1. Distribution management
Marketing channels of distribution

2. What is a marketing channel?
A set of interdependent organizations that help make a product or service available for use or consumption by the consumer or business user (Kotler & Armstrong,2009)

3. Why do producers need marketing channel?
Marketing channels create greater efficiency in making goods available to target markets.
Through their contacts, experience , specialization, and scale of operations , channels offer the producer more than it can achieve on its own.
Marketing channels transform products into units required by consumers (break bulk)

4. What are the other key functions performed by marketing channels?
Information gathering
Promotion
Contact
Matching
Negotiation
Physical distribution
Financing
Risk taking

5. How do marketing channels add customer value?
Marketing channels add customer value by bridging the major time, place and possession gaps that separate goods and services from those who use them.
Marketing channels ensure customers receive and take possession(ownership) of goods and services at the right time, at the right place and in the right quantities.

6. Marketing Channels & Marketing Management Strategy
Marketing strategy is the blending of four controllable marketing variables (i.e. price, product, promotion & place) to meet the needs of the target market.
The place component of the marketing mix represents distribution.
Marketing Management deals with the development & operation of marketing channels in such a way as to support & enhance the other variables of the marketing mix.

7. Growing importance of marketing channels
Explosion of IT& E-commerce has opened new ways for connecting with customers .
Greater difficulty in gaining a sustainable competitive advantage through price, product & promotion
Growing power of distributors, especially large retailers .
High distribution costs.

8. Major channel participants
Producers & manufacturers- firms that are involved in extracting, growing or making products.
Intermediaries/ middlemen- independent businesses that assist producers , manufacturers & final users in the performance of distribution functions.
Final users – consumers and industries
Facilitating agencies –business firms that assist in the performance of distribution tasks other than buying, selling and transferring of title. E.g. insurance brokers.

9. Manufacturers & producers
Include firms involved in agriculture, forestry, fishing, mining, construction, manufacturing , and some service industries.
The firms vary enormously in terms of diversity of goods and services produced and the size of firms.
All exist to provide products that satisfy the needs of customers.

10. Intermediaries Operate basically at two levels: wholesale and Retail
Wholesalers – businesses that are engaged in selling goods for resale or business use. Include agents or brokers involved in either buying goods for or selling them to customers
Three major types of wholesalers:
merchant wholesalers,
Agents , brokers, and commission merchants
Manufacturer’s sales branches & offices

11. Merchant wholesalers
Firms engaged primarily in buying, taking title to, usually storing , and physically handling products in relatively large quantities and then reselling the products in smaller quantities to retailers, to industrial , commercial , or institutional concerns ; and to other wholesalers.
They go by different names e.g. wholesaler, jobber, distributor, industrial distributor, supply house, assembler, importer, exporter etc

12. Distribution tasks performed by Merchant Wholesalers
Distribution tasks performed on behalf of manufactures:
Providing market coverage
Making sales contacts
Holding inventory
Processing orders
Gathering market information
Offering customer support

13. Distribution tasks performed by Merchant Wholesalers
Distribution tasks performed on behalf of customers:
Ensure product availability
Provide customer service
Extend credit & financial assistance
Offering assortment convenience
Breaking bulk
Help customers with advice & technical support

14. Agents, brokers, and commission merchants
Independent middlemen who do not, for all or most of their business, take title to the goods in which they deal, but are actively involved in buying & selling negotiations while acting on behalf of their clients.
Usually compensated in the form of commissions on sales or purchases.
Examples include manufacturer’s agents, commission merchants, brokers, selling agents, and import/export agents.

15. Distribution tasks performed by agent* wholesalers
Market coverage-avail products to a wide base of customers who are geographically dispersed.
Sales contact or sales reps- act as manufacturer’s outside sales force.
Usually represent several manufacturers at the same time & operate in a wide range of product & service categories

16. Distribution tasks performed by brokers*
Described as a go-between(somebody who brings together buyers & sellers to carry out transactions), the primary function of brokers is to provide market information.
In practice however brokers perform many if not most of the distribution functions performed by manufacturers’ agents.

17. Distribution tasks performed by commission*merchants
Physically hold inventories(but not taking title)
Provide market coverage
Sales contact
Breaking bulk
Credit
Order processing
All these tasks are performed on behalf of producers or manufacturers.

18. Manufacturer’s sales branches & offices
Owned & run by manufacturers but are physically separated from manufacturer’s plants
Primarily used to distribute manufacturer’s own products at wholesale.

