Explain why companies use distribution channels and discuss the functions these channel perform. Answer: Definition of Distribution Channel One of the company goals is to deliver their value within the network through supplier, distributor, and also customer. In delivering the value, organization must have and build a distribution channel because most producers do not sell their product or service directly to the consumers. Distribution channel (also called marketing channel or trade channel) is sets of intermediaries that participating in the process of making a product or service available for use or consumption.
In other words, distribution channel performs the work of moving goods from producers to final consumers. The activities can be illustrated in the form of a flow. Channel members are connected via a variety of flows. Five flows are illustrated in Figure 1 for the distribution or marketing of forklift truck. The more member that and organization has in their flow, the higher complexity of their distribution channel. Figure 1 Five Marketing Flows in the Distribution Channel for Forklift Trucks
Importance of Distribution Channel Distribution channel take part as an important function in an organization. It will affect all marketing decision and can be the key of the success of an organization. Example of marketing decision that comes from distribution channel is to decide the selling price of goods. If the distribution channel is long enough, then the price of goods will be higher compare to the one direct channel from producer to consumer. Distribution channel also represents an opportunity cost.
It answers how to convert potential buyers into profitable consumers. In addition, distribution channel contribute to a decision of long-term commitments with other firm as a set of policies and procedures. For example, if a fast food company has pointed one food supplier and made an agreement for a long-term, then this intermediary will be one of channel member of that particular company. Another importance of organization defining distribution channel is to identify each channel member functions need to be performed and who is to perform them.
For example, a manufacturer in selling its product or service might need sales channel (sales manager and team), delivery channel (distributor agent or courier), and service channel (customer service). In order to make product or service is well delivered to consumer, the flow of distribution channel must be clear and performer in each channel member must be well coordinated each other. Distribution channel also represent how company do the marketing communications. If the company has a strong distribution channel, it can be a very good competitive advantage that the company has.
All elements in marketing mix will be well determined through this strong distribution channel. Therefore, most of organizations or companies use distribution channel in their business process. Marketers also should manage the whole context in distribution channel in order to get successful in business. How Distribution Channel Functions Perform in Organization As mentioned earlier, distribution channel covers all the work of moving goods from producers to customer. Each member of distribution channel performs a number key of functions.
Note that these functions can be transferred between channel member depend on the needs and strategies of company at that time. In general, distribution channel member functions in an organization are described as follows: a) Gather information about potential and current customers, competitors, and other actors and forces in the marketing environment The international clothing line, H&M is now open in Bukit Bintang. The market potential is very high because of many tourist visit Bukit Bintang, even though there are many competitors such as Uniqlo, Padini, Cotton On, etc. ) Develop and disseminate persuasive communications to stimulate purchasing Before the formal launching of new iphone from Apple team, there is always a rumor, or people said ‘leakage information’ about when the new product will be released, what will new product look like, what is the additional feature, what is estimated price, etc. These all are to gain the curiosity of customer and, finally, to stimulate purchasing c) Negotiate and reach agreements on price and other terms so that transfer of ownership or possession can be affected Maxis and U-Mobile have made an agreement to share Maxis’ 3G radio access network with U-Mobile. ) Place orders with manufacturers In buying car for its fleet, Hertz prefers a channel from which it can buy a large lot size. e) Acquire the funds to finance inventories at different levels in the distribution channel Most of the businesses need to go to a bank/ any funding organization for a loan to finance their working capital. This inventory financing also can carry out the run of distribution channel. f) Assume risks connected with carrying out channel work Realizing that now is digital era, photographic film company, Kodak has changed its focus business into digital photography.
The strategy was totally renewed due to they shifted all product to digital. g) Provide for the successive storage and movement of physical products Dominos pizza has a principal of on-time delivery and keeps the products in ‘fresh-from-the-oven’ condition. h) Provide for buyers’ payment of their bills through banks and other financial institutions Celcom provide Broadband services that allow customer to pay the bill not only at its counter but also through banks (ATM or internet banking). i) Oversee actual transfer of ownership from one organization or person to another
Exxon Mobil has downstream business of petrol station called Esso & Mobile. Last year, they sold its business in Malaysia to Petron from Philippines. Therefore, all Esso Petrol stations are being rebranded as Petron. Discuss how channel members interact and how they organize to perform the work of the channel. Answer: How channel member interacts and how they organize to perform their works of the channel are discussed in what we called Channel Behavior and Organization. Channel behavior and organization in a single company depends on the type of distribution channel or marketing system they used.
