Unit 3

Distribution channel and physical distribution

3.1 Distribution Channels- Concept and Role; Types of distribution channels; Factors affecting choice of a distribution channel

Channel of distribution refers to those people, institutions or merchants who help in the distribution of goods and services. Philips Kotler defines channel of distribution as “a set of independent organisations involved in the process of making a product or service available for use or consumption”.

Channels of distribution bring economy of effort. They help to cover a vast geographical area and also bring efficiency in distribution including transportation and warehousing. Retailers, Wholesalers are the common channels of distribution.

Channels of distribution provide convenience to customer, who can get various items at one store. If there were no channels of distribution, customer would have faced a lot of difficulties.

Importance

Channels of distribution for a product the route taken by the title to goods they are from the producers to the ultimate consumers. It is very important because product in one place while the consumption scattered in many place. So there is big gap between producers and the consumers. So through channels of distribution can only fill the gap. A channel of distribution connects a link between the producers and the consumers.

The middle man plays an important role in consumer orientation demand. The middlemen are specialist in concentration equalization and dispersion, i.e.

• Collects output of various producers
• Subdivide the products according to the needs of the consumers.
• Disperse this assortment to the consumers.

The success of channels of distribution [COD] is completely depending upon the middlemen as they create time and possession utility. The COD helps in making products available at right time in the night place and in the right quality.

Marketing is a comprehensive term, which includes distribution also, distribution is a function to distribution or sub divided the producer’s goods to various specific markets which incurred to all ultimate consumers

Role

Distribution channels help in the following ways:

(i) Enhance Efficiency:

The components of distribution channels enhance the efficiency of the system. A system of manufacturers directly dealing with consumers will be less efficient than the decentralised system involving distribution agents.

(ii) Smooth Flow of Goods and Services:

The distribution channels smoothen the flow of goods and services by creating possession, time and place utilities.

(iii) Reducing Cost of Transactions:

The cost of transactions is minimised if they are undertaken regularly. The distribution through intermediates will be possible if products are standardised. The terms and conditions of purchase, sale, payments will be standardised resulting into increased number of transactions. Instead of casual transactions, routine dealings will reduce the cost of marketing.

(iv) Facilitate Search:

The buyers and sellers search for each other in the market to transact for products and services. This function is facilitated by distribution agents. These intermediaries remain in touch with sellers and buyers, thus facilitate exchange.

(v) Less Stocks of Goods:

In the absence of distribution agents manufacturers are required to keep large stocks of goods. When middlemen enter the chain of distribution then stocks are maintained by large number of intermediaries and it reduces the burden of producers.

(vi) Proximity to Consumers:

The intermediaries are more near to the consumers as compared to the producers. They are in direct touch with the users of goods and services and understand their reactions to the supplies. The intermediaries help producers in knowing the reactions of consumers to the goods and services brought out by them. This information is of immense value to producers in planning for their products.

Types of distribution channels

Broadly, Channel of distribution is of two types viz., (1) Direct Channel (2) Indirect Channel.

1. Direct Channel or Zero Level Channels:

When the producer or the manufacturer directly sells the goods to the customers without involving any middlemen, it is known as direct channel or zero level channel. It is the simplest and the shortest mode of distribution. Selling through post, internet or door to door selling etc. are the examples of this channel. For example, Mc Donalds, Bata, Mail order etc.

Methods of Direct Channel are:

(a) Door to door selling

(b) Internet selling

(c) Mail order selling

(d) Company owned retail outlets

(e) Telemarketing

2. Indirect Channels:

When a manufacturer or a producer employs one or more middlemen to distribute goods, it is known as indirect channel.

Following are the main forms of indirect channels:

(a) Manufacturer-Retailer-Consumer (One Level Channel):

This channel involves the use of one middleman i.e. retailer who in turn sells them to the ultimate customers. It is usually adopted for speciality goods. For example Tata sells its cars through company approved retailers.

Manufacturer→ Retailer→ Consumer

(b) Manufacturer-Wholesaler-Retailer-Customer (Two level channels):

Under this channel, wholesaler and retailer act as a link between the manufacturer and the customer. This is the most commonly used channel for distributing goods like soap, rice, wheat, clothes etc.

Manufacturer→ Wholesaler→ Retailer→ Customer

(c) Manufacturer-Agent-Wholesaler-Retailer-Consumer (Three level channels):

This level comprises of three middlemen i.e. agent, wholesaler and the retailer. The manufacturers supply the goods to their agents who in turn supply them to wholesalers and retailers. This level is usually used when a manufacturer deal in limited products and yet wants to cover a wide market.

Manufacturer → Agent → Wholesaler → Retailer → Consumer

Factors affecting choice of distribution channel

1. Distribution policy: Where the manufacturer is interested in distributing his products through all possible outlets, it is desirable to use more than one channel to reach the target customers. This is known as intensive distribution policy. The purpose in this case is to make the product available as near to the consumers as possible. Consumer goods of frequent use like pens, pencils, paper, soap, hair pin, etc., are distributed through a large number of wholesalers and retail traders. If goods are meant for customers who are very particular about their quality and usefulness, manufacturers adopt a selective distribution policy. In that case, few selective channels which can be relied upon for their efficiency of operation are used

2. Characteristics of the product: The nature of the product influence the choice of channel. For example, perishable products like eggs, milk, etc., are supplied either directly or through the short channels. In the case of heavy and bulky products (e.g. Cement, steel) where distribution and handling costs are more, short channels are preferred. Sophisticated electrical and electronics equipment which require careful handling are also generally distributed directly or through short channels. On the other hand, long channels are found in the case of light-weight and small-size items like dress material, readymade garments, pocket calculators, stationery, toothpaste, toothbrush, etc. Similarly, simple mechanical products like electronic toys, time-clocks, etc., are supplied through long channels for intensive distribution.

3. Characteristics of target customers: If the number of customers is large and geographical area is extensive, long and multiple channels are necessary for intensive distribution of goods. This is also suitable where the consumers are in the habit of making frequent purchases of small quantities at irregular intervals. Short channels and direct selling are possible in the case of few customers who purchase large quantities at regular intervals and they are concentrated in a small area.

4. Supply characteristics: Goods produced by a small number of producers concentrated in one region are generally distributed through short channels. Paiticularly this is more so if each producer controls a fairly large share of the market. Long channels are suitable if a large number of producers in different regions produce and supply the goods.

5. Types of middlemen: Availability of suitable middlemen in the channel of distribution is another factor in the selection of the channel. This is because different 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.

6. 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 an producer arranges exclusive distribution through a particular wholesaler, other producers also do the same. Thus, selection of a channel may depend on the competition prevailing in the distribution system.

7. Potential volume of sales: The choice of the channel depends upon the target volume of business. The ability to reach target customers and the volume of sales varies between different channels. One outlet may not be adequate for achieving the target in which case more channels need to be used. Of course, the competitive situation must be taken into account while examining the potential volume of sale through different channels:

8. Cost of distribution: The various functions carried out in the channel of distribution add to the cost of distribution. While choosing a channel, the distribution costs of each channel should be calculated and its impact on the consumer price should be analysed. 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.

9. 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 if competing products appear in the market. It may not be economical then to use long channels. So, while choosing a channel one should keep in mind the future market implications as well.

Key takeaways –

1. Channels of distribution provide convenience to customer, who can get various items at one store.
2. Channels of distribution for a product the route taken by the title to goods they are from the producers to the ultimate consumers

3.2 Retailer and whole seller; physical distribution of goods; Transportation; warehousing; Inventory control; Order Processing

Retailer and whole seller

The word wholesale simply means selling in bulk quantities and retail stands for selling merchandise in small quantities. Wholesale and retail are two distribution arrangement that constitutes a major part of the supply chain. When the goods are manufactured, they are sold in large quantities (wholesale) to the wholesalers who further sells them to the retailers who finally sells them to the ultimate customers.

While a wholesaler sells goods to the businesses, as they purchase goods to sell it further. On the other hand, a retailer targets final consumer and sells goods to them.

In this way, these two business forms are one of the important intermediaries of the marketing channel. In the absence of these two links, the whole chain will get disturbed.

Physical Distribution of goods

Physical distribution is concerned with the physical movement of the goods from the producer to the consumer. It is an important part of marketing activity and a major component of marketing mix. It includes all those activities which help in efficient movement of goods from producer to consumer, such as trans­portation, warehousing, material handling, inventory control, order processing, market forecasting, packaging, plant and warehouse location and customer ser­vice.

Philip Kotler has defined physical distribution as, “Physical distribution involves planning, implementing and controlling the physical flow of materials and final goods from the point of origin of use to meet consumer needs at a profit.”

Physical dispersion is a significant advertising capacity describing the promoting exercises identifying with the progression of crude materials from the providers to the processing plant and the development of completed merchandise from the finish of creation line to the last customer or client. Physical circulation is the study of Business Logistics where by the correct measure of the correct sort of product is made accessible at where interest for its exists. Seen in this light, physical circulation is key connection among assembling and request creation.

Objectives

i. To make available the right goods in right quantity at right time and right place at least cost.

Ii. To achieve minimum inventory level and speedier transportation.

Iii. To establish price of products by effective management of physical distribution activities.

Iv. To gain competitive advantage over rivals by performing customer service more effectively.

Importance

1. Creating Time and Place Utility:

Physical distribution activities help in creating time and place utility. This is done through transportation and warehousing. Transportation system creates place utility as it makes available the goods at the right place where they are required. Warehousing creates time utility by storing the goods and releasing them when they are required.

2.     Helps in Reducing Distribution Cost:

Physical distribution cost account for a major part of the price of the product. If these costs are handled systematically, decrease in costs of product can be there. Proper and systematic planning of transportation schedules and routes, warehousing location and operation, material handling, order processing, etc. can easily bring in cost economies.

3.     Helps in Stabilisation of Price:

Physical distribution helps in maintaining stable prices. Even customers expect price stability over a period of time. Proper use of transportation and warehousing facilities can help in matching demand with supply and thus ensure stabilisation of price.

4.     Improved Consumer Services:

Consumer service in physical distribution means making products in right quantity available at right time and right place i.e. place where customer needs.

Transportation

Transportation as a component of physical distribution is concerned with the movement of goods from the warehouse to customer destination. It includes loading and unloading of goods and their movement from one place to another. In doing so it provides time and place utility. Transport accounts for a major portion of the distribution cost and of the total price of the product.

Being a major cost element, marketers must take keen interest in transportation decision as it will help in reducing cost and increasing customer satisfaction. Correct form of transportation mode is very essential as it directly affect the price of the product. Proper choice facilitates smooth movement of goods on time and in good condition. The transportation mode therefore needs to be adequate, regular and dependable.

Different modes of transportation are there like Road transport, railways, Airways, Water transport and pipeline from which a choice has to be made. Each has its own share of merits and demerits. Normally a combination of different mode is chosen and integrated in a sequential order to move the product economically and faster.

Choice of a particular mode of transportation depends upon various factors like cost of the transport, availability of the mode of transport, speed, reliability, frequency, safety and suitability of the mode to move the product.

i. Road Transport:

This is an ancient form of transport and plays an important role in marketing. Road transport may be through different means like transport by animals (like bullock, camel), transport by human beings (like coolies or porters), transport by automobiles (like scooters, auto rickshaws, cars, truck buses etc.). Road transport is flexible and economical. However, it is unsuitable for long distances.

Ii. Railways:

It is suitable for transporting bulk goods over long distances. It is an economical mode because large volume of traffic is handled over large network of railways. However, it is inflexible as it is unfit to transport goods to rural areas. Further, it involves huge maintenance expenditure.

Iii. Water Transport:

Water way is an important mode of transport for heavy and bulky goods in large quantities. It consists of inland water transport and ocean transport. Inland water transport is used for transporting goods within county and ocean transport is used to transport goods to other countries. Water transport is a cheapest form of transport, having great carrying capacity and is highly suitable for heavy and bulky goods, but it has low speed and higher degree of risk due to seasonal difficulties.

Iv. Air Transport:

Of late air transport has assumed significant importance as a mode of transport. Although it accounts for a small percentage of transportation, it is useful for perishable items, overnight packages, emergency supplies etc. The main disadvantage of air transport is that it has high freight charges, low carrying capacity and too much dependence on climatic conditions.

v. Pipelines:

These are specialized carriers design to transport the crude and refined petroleum and natural gas from wells to refineries and further to distribution centre. It is an economical mode as it involves less handling and labour cost, but it is the slowest mode of transportation and very limited in number.