19. Retail Intermediaries
Business firms that engage in selling merchandise for personal or household consumption & rendering service incidental to the sale of such goods.
Range from kiost (Semausu) to giant mass merchandise chains such as Wal-Mart, Spar, Pick n Pay, Choppies etc.
Dominated by small retail outlets in developing countries .

20. Growing power of retail
The power and influence of retailers have been growing in recent years. Due to
Their increase in size and buying power.
Application of advanced technologies
Use of modern marketing strategies.

21. Distribution tasks performed by retailers
Customer contact
Personal selling, advertising & display
Break bulk
Storage
Risk taking
Information gathering & dissemination

22. Facilitating Agencies
Business firms that assist in the performance of distribution tasks other than buying, selling and transferring title . Include:
Transportation agencies
Storage agencies
Order processing agencies
Advertising agencies
Financial agencies
Insurance agencies
Marketing research firms

23. Review Questions
Describe the distribution tasks that wholesalers and Retailers are especially suited for performing.
What are the main reasons for the growth of retail power in the marketing channel? Discuss the implications of this for channel management.
Why do you suppose the average cost of performing many distribution tasks are lower for intermediaries than for producers & manufacturers.

24. Consumer Channel structure
M to C (two levels)
M to R to C (three levels)
M to W to R to C (four levels)
M to A to W to R to C (five levels)
The channel structure reflects how the producers has allocated distribution tasks.
Multi channel structure –means that the producer has chosen to reach its customers through more than one channel.

25. Channel structure for business markets
M to BC (Direct sales using sales reps, direct marketing, direct mail, telemarketing
M to BD to BC (Business distributors include Brokers, retail outlets, dealers)
M to MR to BD to BC

26. Marketing channels for services
Producer to User (Consumer or Business or Institution or Government)
Producer to Agents or brokers to user
Producer to services retailers to user

27. Review questions
Identify & explain the major channels open to a producer of consumer/industrial products.
Discuss the concept of specialization and division of labor as it applies to marketing channels.
Discuss the relationship between marketing channel strategy and marketing mix.
Why have marketing channels enjoyed increased attention in marketing as a strategic area for competing in the market?
Why is it difficult to develop a truly optimal channel structure?

28. Distribution Structure Decisions
Intensity –Intensive, selective or exclusive distributions
Competitive strategy- cost leader, differentiation or focus strategy
Multichannel Distribution Systems
Vertical marketing systems (VMS)– corporate , contractual, alliance & administered form of VMS.
Franchising

29. Distribution Intensity
Intensity- the number of intermediaries at each level of the marketing channel.
Intensive (Saturation) distribution -producer uses as many outlets as possible at each level of the channel.
Selective distribution- not all possible intermediaries at a particular level are used but only a select few.
Exclusive distribution- Only one or very limited number of outlets are given exclusive rights to distribute the product.

30. Competitive strategy
Cost leadership- producing and distribution products at the lowest cost per unit to target customer segments that are price sensitive
Differentiation strategy – emphasizing uniqueness in the way that the product is distribute targeting customers with unique needs .
Focus strategy- concentrating on a particular market segment (niche) in an industry

31. Multichannel Distribution Systems
A single firm sets up two or more marketing channels to reach ore or more customer segments.
Offers opportunity to expand sales & market coverage and to tailor products to the specifics needs of diverse customer segments.
However, it is difficult to maintain control , and can generate conflict as more channels compete for customers and sales .

32. Vertical Marketing Systems (VMS)
VMS –a unified system of producers, wholesalers and retailers under the ownership of one channel member .
Corporate - production and distribution facilities are owned by the same company.
Contractual –independent channel members are linked by formal contractual agreement. E.g. franchise
Administered – one dominant channel members assumes leadership of the chain.

33. Franchise
An arrangement between the franchisor & franchisee that allows the latter to use the trademark (or name) and system of business of the former. The most common form of contractual VMS. Three types:
manufacturer-sponsored retail franchise system
Manufacturer-sponsored wholesale franchise system.
Service-firm-sponsored retailer franchise system

34. Review Questions
What is a franchise? Discuss the different types of franchise organizations.
What is intensive distribution? Discus the implications of decisions about distribution intensity on channel and marketing strategy.
Discuss the advantages and disadvantages of selective and Exclusive distribution.
Under what firm and market conditions would you choose intensive, selective or exclusive distribution and why?