As we can see in Figure 2, there are four basic distribution channels or systems, which are Conventional Distribution Channels, Vertical Marketing System, Horizontal Marketing System, and Multichannel Marketing System. These channels or systems may affect on how each channel interact and perform their work in a company. Beside these factors, another significant factor of channel behavior and organization is the changing of channel organization. Once the channel organization changes, the interaction of channel member will change, as well as their performance of the channel work.
To have clearer understanding about this, let’s discuss one by one in more details. Changing Channel Organization Channel Behavior and Organization Figure 2 Channel Behavior and Organization Factors Conventional Distribution Channel This kind of distribution channel is a usual type which consists of one or more channel members. Each channel member has its own function and objective. Sometimes, once one particular channel member completes their task, they just simply do not care about the next step of the product being produced in the next channel member flow.
Because of this, conventional distribution channel has intention to have lack leadership and power. The longer the channel, the harder for leader to control the performance. This might lead to poor performance. Vertical Marketing Systems Vertical Marketing Systems (VMS) consist of channel member acting and working together as a unified system in order to meet the customer needs. In conventional distribution channel, channel members are working and trying separately to maximize their profits.
When the effort of one channel member during their work to maximize profit comes at the expense of other channel members, the conflict can arise and cause the reduction of profits for the whole channel or system. Therefore, VMS comes to overcome this problem. To see another difference between conventional distribution channel and VMS, see Figure 3. Figure [ 3 ] Conventional vs Vertical Marketing System Concept of using VMS is similar to vertical integration or in other words using contracts or ownership of power. VMS has three common types, which are administered, contractual, and corporate. Administered VMS The interaction and coordination between production and distribution intermediaries is achieved by the size and influence of the dominant firm, without formal agreement or ownership. This dominant firm usually plays as a leader. The leader could be manufacturer or retailer. * Contractual VMS Contractual VMS is used when production and distribution firms join together and formally agree to integrate their business and resources through contracts. Franchise is simple example of this kind of marketing system.
In franchise organization, the manufacturer or service provider sponsors retailer or wholesaler using their franchise system. * Corporate VMS Company that is using corporate VMS usually owns production and distribution firms. It could be production firm owns distribution firm/ a retail chain (forward integration) or distribution firm/ a retail chain owns a production firm (backward integration). Horizontal Marketing System Horizontal marketing system occurs when there is a merger of companies on the same level work together with channel members in order to pursue marketing opportunities.
The companies usually combine their capital, capabilities of production and distribution or marketing resources in order to earn more profits. The working contract might be temporary or permanent. Coca Cola and Nestle agreed to set a joint business enterprise to market ready-to-drink (RTD) coffee and tea throughout the world. Coca Cola contributed to share great experience about how to market and distribute beverages around the world. While Nestle contributed to establish new brand names which are Nescafe and Nestea. AS a result, these products have been successfully marketed globally.
Multichannel Marketing System Multichannel marketing system or usually being called Hybrid marketing system occurs when a company uses two or more distribution or marketing channel/system. The purpose of using several number of channels/system is to reach one or more customer segments. The company’s sales and market coverage could be increased by using multichannel marketing system. The company also has opportunity to design its product in more specified way in order to meet the customer needs in a particular segment. The challenge of having multichannel is the performance control sometimes is not easy to be done.
At their early stage of business, IBM sold products only through its own sale force. However, when the market of computer in every business was increasing and when the low-cost computer exploded, IBM decided to serve the diverse needs of many customer segments. In less than 10 years, IBM added 18 new channels. Changing Channel Organization The interaction and performance of channel member could be affected by changing the channel organization. The changing could be adding or reducing one or more channel member in the entire system. The common phenomenon in the business world is disintermediation.
Disintermediation occurs when producers cut out one or more channel members and shorten the way of product or service to go to final users. This usually happens when there are new types of channel that can emerge to displace the traditional ones. Identify the major channel alternatives open to a company. Answer: Each channel has unique strength and weakness. Therefore, many companies come up with channel alternatives that they are going to apply. Even, there are some companies using hybrid channel or multichannel marketing. It means that the company uses two or more marketing channels to reach customer segments.
For example, Philips as a home appliances company has two main customers which are business and personal (household customer). Thus, Philips has several alternatives channel to approach both of their customers in different way. Many factors that can cause channel alternative open to a company. As can be shown in Figure 4, channel alternative differ in three ways, which are types of intermediaries, number of intermediaries, and terms and responsibilities of channel members. Figure 4 Major Channel Alternatives Types of Intermediaries A company should identify the types of intermediaries that available to carry outs its channel work.