Warehousing

Small business owners who require warehousing facilities must decide whether to maintain their own strategically located depot(s), or resort to holding their goods in public warehouses. And those entrepreneurs who go with non-public warehousing must further decide between storage or distribution facilities. A storage warehouse holds products for moderate to long-term periods in an attempt to balance supply and demand for producers and purchasers. They are most often used by small businesses whose products' supply and demand are seasonal. On the other hand, a distribution warehouse assembles and redistributes products quickly, keeping them on the move as much as possible. Many distribution warehouses physically store goods for fewer than 24 hours before shipping them on to customers.

In contrast to the older, multi-story structures that dot cities around the country, modern warehouses are long, one-story buildings located in suburban and semi-rural settings where land costs are substantially less. These facilities are often located so that their users have easy access to major highways or other transportation options. Single-story construction eliminates the need for installing and maintaining freight elevators, and for accommodating floor load limits. Furthermore, the internal flow of stock runs a straight course rather than up and down multiple levels. The efficient movement of goods involves entry on one side of the building, central storage, and departure out the other end.

Computer technology for automating warehouses is dropping in price, and thus is increasingly available for small business applications. Sophisticated software translates orders into bar codes and determines the most efficient inventory picking sequence. Order information is keyboarded only once, while labels, bills, and shipping documents are generated automatically. Information reaches hand-held scanners, which warehouse staff members use to fill orders. The advantages of automation include low inventory error rates and high processing speeds.

Inventory control

Inventory control refers to efficient control of goods stored in warehouses. Maintaining adequate level of inventory is very essential for smooth flow of business. Inventory acts as a bridge between the orders of customers and production. They are the reservoir of the goods held in anticipation of sales. Therefore, it needs to be properly managed and controlled. Neither to small nor too large inventory should be maintained.

Former would result in stock out, resulting in lost sales and latter involves heavy investments. Thus, a balance has to be maintained. As Prof. W. J. Stanton states, “the goal of inventory control is to minimise both the investment and the fluctuation in inventories, while at the same time filling customer order properly and accurately.”

Correct anticipation of the product demand is necessary for maintaining the correct level of inventory. Properly estimated demand helps the business firms in terms of cost of inventory, supplying to customer in time and maintaining the production schedule.

Order Processing

Order processing is the starting point of any distribution activity. Order processing includes activities like receiving the order, handling the order, granting credit, invoicing, dispatching, collecting bills, etc. Each customer expects that the order placed by him is implemented without delay, and as per the specifications of the order.

Thus, order processing becomes very important. Marketer should make effort to maintain the order cycle time i.e. the time period between the time of placement of an order by the customer to the time of arrival of goods at his destination. Standard procedure should be laid down for processing of order.

The small business owner is concerned with order processing—another physical distribution function—because it directly affects the ability to meet the customer service standards defined by the owner. If the order processing system is efficient, the owner can avoid the costs of premium transportation or high inventory levels. Order processing varies by industry, but often consists of four major activities: a credit check; recording of the sale, such as crediting a sales representative's commission account; making the appropriate accounting entries; and locating the item, shipping, and adjusting inventory records.

Technological innovations, such as increased use of the Universal Product Code, are contributing to greater efficiency in order processing. Bar code systems give small businesses the ability to route customer orders efficiently and reduce the need for manual handling. The coded information includes all the data necessary to generate customer invoices, thus eliminating the need for repeated keypunching.

Another technological innovation affecting order processing is Electronic Data Interchange. EDI allows computers at two different locations to exchange business documents in machine-readable format, employing strictly-defined industry standards. Purchase orders, invoices, remittance slips, and the like are exchanged electronically, thereby eliminating duplication of data entry, dramatic reductions in data entry errors, and increased speed in procurement cycles.

Key takeaways

1. Channel of distribution refers to those people, institutions or merchants who help in the distribution of goods and services.
2. Channels of distribution for a product the route taken by the title to goods they are from the producers to the ultimate consumers.
3. Physical distribution is concerned with the physical movement of the goods from the producer to the consumer.

References:

1. Basic Marketing- Concepts, Decisions and Strategies- Cundiff, Edward, W. & Still, R.R.
2. Marketing Management - Kotler, Phillip
3. Principles of Marketing - Kotler, Phillip & Armstrong, Gray
4. Marketing Management - Mamoria, C.B,Mamoria Satish & Suri, R.K.