Chapter Ten:Chapter Ten:

Distribution StrategiesDistribution Strategies

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Chapter ObjectivesChapter Objectives

• Identify the different channel functions Identify the different channel functions and dimensions.and dimensions.

• Identify issues related to channel Identify issues related to channel management.management.

• Examine the different logistics functions.Examine the different logistics functions.

• Identify the different functions of Identify the different functions of wholesaling.wholesaling.

Distribution and the Channel Functions:Distribution and Channels

Distribution and the Channel Functions:Distribution and Channels

• Distribution planning involves:Distribution planning involves:• Planning of the physical movement of products from the Planning of the physical movement of products from the

producer to individual or organizational consumer.producer to individual or organizational consumer.

• The transfer of ownership, risk, and all the exchanges taking The transfer of ownership, risk, and all the exchanges taking place at each channel levelplace at each channel level

• Transportation, warehousingTransportation, warehousing

• Channels of distributionChannels of distribution• Totality of organizations and individuals involved in the Totality of organizations and individuals involved in the

distribution process who take title or assist in the transferring of distribution process who take title or assist in the transferring of title in the distribution process from the producer to the title in the distribution process from the producer to the individual or organizational consumer.individual or organizational consumer.

• Value chain (or supply chain)Value chain (or supply chain)• The chain of activities performed in developing, producing, The chain of activities performed in developing, producing,

marketing, delivering, and servicing a product for the customer.marketing, delivering, and servicing a product for the customer.

Distribution and the Channel Functions:Drivers of Adaptive Supply Chains

Distribution and the Channel Functions:Drivers of Adaptive Supply Chains

FulfillmentExcellence

Collaboration

Optimization

Connectivity

Speed

Execution

Visibility

Distribution and the Channel Functions:

Advantages of Using Intermediaries Distribution and the Channel Functions:

Advantages of Using Intermediaries

• Provide convenience for the consumer.Provide convenience for the consumer.• Carry and store the product.Carry and store the product.• Carry risk in the delivery process.Carry risk in the delivery process.• Provide assortment for retailers, and Provide assortment for retailers, and

ultimately, for consumers.ultimately, for consumers.• Buy products in bulk and redistribute Buy products in bulk and redistribute

smaller amounts.smaller amounts.• Conduct research for the manufacturer. Conduct research for the manufacturer.

Mfg.2

Mfg.5

Mfg.1

Mfg.4

Mfg.3

Ret.1

Ret.5

Ret.4

Ret.3

Ret.2

Mfg.2

Mfg.5

Mfg.1

Mfg.4

Mfg.3

Ret.1

Ret.5

Ret.4

Ret.3

Ret.2

Wholesaler

Distribution and Channel Functions:Advantages of Using Intermediaries Distribution and Channel Functions:Advantages of Using Intermediaries

• Provide creditProvide credit• Provide service contracts, e.g. warrantiesProvide service contracts, e.g. warranties• Pay part of the promotional expenditures.Pay part of the promotional expenditures.• Reduce cost of product delivery by reducing Reduce cost of product delivery by reducing

number of transactions.number of transactions.

Distribution and the Channel Functions:Channel Types*

Distribution and the Channel Functions:Channel Types*

Conventional Channels:• Direct channels:Direct channels:

• Producer to ConsumerProducer to Consumer

• Indirect channels:Indirect channels:• Producer to Retailer to ConsumerProducer to Retailer to Consumer

• Producer to Wholesaler to Retailer to ConsumerProducer to Wholesaler to Retailer to Consumer

Conventional Systems Conventional Systems

vs.vs.

Vertical Marketing Systems (VMS)Vertical Marketing Systems (VMS)

Vertical Marketing Systems*Vertical Marketing Systems*Vertical Marketing Systems*Vertical Marketing Systems*

• Corporate SystemCorporate System• Coordinated through ownershipCoordinated through ownership

• Contractual channelContractual channel• Coordinated by contract, which spells out Coordinated by contract, which spells out

all the tasks that must be performed by each all the tasks that must be performed by each channel memberchannel member

• Administered channelAdministered channel• Coordinated by power:Coordinated by power:

• Reward power: Based on anticipation of special privilegesReward power: Based on anticipation of special privileges

• Coercive power: Based on the ability to remove privileges for noncompliance Coercive power: Based on the ability to remove privileges for noncompliance

• Expert power: Based on experience and knowledge Expert power: Based on experience and knowledge

• Referent Power: Based on the close match in terms of values and objectives shared Referent Power: Based on the close match in terms of values and objectives shared by members of the channel by members of the channel

• Legitimate power: Based on status or position in the channelLegitimate power: Based on status or position in the channel