There are three example of channel alternatives based on types of intermediaries: * Company sales force Company assigns outside sales people to territory and has them contact all prospects in the area. For example as in automotive sales company who has sales people to sell their cars. * Manufacturer’s agency Company hires manufacturer’s agent that is independent firms whose sales forces handle related products from many companies. This manufacturer’s agency that is being assigned usually in different regions or industries to sell the new test equipment. * Industrial distributors
Company finds distributors in the different regions or industries who will buy and carry the new line. Company usually gives them exclusive distribution, good margins, product training and promotional support. Number of Intermediaries Based on the number of intermediaries, the strategy differs in three kinds, which are: * Exclusive distribution Exclusive distribution is strictly limiting the number of intermediaries. This strategy is more suitable for company that wants to control over the service level and outputs. The company wants the more dedicated relationships and knowledgeable selling.
Therefore, it often occur exclusive dealing arrangements between seller and reseller in exclusive distribution. Example of company that using exclusive distribution is manufacturer of luxury cars. * Selective distribution Selective distribution has only some of the intermediaries that willing to carry particular product. Company that uses this kind of strategy usually does not have too many outlets. They believe that by having few outlets, no matter the product is well established or new brand, this strategy can gain sufficient market coverage with more control and less cost compare to intensive distribution.
Producers of electronics or home appliances are the example of companies that place the products in selective area. * Intensive distribution Intensive distribution has the product or service to be placed in as many outlets as possible. This strategy is suitable for company that produces foods, drinks, newspaper, or any product that consumers are willing to buy frequently in anytime and anywhere. To distribute this kind of product, company usually use convenience store such as Seven Eleven, Circle K and other minimarket. Intensive distribution is usually used if company wants to broaden their coverage and awareness of the brand.
This strategy may success in a short-term. However, if it is not done properly, it will affect to long-term performance, because it will be very costly to do the intensive distribution in a large coverage. Another problem is, by placing the product in many convenience stores, it will build competitive environment and price war will happen with high possibility. If price war happens, the economic profit of the company will decrease and this is not good for company performance. Terms and Responsibilities of Channel Member For every channel member, the same treatment and opportunity of being profitable must be given equally.
The terms and responsibility of channel member can be described as follows: * Price policy Price policy is made by producer for determining price list and schedule of discounts. This policy also includes the how much the allowances given in such a way so that the intermediaries see it as sufficient and fair. * Conditions of sale Conditions of sale represent the payment terms and producer guarantees. For example, most producers give cash discount to distributors for early payment. They might also offer a guarantee to defective merchandise or price declines, for creating an incentive of buying larger quantities. Distributors’ territorial rights Distributors’ territorial rights will help the producer to enfranchise other distributors. Distributors usually expect to receive full credit for all sales in their territory, whether they did the selling or not. * Mutual services and responsibilities Mutual services and responsibilities have to be well defined, especially in franchise business and exclusive-agency channels. For example, McDonald’s provides a franchise package including building, promotional support, a record-keeping system, staff training, and general administrative and technical assistance for franchisees.
In turn, franchisees should satisfy company standards for the physical facilities, corporate with new promotion programs, furnish requested information, and buy supplies from specified vendors. However, to identify the major channel alternatives open to a company, there are several steps that need to be done constraint for each channel. These activities are combined in one single process called channel-design decision. The steps can be seen in Figure 5. * Step 1: Analyzing customer needs and wants
Consumer may select the channels that they prefer based on price, product assortment, and convenience, as well as their own shopping goals (economic, experiential, or social). The cost and feasibility of needs and wants also must be considered in deciding and designing the channels. * Step 2: Establishing Channel Objectives and Constraints The objectives and constraint for each channel member should be defined in order to them to complete the tasks. One common objective is to minimize the operational cost but still can provide desired level of services. Figure [ 5 ] Channel-Design Desicion * Step 3: Identifying Major Channel Alternatives
This step is already being discussed earlier about the factors that may influence in identifying major channel alternatives. * Step 4: Evaluating Major Channel Alternatives Each channel alternatives needs to be evaluated against economic, control, and adaptive criteria. Economic criteria means a company compares the likely sales, costs, and profitability of different channel alternatives. Control issues address how and to whom the control should be given. Lastly, adaptive criteria relates on considering long term commitment or flexibility. Explain how companies select, motivate, and evaluate channel members. Answer:
Now the company is considered has chosen a channel system. The next process it to select, train or manage, motivate, and evaluate individual intermediaries for each channel members. It all covers in channel management decisions, as can be shown in Figure 6. Figure [ 6 ] Channel Management Decisions Selecting Channel Members To select channel members at the first place, producers should determine the characteristics that differentiate the best intermediaries or channel members, such as: * Number of years in business * Line carried * Growth and profit record * Financial strength * Cooperativeness and reputation Type of customer or client * Location Managing and Motivating Channel Members Company should determine the needs and wants of its channel members in order to provide them with superior value. The value could be in terms of training, market research, and other capability-building program with the purpose of motivating and improving channel members’ performance. Companies realize that there are always channel members as crucial partners in a joint effort to satisfy end users of the product or service. Therefore, companies take consider in gaining channel members’ cooperation as a huge challenge.
