topic 9
 Supply Chains & the Value Delivery Network
 Nature, Importance & Functions of Distribution Channels
 Distribution Channels Levels
 Distribution Channels Behavior & Organization
 Vertical Marketing Systems (VMS)
 Horizontal Marketing Systems
 Multichannel Distribution Systems
 Distribution Channels Design Decisions
 Distribution Strategies/Alternatives
 Distribution Channels Management Decisions
 Physical Distribution (Marketing Logistics)
 Nature of Physical Distribution
 Supply Chain Management
 Importance & Functions of Physical Distribution
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 Supply Chain & the Value Delivery Network
pg 364

Supply chain consists of “upstream” & “downstream”

partners.
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Upstream partners
from the company is the set of firms that supply the raw
materials, components, parts, information, finances, and
expertise needed to create a product or service.

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Downstream partners
Focus on distribution channels (or marketing channels or
intermediaries) that look forward toward the customer.

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Distribution channels (marketing channels/intermediaries)
a set of interdependent organizations that help make a product or
service available for use by the consumer or business user.

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 Nature of Distribution Channels pg365
offer producers greater efficiency in making goods available
to target markets. Through their contacts, experience,
specialization, and scale of operations, intermediaries
usually offer the firm more than it can achieve on its own.

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 Importance of Distribution Channels pg 365

How distribution channels members Add Value?

PRODUCER CUSTOMER

PRODUCER CUSTOMER

PRODUCER CUSTOMER

9 transactions

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How distribution channels members Add Value?

PRODUCER CUSTOMER

PRODUCER DISTRIBUTOR CUSTOMER

PRODUCER CUSTOMER

6 transactions

To conclude, in making products/services available to consumers,

distribution channels members add value by bridging the major time,
place and possession gaps that separate products/services from those
who use them by performing many key functions:
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 Key Functions of Distribution Channels Members:
pg 366
1. Information
gather and distribute marketing research & marketing intelligence information about
actors & forces in the marketing environment needed for planning & aiding exchange
2. Promotion
engage in promotion to develop & spread persuasive communications to
consumers/buyers about products/services
3. Contact
find & communicate with prospect consumers/buyers
4. Matching
shape & fit product/services to consumers/buyers’ needs (include activities of
manufacturing, grading, assembling & packaging)
5. Negotiation
reach an agreement on price & other terms so that ownership can be transferred
6. Physical distribution
involves transporting & storing products
7. Financing
acquire & use funds to cover the costs of the distribution channel work
8. Risk taking
assume the risks of carrying out the distribution channel work
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  Distribution Channels Levels
pg 367
CONSUMER CHANNEL:

Direct Dist. channel: Indirect Dist. channel:

PRODUCER PRODUCER PRODUCER

WHOLESALER

RETAILER RETAILER

CONSUMER CONSUMER CONSUMER

note:
Direct dist. channel has no intermediary levels ie. company sells directly to consumers.
(means more control and less channel complexity)
Indirect dist. channel contains one or more intermediaries.
(means less control and greater channel complexity) 10
 Channel Levels
BUSINESS CHANNEL

PRODUCER PRODUCER PRODUCER

MFR. REP

BUSINESS BUSINESS
DISTRIBUTOR DISTRIBUTOR

BUSINESS BUSINESS BUSINESS

CUSTOMER CUSTOMER CUSTOMER
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  Distribution Channels Behavior & Organization
pg 368
1. Vertical marketing system (VMS) pg 369
Conventional Vertical Marketing System
PRODUCER
PRODUCER

WHOLESALER WHOLESALER

RETAILER
RETAILER

CONSUMER CONSUMER
Conventional distribution channels:
- consists of one or more independent producers, wholesalers & retailers
- each is a separate business seeking to maximize its own profits, perhaps even at the expense of the
system as a whole.

Vertical marketing system (VMS)

- consists of producers, wholesalers, and retailers acting as a unified system

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- one channel member owns the others, has contracts with them, or wields so much power that they
must all cooperate.
 VMS

Example of VMS:
Goodyear is vertically integrated with its retail chain.
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 Types OF VMS designs:
pg 369

CORPORATE VMS

CONTRACTUAL VMS

FRANCHISE ORGANIZATION

ADMINISTERED VMS

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Corporate VMS

Corporate VMS integrates successive stages of production & distribution

under single ownership.

Example:
Zara has control over almost every aspect of the supply chain, from design and
production to its own worldwide distribution network. It makes 40 percent of its own
fabrics and produces more than half of its own clothes, rather than relying on a
mixture of slow-moving suppliers. New designs feed into Zara manufacturing centers,
which ship finished products directly to Zara stores in 68 countries, saving time,
eliminating the need for warehouses, and keeping inventories low.
Effective VMS integration makes Zara faster, more flexible & more efficient than its
competitors.
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Contractual VMS
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.

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Franchised VMS

3 types of franchises:
1. Manufacturer sponsored retailer franchise system
eg. Ford & its network of independent franchised dealers.
2. Manufacturer sponsored wholesaler franchise system
eg. Coca Cola licenses bottlers (wholesalers) in various
markets who buy Coca-Cola syrup and then bottle and
sell the finished product to retailers in local markets.
3. Service firm sponsored retailer franchise system
eg. Avis Rent-a-Car, McDonald’s
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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Administered VMS
In an administered VMS, leadership is assumed not
through common ownership or contractual ties but through
the size and power of one or a few dominant channel
members.
eg. P&G and Nestle as the manufacturers of top brands can
obtain strong trade cooperation and support from resellers.

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 2. Horizontal Marketing System
pg 372
Horizontal marketing systems two or more companies at one level
join together to follow a new marketing opportunity. Companies
combine financial, production or marketing resources to accomplish
more than any one company could alone.
eg. Petronas – Dunkin Donut, A&W, etc
Esso – Ayamas, etc

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3. Multi-Channel distribution (Hybrid marketing channels)
pg 373
Occur when a single firm sets up two or more marketing channels to reach one or more
customer segments.
These systems increase sales and market coverage, they create new opportunities to
tailor products & services to specific needs of diverse customer segments. However,
these systems are hard to control and prone to conflict.

PRODUCER

Internet, DISTRIBUTORS Sales

catalogs force

RETAILERS DEALERS

CONSUMER CONSUMER BUSINESS BUSINESS

SEGMENT 1 SEGMENT 2 SEGMENT 1 SEGMENT 2

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 Distribution Channels Design Decisions
pg 375

Distribution 1. ANALYZE CONSUMER

channels design NEEDS
decisions
involves:
2. SET CHANNEL
OBJECTIVES

3. IDENTIFY MAJOR
CHANNEL ALTERNATIVES

4. EVALUATION OF
ALTERNATIVES
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1. Analyze Consumer needs
The company must balance
consumer needs not only
against the feasibility and
costs of meeting these needs
but also against customer
price preferences.

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2. Set Channel objectives
Companies should state their
marketing channel objectives in
terms of targeted levels of
customer service.
The company should decide which
segments to serve and the best
channels to use in each case.
The company’s channel objectives
are influenced by the nature of the
company, its products, its
marketing intermediaries, its
competitors, and the environment.

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3. Identify major channel
Alternatives
A firm should identify the:
- types of intermediaries
- number of intermediaries
- responsibilities of each
channel member

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  Distribution Strategies/Alternatives
(based on number of intermediaries)
pg 376

Few Many

Number of
Outlets

EXCLUSIVE SELECTIVE INTENSIVE

Distribution Distribution Distribution

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(i) Intensive distribution
Ideal for producers of convenience products and
common raw materials. It is a strategy in which they
stock their products in as many outlets as possible.

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(ii) Exclusive distribution
Purposely limit the number of intermediaries handling
their products. The producer gives only a limited
number of dealers the exclusive right to distribute its
products in their territories.

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(iii) Selective distribution
This is the use of more than one, but fewer than all, of
the intermediaries who are willing to carry a company’s
products.

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4. Evaluation of alternatives
Using:
a. economic criteria
a company compares the likely
sales, costs, and profitability of
different channel alternatives.
b. control issues
means giving them some control
over the marketing of the product,
and some intermediaries take more
control than others.
c. adaptive criteria
means the company wants to
keep the channel flexible so that it
can adapt to environmental changes.

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Designing International
distribution channels
pg 378
In some markets, the distribution
system is complex and hard to
penetrate, consisting of many layers
and large numbers of intermediaries.
At the other extreme, distribution
systems in developing countries may
be scattered, inefficient, or altogether
lacking.
Sometimes customs or government
regulation can greatly restrict how a
company distributes products in
global markets.