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LowLow

Cool Huntiing #4

Channel Dimensions:Channel Strategies

Channel Dimensions:Channel Strategies

1. Intensive distribution

Full market coverage

Easy product availability

2. Selective distribution

Control over types of outlets

Moderate market coverage

3. Exclusive distribution

High level of channel control

Limited product availability

Many OutletsMany Outlets

Few OutletsFew Outlets

ConvenienceConvenience

ShoppingShopping

SpecialtySpecialty

Channel ManagementChannel Management

• Dual channel of distribution• Multi-channel of distribution• Reverse Channels*• Multiple Channels, e.g. Dual Distribution*• Channel Conflict• Push vs. Pull Strategy

• Push strategies:

• Focus on intermediaries

• Extensive incentives to channel members

• Makes the product available for consumers on the retail shelves• Pull strategies:

• Focus on consumer demand• Extensive consumer promotion• Drives consumer to request the brand from retailers

Logistics: Overview and FunctionsLogistics: Overview and Functions

• Logistics: Defined as all the activities involved in the physical flow and storage of materials, semi-finished goods, and finished goods to customers in a manner that is efficient and cost-effective.

• Logistics costs account for about 10–35 % of a company’s revenues and more than 10% of the US GDP.

• Functions of Logistics:• Transportation• Warehousing• Inventory control and order processing

TransportationTransportation

Cost* (service, size, distance) and delivery time are key factors in choosing transportation.

Breakdown of volume distribution

Truck29%

Rail40%

Air1%

Water13%

Pipeline17%

Transportation: Characteristics of Different Modes of Transportation

Transportation: Characteristics of Different Modes of Transportation

Source: Statistical Abstract of the United States 2004–2005, U.S. Census Bureau.

Mode Flexibility (in terms of area coverage)

Cost Speed Product Examples Volume of Domestic Traffic*

Truck High Higher Higher Perishables, clothing, cement, furniture, appliances, electronics, and automobiles

1,051

Rail Higher Medium Lower Coal, stone, cement, oil, grain, lumber, and automobiles

1,558

Air Highest High High Jewelry, perishables, electronics, semiconductors, wine, and spirits

15

Water Low High Low Coal, stone, cement, oil, grain, and automobiles

494

Pipeline Low Lower Low Oil and gas, chemicals, coal as a semi-liquid 616

*Volume of domestic yearly traffic within the continental United States; freight traffic in billion ton-miles, whereby a ton-mile is the movement of one ton (2,000 pounds) of freight for the distance of one mile.

Trucks offer high flexibility and are appropriate for transporting perishables, clothing, cement, furniture, appliances, electronics, and automobiles.

Rail transportation is low cost and appropriate for coal, stone, cement, oil, grain, lumber, and automobiles. In Europe, automobiles are often transported by train, whereas, in the United States, they are transported by truck.

Logistics FacilitatorsLogistics Facilitators

• Freight Forwarders • Specialized firms that collect shipments from different businesses,

consolidate them for part of the distance, and deliver them to a destination, in what is typically a door-to-door service.

• Intermodal Transportation*

• Warehousing • The marketing function whereby

goods are stored, identified, and

sorted in the process of transfer to

an intermediary in the distribution

channel or to the final consumer.

• Private and public warehouses

• Distribution centers and conventional warehouses

Logistics (cont.)Logistics (cont.)

• Foreign Trade Zones (FTZs)• An FTZ is a tax-free area in the U.S. that is not considered part of

the U.S. in terms of import regulations and restrictions, and therefore outside the jurisdiction of U.S. Customs.

• Products can be shipped to a free trade zone, stored and assembled there, and then be shipped to the U.S. or another country.

• Such products are not assessed duties and cannot be subjected to tariffs or quotas unless they enter the U.S.

• Inventory Control and Order Processing• Firms need to guarantee the continuous flow of goods to

consumers to meet the quantity of goods with demand for goods.

• Just-in-time inventory system (JIT) • Electronic data interchange (EDI)

Cool Hunting #5/6

WholesalingWholesaling

• Wholesaling encompasses all the activities involved in buying and handling the goods intended for sale to resellers or other organizational users.

• Merchant wholesalers are independent intermediaries who take title to and possession of products they distribute to resellers or organizational consumers. • Full-service wholesalers

• General merchandise wholesalers• Specialty merchandise wholesalers• Rack jobbers• Franchise wholesalers• Wholesale cooperatives

• Limited-service wholesalers• Cash-and-carry wholesalers• Truck wholesalers (or truck jobbers)• Drop shippers (or desk jobbers)• Mail-order wholesalers

Wholesaling (cont.)Wholesaling (cont.)

• Agents and Brokers are independent intermediaries who do not take title to and possession of products they distribute to resellers or organizational consumers.

• Agent and Broker Examples:• Manufacturer’s agent (or manufacturer’s

representative)

• Selling agent

• Purchasing agent

• Commission merchant