They often use positive motivators, such as higher margins, special deals, premiums, cooperative advertising, allowances, display allowances, and sales contests. In the other hand, they can apply negative sanctions, such as threatening to reduce margins, slow down the delivery, or terminate the relationship. Most companies try to apply Partner Relationship Management (PRM) for a long-term with its distributors. The companies obviously communicate their needs and ask them from its distributors in the way of market coverage, inventory levels, marketing development, account solicitation, technical advice and services, and marketing information.
Evaluating Channel Members Company must periodically do the evaluation of channel members’ performance against such standards as: * Sales quota attainment * Average inventory levels * Customer delivery time * Treatment of damage and lost goods * Cooperation in promotional and training program * Customer service As a result, company sometime finds out that there is particular channel member was overpaid for what they are actually doing. For example, one manufacturer compensating a distributor for holding inventories found out that the inventories were actually held in a public warehouse as its own expenses.
Another case is, by doing evaluation, company may find underperformers. For this case of channel member underperformance, they need to be counseled, retrained, motivated, or terminated. Discuss the nature and importance of physical distribution and integrated logistics management. Answer: Physical Distribution Physical distribution or Marketing Logistics involves planning, implementing, and controlling the physical flow of goods, services, and related information from points of origin (producer) to points of consumptions (consumer) in order to meet consumer requirements at a profit.
Figure 7 Nature of Physical Distribution In Figure 7, the major functions of physical distribution are warehousing, transportation, inventory management, and integrated logistics management. * Warehousing is the storage function that overcomes differences in need quantities and timing, ensuring that the products are available when customers are ready to buy them. * Transportation affects the pricing of the product, delivery performance, and condition of the goods when they are arrive. Transportation can carrier to reach its destination can be by truck , rail, pipeline, water, air, or internet. Inventory management balances carrying too little and too much inventory. * Integrated logistics management cover cross-functional teamwork to achieve the goal of integrated supply chain management. Physical distribution involves the entire supply chain management system. Supply chain management system is the process of managing upstream and downstream value-added flows of materials, final goods, and related information among suppliers, the company, resellers, and final consumers In terms of its distribution, physical distribution differs into three types which are: * Outbound distribution
Distribution that moves products from the factory to resellers and consumers. * Inbound distribution Distribution that moves products and materials from suppliers to the factory. * Reverse distribution Distribution that moves broken, unwanted, or excess products returned by consumers or resellers. The distribution or marketing logistics are very important to be emphasized in a single company. Here are the importances of having physical distribution: * To offer company a competitive advantage * To yield cost savings The greater product variety requires improved logistics * Improvements in distribution efficiency are possible due to information technology Integrated Logistics Management Integrated logistics management discuss about the logistics concept that emphasizes teamwork, both inside the company and among all the distribution channel organization, to maximize the performance of the entire distribution system. The nature of integrated logistics management helps company to understand the marketing logistics role. It involves as follows: * Cross-functional teamwork inside the company is critical.
This refers to the inter-relationship of different departments within the company to achieve the goals of integrated supply chain management. * Building logistics partnership through shared project. A successful logistics partnership requires open communication, mutual commitment to the partnership, fairness and flexibility. * Outsourcing of logistics firms to third-party firms is becoming more common. The good criteria of third-party logistics is the company who can provide logistics functions to be more efficiently at lower cost and who are more knowledgeable of complex logistics.
In benefits, the company can be focus on its core business.
References Chapter 12: Distribution Channels and Logistics Management. (n. d. ). Retrieved from http://gmx. xmu. edu. cn/ews/business/pmarketing/chapter12. htm#distribution Identifying Major Alternatives. (n. d. ). Retrieved from Marketing Notes: http://www. scribd. com/doc/55342177/27/Identifying-major-alternatives Kotler, & Keller. (2012). Marketing Management. Pearson. Marketing Channel and Supply Chain Management. Chapter 13. (n. d. ). Retrieved from rainerapple. cn: