9.1 Purpose of Distribution Channels
Just as with the other elements of the firm’s marketing program, distribution activities are undertaken to facilitate the exchange between marketers and consumers. There are two basic functions performed between the manufacturer and the end user. The first, called the exchange function, involves sales of the product to the various members of the channel of distribution. The second, the physical distribution function, moves products through the exchange channel, simultaneously with title and ownership. Decisions concerning both of these sets of activities are made in conjunction with the firm’s overall marketing plan and are designed so that the firm can best serve its customers in the marketplace. In actuality, without a channel of distribution the exchange process would be far more difficult and ineffective. The key role that distribution plays is satisfying a firm’s customer and achieving a profit for the firm. From a distribution perspective, customer satisfaction involves maximizing time and place value to: the organization’s suppliers, intermediate customers, and final customers. In short, organizations attempt to get their products to their customers in the most effective ways. Further, as households find their needs satisfied by an increased quantity and variety of goods, the mechanism of exchange—i.e. the channel—increases in importance.
Terminology
Marketing Channels vs. Distribution Channels: Channels refers to all the organizations from the producer of the offering to the final seller to the end user. These channels are officially called marketing channels. However, since many non-marketers think marketing is just about promotion, some people hear the term ‘marketing channels’ and associate it with methods of promotion. While that is not accurate, it is a common misconception. Distribution channels are marketing channels. Using the term distribution channel helps to avoid the confusion just discussed.
Supply Chain vs. Distribution Channels: In the past few decades, organizations have begun taking a more holistic look at their marketing channels. Instead of looking at only the firms that sell and promote their products, they have begun looking at all the organizations that figure into any part of the process of producing, promoting, and delivering an offering to its user. All these organizations are considered part of the offering’s supply chain. Firms are constantly monitoring their supply chains and tinkering with them so they’re as efficient as possible. This process is called supply chain management. Supply chain management is challenging. If done well, it’s practically an art.
Intermediaries vs Channel Members or Partners: Channel members (or partners) are all the organizations involved in getting an offering to the end user starting with the producer through the final seller. Intermediaries are channel partners between the producer and the end user. In other words, the producer is not included in the term ‘intermediary’.
Channel Benefits / Functions
A properly managed channel provides many benefits to the end user and the other channel partners though it may not always be obvious. The most noticeable functions are:
Sorting and Regrouping Products
Many businesses don’t want to receive huge quantities of a product. One of the functions of wholesalers and distributors is to break down large quantities of products into smaller units and provide an assortment of different products to businesses. (This will be discussed in more detail later in this section)
For example, cranberry farmers have large crops to sell. You don’t want to buy large amounts of cranberries, make your own juice or cranberry sauce, or dry them into craisins for salads. So the farmers sell their produce to a co-op, which sorts the berries by size; large ones become craisins while others are destined to become either juice or sauce, depending on their liquid content. Those are then sold to the juice and sauce producers.
Storing and Managing Inventory
If a channel member has run out of a product when a customer wants to buy it, the result is often a lost sale. That’s why most channel members stock, or “carry,” reserve inventory. However, storing products is not free. Warehouses cost money to build or rent and heat and cool; employees have to be paid to stock shelves, pick products, ship them, and so forth. Some companies, including Walmart, put their suppliers in charge of their inventory. The suppliers have access to Walmart’s inventory levels and ship products when and where the retailer’s stores need them.
Storing and managing inventory is not just a function provided for retailers, though. Storage also involves storing commodities like grain prior to processing. Gigantic grain elevators store corn, wheat, and other grains until processors, like Oroweat, need them. You can buy fresh bread in your grocer every day because the wheat was stored first at a grain elevator until it was needed.
Distributing Products
Physical goods that travel within a channel need to be moved from one member to another and sometimes back again. Some large wholesalers, distributors, and retailers own their own fleets of trucks for this purpose. In other cases, they hire third-party transportation providers—trucking companies, railroads, and so forth—to move their products.
Walmart doesn’t just own its own warehouses. It also owns its own fleet of semi-trucks.
Walmart – Walmart’s Hybrid Assist Trucks – CC BY 2.0.
Being able to track merchandise like you can track a FedEx package is extremely important to channel partners. They want to know where their products are at all times and what shape they are in. Losing inventory or having it damaged or spoiled can wreak havoc on a company’s profits. So can not getting products on time or being able to get them at all when your competitors can.
Assume Ownership Risk and Extend Credit
If products are damaged during transit, one of the first questions asked is who owned the product at the time. In other words, who suffers the loss? Generally, no one channel member assumes all of the ownership risk in a channel. Instead, it is distributed among channel members depending on the contracts they have with one another and their free on board provisions. A free on board (FOB) provision designates who is responsible for what shipping costs and who owns the title to the goods and when. However, the type of product, the demand for it, marketing conditions, and the clout of the various organizations in its marketing channel can affect the contract terms channel members are willing to agree to. Some companies try to wait as long as possible to take ownership of products so they don’t have to store them. During the economic downturn, many channel members tried to hold as little inventory as possible for fear it would go unsold or become obsolete (Jorgensen, 2009).
Share Marketing and Other Information
Each of the channel members has information about the demand for products, trends, inventory levels, and what the competition is doing. The information is valuable and can be doubly valuable if channel partners trust one another and share it. More information can help each firm in the marketing channel perform its functions better and overcome competitive obstacles (Grazier, et. al., 2009).
That said, confidentiality is a huge issue among supply chain partners because they share so much information with one another, such as sales and inventory data. For example, a salesperson who sells Tide laundry detergent for Procter & Gamble will have a good idea of how many units of Tide Walmart and Target are selling. However, it would be unethical for the salesperson to share Walmart’s numbers with Target or Target’s numbers with Walmart. Many business buyers require their channel partners to sign nondisclosure agreements or make the agreements part of purchasing contracts. A nondisclosure agreement (NDA) is a contract that specifies what information is proprietary, or owned by the partner, and how, if at all, the partner can use that information.
Results of Providing These Functions
Alleviating Discrepancies – Ensuring that channel partners, and ultimately the end user, have the quantity and assortment they desire, is paramount to the channel, as discussed earlier in this section. Thus, channel partners will address these areas by accumulating from multiple producers to have the larger quantity desired by the buyer, or they can provide bulk breaking services by taking the large quantity produced and breaking it into smaller amounts as desired by the buyer.
In addition to addressing the need for quantity adjustments, channel partners can aid in providing the desired assortment. They can sort through a range of product offerings to find the ones most desirous to the target market and only offer those products. In addition, the channel partner can provide assorting by getting products from multiple producers so there are more choices available to the buyer.
Providing Cost Efficiencies – If the functions discussed in this section are performed effectively, the result can be a decrease in the price charged to the end user. This is counter-intuitive. We assume since more organizations are involved in the process, that will result in higher prices. In actuality, because of the efficiencies created through specialization of labor, costs are contained thus allowing for lower prices.
You Try It!
References
Frazier, G. L., Elliot Maltz, Kersi D. Antia, and Aric Rindfleisch, “Distributor Sharing of Strategic Information with Suppliers,” Journal of Marketing, July 1, 2009, http://www.atypon-link.com/AMA/doi/abs/10.1509/jmkg.73.4.31?cookieSet=1&journalCode=jmkg (accessed December 12, 2009).
Jorgensen, B., “Distributors’ Services Help Keep Customers Afloat,” EDN 54, no. 8 (April 23, 2009): 60.