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  Distribution Channels Management Decisions
pg 378

SELECT MANAGE MOTIVATE EVALUATE

CHANNEL CHANNEL CHANNEL CHANNEL
MEMBERS MEMBERS MEMBERS MEMBERS

Distribution channels management calls for:

i. Selecting Channel Members
In selection, company should determine what characteristics distinguish the better
ones.
ii. Managing and Motivating Channel Members
Company must sell not only through the intermediaries but to and with them. Most
companies practice strong partner relationship management (PRM) to forge long-
term partnerships with channel members.
iii. Evaluating Channel Members
Company should recognize and reward intermediaries who are performing well and
adding good value for consumers. Those who are performing poorly should be

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assisted or, as a last resort, replaced.
 Physical Distribution (Marketing Logistics)
pg 381

Physical distribution involves planning,

implementing, and controlling the physical
flow of goods, services & related information
from points of origin to points of consumption
to meet consumer requirements at a profit
ie.
“get the right product to the right customer
in the right place at the right time”

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  Nature of Physical Distribution
 Supply Change Management
pg 381
Nature of physical distribution involves:
i. Outbound distribution
moving products from the factory to resellers & consumers.
ii. Inbound distribution
moving products and materials from suppliers to the factory.
iii. Reverse distribution
moving broken, unwanted or excess products returned by consumers or resellers.

Supply Chain Management:

Inbound Logistics Outbound Logistics

Suppliers Company Resellers Customers

Reverse Logistics
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 Importance of Physical Distribution
pg 382

Logistics manager need to coordinate the activities of suppliers,

purchasing agents, marketers, channel members and customers.

Importance of physical distribution is growing due to:

i. Companies gain powerful competitive advantage by using
improved logistics to give customers better service or lower
prices.
ii. Improved logistics can yield tremendous cost savings to both the
company and its customers.
iii. The explosion in product variety has created a need for
improved logistics management.
iv. Improvements in information technology have created
opportunities for major gains in distribution efficiency.

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  Key Functions of Physical Distribution
pg 384

• Warehousing

• Inventory Management

• Transportation

• Information Management

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 Warehousing
A company must decide on how many & what types of
warehouses it needs & where they will be located.

Types of warehouse:
a. Storage warehouses
store goods for moderate to long periods.
b. Distribution centers
designed to move goods rather than just store
- large & highly automated warehouses designed to
receive goods from various plants and suppliers, take
orders, fill them efficiently and deliver goods to
customers a.s.a.p.
- eg. Wal-Mart operates a network of 112 huge U.S.
distribution centers & another 57 around the world.
A single center, serves the daily needs of 75 to 100
Wal-Mart stores, typically contains some 1 million
square feet of space (about 20 football fields) under
a single roof.
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 Inventory Control

Firms store goods for many reasons, such as enabling production to

meet seasonal demand and creating economies in ordering.

Just-in-time (JIT) logistics systems

- Producers and retailers carry only small inventories of parts or
merchandise, often only enough for a few days of operations.

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Transportation
Transportation Modes:
1. Trucks account for 35 % total cargo.
- highly flexible in their routing & time schedules, and they can usually offer
faster service than railroads. They are efficient for short hauls of high value
products.
2. Railroads account for 31 % total cargo.
- cost effective modes for shipping large amounts of bulk products (eg. coal,
sand, forest products) over long distances.
3. Water carriers account for 11 % total cargo.
- transport large amounts of goods by ships and barges
- cost of water transportation is very low for shipping bulky, low value,
nonperishable products but it is the slowest mode and may be affected by
the weather.
4. Pipelines account for 16 % total cargo.
- specialized means of shipping petroleum, natural gas and chemicals
5. Air carriers account for 5 % total cargo.
- airfreight rates are much higher than rail or truck rates.
6. Internet
- carries digital products from producer to customer via satellite, cable, or
phone wire.

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 Information management
Information management involves:
i. Electronic data interchange (EDI)
computerized exchange of data between
organizations.
ii. Vendor-managed inventory (VMI)
systems (continuous inventory replenishment
systems)
allow the real-time customer sharing of data
on sales and current inventory levels with the
supplier. The supplier then takes full
responsibility for managing inventories and
deliveries.

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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Integrated logistics management

(further reading in your own time pg 387)

Integrated logistics management is the logistics concept that

emphasizes teamwork (both inside the company and among all the
marketing channel organizations) to maximize the performance of
the entire distribution system.

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