Agribusiness Management and Trade

Lesson 14. Distribution Decisions

14.2  CONCEPT OF DISTRIBUTION CHANNELS    

Distribution channel also called the marketing channel consists of a set of people and firms involved in the transfer of title to a product as the product moves from producer/manufacturer to consumer. Thus, a distribution channel is primarily concerned with the movement of goods from the point of production to the point of consumption, which involves a variety of functions. The main participants in the distribution system are: (1) the manufacturers, (2) the intermediaries, (3) the facilitating agencies, and (4) the consumers. Manufacturers produce the goods. This is the starting point in the distribution system. The second category of participants i.e., intermediaries, are involved in direct negotiation between buyers and sellers whether or not they take title to goods. These intermediaries locate the manufacturers who produce various products, identify the needs of the consumers and distribute the goods. In the process, they perform various functions like buying, selling, assembling, standardization and grading, packing and packaging, risk bearing, etc. Facilitating agencies are the independent business organisations other than intermediaries. These agencies facilitate the smooth distribution of goods from producers, through intermediaries, to consumers. The major facilitating agencies are banking institutions, insurance companies, transportation agencies and warehousing companies. The fourth category of participants in the distribution system i.e., consumers, are the final destination for goods in the distribution system.

A Channel of distribution is mainly concerned with second participant i.e., the intermediaries. The term 'Channel of Distribution' refers to the route taken by goods as they flow from the producer to the consumer. This flow of goods may mean its physical distribution and/or the transfer of title (ownership). Channels of distribution are mainly concerned with the transfer of title to a product which may be effected directly or through a chain of intermediaries. You know most producers do not sell goods directly to the consumers. They make use of a variety of intermediaries known as middlemen. These middlemen who take title to goods or assist in transferring the title to goods as they move from the producer to the consumer is called the channel of distribution. Thus, distribution channel is a network of institutions that perform a variety of interrelated and coordinated functions in the movement of goods from producers to consumers.

A distribution channel creates place, time, form and possession utilities to the products by prompt and efficient performance of the function of physical distribution. A distribution channel helps in the movement of goods from producer to consumer and, thus, creates place utility to the product. Distributional channel makes it possible for the consumers to get the product whenever they want and thus creates the time utility. Similarly, a distribution channel makes it possible for the consumers to get the products in a convenient shape, unit size, style and package. Thus, it creates convenience value. Distribution channel also makes it possible for the consumer to obtain goods at a price he is willing to pay and under conditions which bring him satisfaction and pride of ownership. Thus, it creates possession utility.

14.3 FUNCTIONS OF DISTRIBUTION CHANNELS

Broadly, distribution channels perform the transactional functions, logistical functions and facilitating functions. In specific terms, distribution channel perform the following functions:

• Facilitate selling by being physically close to customers

• Provide distributional efficiency by bridging the manufacturer with the user efficiently and economically

• Break the bulk and cater to the small requirements of buyers

• Assemble products into assortments to meet buyer's needs;

• Look after a part of physical distribution1 marketing logistics

• Share the financial burden of the principal; provide deposits; finance the stocks till they are sold to the ultimate consumers; extend credit to the retailers/consumers.

• Provide salesmanship and after-sale service

• Assist in sales promotion

• Assist in merchandising

• Assist in introducing new products

• Assist in implementing the price mechanism: assist in price negotiations

• Assist in developing sales forecasts I sales plans for the territory

• Provide market intelligence and feedback

• Maintain records

• The searching out of buyers and sellers (contacting).

• Matching goods to the requirements of market. (merchandising).

• Offering products in the form of assortments or packages of items useable or acceptable by the consumers.

• Persuading and influencing the prospective buyers to favour a certain product and its maker ( personal selling/sales promotion)

• Implementing pricing strategies in such a manner that will be acceptable to the buyers and ensure effective distribution.

• Looking after all physical distribution function.

• Participating actively in the creation and establishment of the market for a new product.

• Offering pre and after sales services to the customer

• Transferring new technology to the users along with the supply of products and playing the role of change agents

• Providing feedback information, marketing intelligence and sales forecasting services for their regions to their suppliers

• Offering credit to retailers and consumers

• Risk bearing with reference to stock holding / transport.

14.4 DISTRIBUTION CHANNELS USED

The marketing channels for consumer and industrial products is given in the figure

 

Source: Philip Kotler, Gary Armstrong (2009)

Channels for Consumer Products

These channels are used for consumer durable goods which are directly consumed by the household. For example, TV, car, food items etc. Following levels of channel are used for this purpose.

Producer ---consumer: The shortest, simplest distribution channel for consumer goods involves no middlemen. The producer may sell door to door or by mail.

Producer-retailer-consumer: Many large retailers buy directly from manufacturers and agricultural producers. To the chagrin of various wholesaling middlemen, Wal-Mart has increased its direct dealings with producers.

Producer- wholesaler-retailer-consumer: If there is a traditional channel for consumer goods, this is it. Small retailers and manufacturers find these channels the only economically feasible choice.

Producer-agent-retailer-consumer: Instead of using wholesalers, many producers prefer to use agent middlemen to reach the retail market, especially large scale retailers

Producer -agent-wholesaler-retailer-consumer: To reach small retailers producers often use agent middlemen, who in turn call on wholesalers that sell to large retail chains and/or small retail stores.

Channels for Industrial Products

A variety of channels are available to reach organizations that incorporate the products into their manufacturing process or use them in their operations. In the distribution of business goods, the terms industrial distributor and merchant wholesaler are synonymous. The four common channels for business goods are:

Producer-user: The direct channel accounts for a greater dollar volume of business products than any other distribution structure. Manufacturers of large installations, such as airplanes generator, and heating plants usually sell directly to users.

Producer-industrial distributor-user: Producers of operating supplies and small accessory equipment frequently use industrial distributors to reach their markets. Manufacturers of building materials and air-conditioning equipment are two examples of firms that make heavy use of industrial distributors.

Producer-agent –user: Firms without their own sales department find this a desirable channel. Also a company that wants to introduce a new product or enter a new market may prefer to use agents rather than its own sales force.

Producer- agents -industrial distributor - user: This channel is similar to the preceding one. It is used when, for some reason, it is not feasible to sell through agents directly to the business user. The unit sale may be too small for the direct selling. Or decentralized inventory may be required to supply users rapidly, in which case the storage services of an industrial distributor may be required.

14.5 FACTORS INFLUENCING THE CHOICE OF CHANNEL

As seen in this chapter, there are different channels, some are short, while some are long. Which one to use, depends on different factors like type of market, type of product, middlemen and company considerations. These factors are discussed below;

Product considerations:

• Perishability: Perishable products like milk, eggs, etc., are supplied either directly or through the short channels.

• Bulkiness: In the case of heavy and bulky products (e.g., cement, steel, heavy machinery, etc.) where distribution and handling costs are more, short channels are preferred.

• Technical nature of the product: Sophisticated electrical and electronics equipment which require careful handling are also generally distributed directly or through short channels.

• Product value: Normally larger channels are preferred for products whose unit value is low. However, short channels may be equally economical when such products are sold in bulk or are combined with other products.

Market considerations:

• Potential volume of sales: The choice of channel depends upon the target volume of business. The ability to reach target customers and the volume of sales varies between different channels. If one outlet is not adequate for achieving the target, more channels need to be used.

• Concentration of buyers: If the buyers are concentrated in a few areas, it is possible for the manufacturer to establish sales divisions in such areas and sell directly to the buyers. Thus, short channels may be feasible when buyers are concentrated in fewer locations. On the other hand, if buyers are spread over a large geographic area, short channels may become uneconomical and the manufacturer may have to go for long and multiple channels.

• Size of the purchase order: Manufacturer can distribute directly or through a short channel in the case of large scale buyers. Normally long channels are effective and economical in the case of buyers whose purchase orders are usually too small to justify direct sale.

Middlemen Considerations

• Types of middlemen: Functions like standardisation, grading, packing, branding, storage, after sale servicing, etc., are expected to be performed by middlemen. Efficiency of distribution depends upon the size, location and financial position of middlemen. If the middlemen in a specific channel are dependable and efficient, that channel may be preferred by producers.

• Channel competition: There are different situations in which manufacturers compete with each other for availing the services of particular wholesalers. Similarly, wholesalers often compete with each other to deal with particular retailers or carrying particular brands of products. Sometimes producers use the same channel which is used by their competing producers. If any producer arranges exclusive distribution through a particular wholesaler, the other producers also do the same. Thus selection of a channel may depend on the competition prevailing in the distribution system.

• Availability of middlemen: The producer may wish to make use of the services of specific category of middlemen, but such middlemen may not be available in the market. They may be carrying the competitors' products and may not wish to add another product line. In such situations, the manufacturer has to make use of the services of the middlemen whoever available in the

Company considerations:

• Cost of distribution: A channel which is less expensive is normally preferred. Sometimes, a channel which is convenient to the customers is preferred even if it is more expensive. In such cases the choice is based on the convenience of the customers rather than the cost of distribution.

• Long-run effect on profit: Direct distribution, short channels, and long channels have different implications with regard to the profits in the short-run and long-run. If demand for a product is high, reaching the maximum number of customers through more than one channel may be profitable. But the demand may decline in course of time as competing products appear in the market. It may not be economical than to use long channels. So while choosing a channel one should keep in mind the future market implications as well.

• Experience and ability: A manufacturer who has reasonable experience and expertise in marketing the products may prefer to distribute his products on his own. But the manufacturers who do not have marketing know-how prefer to make use of the services of middlemen.

• Financial strength: Lots of financial resources are required to establish distribution system. So only a financially strong manufacturer can establish his own distribution system and a financially weak firm may have to depend on middlemen.

• Extent of channel control: Producers who want good control over the distribution of their products prefer short channels. Controlling of the channels is necessary to undertake aggressive promotion, to maintain fresh stocks and retail Thus, in making a choice; the manufacturer has to consider his objectives, resources and the channels available to him, nature of the product and characteristics of the buyers. He would like to use the channel of distribution which will produce the combination of sales volume and cost that yields him the maximum amount of profit. There are no set guidelines for channel selection and the manufacturer will have to make his own decision in the light of his own judgment and experience. However, most companies do use multiple channels of distribution to ensure that their products reach the maximum number of people.