35. Marketing Channel Environment
Marketing channels operate in a continuously changing environment. Thus channel managers need to be sensitive to the environment in order to develop effective channel strategies. Here we consider the following elements of marketing environment:
Economic environment
Competitive environment
Socio-cultural environment
Technological environment
Legal Environment

36. The economic environment
Economic factors have a pervasive influence on the behavior of channel members. These include:
Recession
Inflation
Interest rates
Currency
Budget deficit

37. The competitive Environment
Marketing channel managers need to pay close attention to existing and emerging competitors both locally and globally. Channel managers must consider also the major types of competition that can affect channel strategy:
Horizontal competition
Intertype competition
Vertical competition
Channel system competition

38. The socio-cultural Environment
The socio-cultural environment pervades al aspects of society including marketing channels. The major socio cultural variables that can influence channel strategy include:
Age patterns of the population
Ethnic mix of the population
Education trends
Family or household structure
Changing role of women

39. The technological Environment
Technology is the most rapidly changing aspect of the marketing channel environment. Examples include:
The internet
Scanners, computerized inventory management & portable computers
Electronic Data Interchange (EDI)
3-D modeling
Mobile Robot

40. The legal Environment
The legal environment include the set of laws that impact on marketing channels . These laws relate to the following issues amongst others:
Antitrust (Anti-competition)
Exclusive dealing
Dual (multi-channel ) distribution
Full-line forcing
Price discrimination

41. Legal issues cont… Price maintenance Refusal to deal
Resale restrictions
Tying agreements
Vertical integration

42. Physical Distribution (Logistics)
Physical distribution (Logistics):-the planning , implementing and controlling the physical flows of materials and final goods from points of origin to points of use to meet customer’s needs at a profit. (Kotler). Include flow of information & money
Supply chain management(demand chain planning) –logistical systems that emphasize close cooperation & comprehensive inter-organizational mgt to integrate the logistical operations of different firms in the channel.

43. Rationale of logistics
The movement of the right amount of the right products to the right place at the right time.
In an increasingly diverse market (in terms of consumer segment) spread over large geographic areas, getting the right amount of products to the right place at the right time can be very complex and expensive.
Specialized firms which perform most ,if not all, of the logical tasks that would normally be performed by a channel member are needed to deal with this problem.

44. Objective
To reduce the total cost associated with logistics management.
Inventory related costs
Transportation costs
Order processing & administration costs
Increase customer service
Order lead time
Dependability
Convenience
Inventory availability

45. Components of logistics
Transportation
Materials Handling
Order processing
Inventory control
Warehousing
Packaging

46. Transportation
The overriding issue is choosing the optimum mode of transportation to meet customer service demands .
Factors to consider include:
Capability
Costs
Specific transportation services offered
Reliability of carriers
The modes of transport available
Accessibility
Time

47. Modes of transportation
Rail transport
Road transport
Air transport
Pipelines
Water transport

48. Materials handling
Range of activities and equipment involved in the placement and movement of products in and out of storage areas.
How to minimize the distance products are moved within the warehouse
What kind of mechanical equipment should be used
How to make the best of labor when receiving, handling & shipping products.

49. Materials handling cont…
An effective materials handling moves inventory into, within and out of the warehouse quickly with minimum handling.
Manual materials handling system increases potential for damage.
Automated materials handling is more efficient. Why?

50. Inventory Management
Decisions designed to maintain optimal level of stock or inventory.
Keeping too little stock :
Risk not having products when needed by customers
Gives rise to costly emergency shipments or production
Keeping too much stock:
Increases stock-carrying costs.
Increases stock obsolescence

51. Determinants of reorder point
Order lead time- the time between the order being placed and the goods being received by the customer.
Usage rate – the rate at which inventory is being used or sold during a specific period.
Safety stock- the stock kept in order to prevent stock-outs.
Reorder point=(order lead time X usage rate) +safety stock

52. Reorder point -example
If order lead time is four days, the usage rate is 100 units per day and the safety stock is 200 units, what is the reorder point?
Reorder point = (4x100) +200
=600 units.

53. Economic Order Quantity (EOQ)
The most cost effective order quantity.
Determined by inventory carrying costs and order processing costs.
Inventory carrying costs include warehousing costs, financing costs, interest, insurance costs and depreciation costs.
Order processing costs include order placing costs, follow-ups, receipt of order, quality control, and payment processing.

54. EOQ –example in the textbook
Suppose we have the following:
Annual demand = units
Ordering cost= P200 per order
Unit cost = P25
Inventory carrying cost = 20% of annual Inventory investment.
EOQ =√ (2* *200)/25*0.2
= 4000 units.
The optimal number of order per year = /4000=50
What are the limitations of EOQ model?

55. Warehousing Holding of stock until it is ready to be sold .
Location of facilities
Number of warehousing units
The design of the units
Size of the units
Ownership

56. Types of warehouses Private warehouses- privately owned
Public warehouse – government owned
Distribution centers

57. Packaging The cost of packaging of products are related to:
Transport costs-
Materials handling costs- labor costs
Order processing costs – admin costs, stationery costs etc
Inventory carrying costs e.g. damage

58. Developing the marketing channel strategy
how the firm expects to achieve its distribution objectives for its target market (s)
concerned with the place aspect of marketing strategy.
narrower than the marketing strategy which includes the promotion, pricing and product strategies.

59. The major channel strategy decisions
The role of distribution in the firm’s overall objectives and strategies
The importance attached to distribution relative to other elements of the marketing mix
The way channel members should be selected, managed and evaluated.

60. Designing the marketing channel
Channel design.
Decisions involved in either developing a new marketing channel or modifying existing channel (s)

61. Steps in channel design
Recognize the need for a channel design decision.
Setting & coordinating distribution objectives
Specifying the distribution tasks
Developing possible alternative channel structures
Evaluating the variables affecting channel structure
Choosing the “best” channel structure
Selecting the channel members

62. Recognize the need for a channel design decision
Situations that can indicate a need for a channel design decision include:
Developing a new product or product line
Aiming an existing product at a new target market
Making a major change in the other components of the marketing mix e.g. new pricing policy
Establishing a new firm
Opening up new geographic marketing areas(territories)
Facing a major environmental change etc

63. Setting & coordinating distribution objectives
Three key task are
Study the objectives & strategies in the other marketing mix areas and other relevant objectives & strategies of the firm.
Set distribution objectives & state them explicitly
Check to see if the distribution objectives set are congruent with marketing and other general objectives & strategies of the firm.

64. Specifying the distribution tasks
Examples of distribution tasks include
Gathering information on target market shopping patterns
Promoting product availability in the target market
Compiling information about product features
Maintaining inventory storage to assure timely availability
Transport the product
Arrange for credit provisions
Processing & filling specific customer orders etc

65. Developing possible alternative channel structures
Number of channel levels
Most common examples include two, three or four levels
Intensity at the various levels
The number of intermediaries at each level
Types of intermediaries at each level
Examples include wholesalers, retailers,

66. Evaluating the variables affecting channel structure
Market variables
Market geography, size, density & behavior.
Product variables
Bulk & weight, perishability, Unit value etc
Company variables
Size, financial capacity, expertise, objectives etc
Intermediary variables
Availability, cost, services etc
Environmental variables
Behavioral variables

67. Selecting channel members
Three steps:
Find prospective channel members
Apply selection criteria to determine suitability of channel members.
Secure channel member

68. Sources of prospective channel members
Trade shows
Customers
Fields sales people
Trade sources
Advertising
others

69. Selection criteria Years in business (experience) Other lines carried
Growth (sales ) & profit record
Management ability
Size
Cooperativeness
Reputation
Market coverage
Attitude

70. Managing the marketing channel
Motivation
Evaluation
Product/ pricing/promotion issues in channel mgt.

71. Motivating Channel Members
Rationale- not only does the company sell through the intermediaries but it also sells to and with them.
Three basic facets in channel member motivation are:
Finding out the needs & problems of channel members
Offering support to the channel members that is consistent with their needs and problems.
Providing leadership

72. Finding out the needs & problems of channel members
Main approaches:
Research studies of channel members conducted by the manufacturer.
Research studies of channel members conducted by third parties
Marketing channel audit conducted by the manufacturer.
Distributor Advisory Councils established by the manufacturer.

73. Offering support to the channel members
Three categories:
Cooperative arrangements
Partnerships or Strategic alliances
Distribution programming

74. Cooperative Arrangements
Cooperative arrangements between the manufacturer & channel members at the wholesale & retail levels are many & varied.
Rationale – to provide incentives for getting extra effort from channel members in the promotion of the manufacturer’s products.

75. Common examples of cooperative arrangements
Cooperative advertising
Payments for window display space & installation costs.
Store or distributor name mention in manufacturer’s advertising
Payments for interior designs including shelf-extender, aisle display etc
Payments for store fixtures

76. Success factors in cooperative arrangements
Must address the specific needs and problems of the channel member
Must be simple and straight forward with no complex rules and procedures to follow.
Must convey a clear sense of mutual benefits to both the manufacturer and the distributors.

77. Partnerships/Strategic alliances
A continuing and mutually supportive relationship between the manufacturer and its channel members in an effort to provide a highly motivated team, network or alliance of channel partners.
Rationale –replaces the traditional “us-against-them””mentality with the “us” in channel member relationships.

78. Basic principles for building successful channel partnerships
Must be mutually beneficial .
Must be based on mutual respect
Must be achievable –promise only what you can deliver.
Must seek to achieve specific objectives.
Must seek to build Long lasting relationships
Each party must keep open all lines of communication
All key decisions must be made together.

79. Distribution programming
A comprehensive set of policies for the promotion of a product through the channel.
Goes beyond the typical partnership or strategic alliance.
Deals with virtually all aspects of the channel relationship.
A comprehensive approach for achieving a highly motivated channel team .

80. Distribution programming-benefits
A professionally planned, developed and managed program
A joint effort between manufacturer and the channel members , incorporating the needs of both.
Offers the advantages of a vertically integrated channel while at the same time allowing channel members to maintain their status as independent business firms.

81. Examples of Distribution Programming
BMW–developed a distribution program for its “Certified Pre-owned” cars with its independent auto dealers to meet the growing challenge of selling the large fleet of used cars on dealers’ slots.
Included in the program are BMW’s $20M annual expenditure on TV ads, special financing arrangements, meticulous mechanical inspection of vehicles, special warranty provisions and virtually all every other detail.
McDonald’s in fast food -specifies exactly how a McDonald’s restaurant should be designed and precisely what it can and cannot have in it.

82. Provide leadership
Provide leadership on a continuing basis bearing in mind the following challenges which characterize the inter-organizational setting of the marketing channel:
The looseness of the organization of many channel systems.
A tendency by channel members to avoid being directed.
Lack of single ownership
No clear demarcation of superior-subordinate relationships .

83. Evaluating Channel Member Performance
Factors determining the scope & frequency of evaluation:
Degree of control
Importance of channel members
Nature of the product
Number of channel members

84. Channel member performance audit
Three phases:
Develop performance measurement criteria.
Evaluate channel members against criteria
Take corrective actions in needed
Common criteria:
Sales performance
Selling capabilities
Attitudes of channel members
Competition against other intermediaries/from other product lines carried by the channel member.
General growth prospects

85. Measure performance against criteria
Three approaches:
Separate performance evaluations on one or more criteria
Multiple criteria informally to evaluate overall performance qualitatively
Multiple criteria combined formally to arrive at a quantitative index of overall performance

86. Take correction actions if need be.

87. Conflict in the marketing Channel
A situation where a channel member(s) perceives another member(s) as a threat.
inherent & pervasive in any channel
Channel conflict builds over time
Channel conflict can lead to open hostility.
Channel conflict can be resolved
Can have both negative and positive effect on the channel

88. Causes of channel conflict
Oversaturation
Stocking levels
Competition
Sales quotas
Overselling
Pricing issues
Scarce resources

89. Problem solving/ joint goal setting Persuasion Negotiation
Mediation & arbitration
Judicial appeal
Politics
Coalitions
Lobbying

90. Power in the Marketing Channel
The capacity of a particular channel member to control or influence the behavior of another channel member (s)
Five forms of power:
Reward power
Coercive power
Legitimate power
Referent power
Expert power

91. How to use power to influence channel member behavior
Promise - reward power
Threaten – Coercive
Legalistic – Legitimate
Request –Referent, reward, coercive
Information exchange –expert, reward
Recommendation – expert, reward

92. Electronic Marketing Channel (EMC)
EMC is the use of the internet to make products and services available to the target market .
EMC has the capacity to link producers and final consumers directly
Key question is whether EMC provide a substitute for convention channel structure involving physical stores and shopping malls?

93. Developments & trends in EMC
Online shopping developed from nothing in the mid 1990s to a $36billion industry in 2002.
Online shopping has become a routine channel choice for a wide range of products .
The number of consumers using online shopping has increased substantially in recent years.
Although consumers of all ages shop online, the highest percentages are in the range

94. Advantages of EMC Global scope and reach
Convenience/rapid transaction processing
Information processing efficiency & flexibility
Lower sales & distribution costs
Data based management and relationship capabilities.

95. Disadvantages
Lack of contact with actual products and delayed possession
Security concerns of customers
Non-purchase motives for shopping no addressed
Clutter, confusion, and cumbersomeness of the internet
Fulfillment logistics not at internet speed or efficiency.

96. International channel perspectives
International channel environment
Behavioral processes in international channels
Designing international channels
Motivating international channel members

97. International channel environment
Economic factors
Competitive environment
Socio-cultural environment
Legal/political environment

98. Behavioral processes Same issues as in domestic channels.
Cultural awareness needed in managing conflict and using power.

99. Designing international channels