Chapter Seven

Distribution and channel relations in industrial markets

The distribution channel
Why intermediaries
Types of intermediaries
Major industrial channels
Overview

Distribution is the term applied to the process of moving goods from producer to the
ultimate customer. Distribution is usually thought of in terms of physical goods only. In
marketing goods and services, however, much more than the simple movement of physical
objects is necessary. Knowledge of who has the correct item, credit service, and technical
information are a few of the ingredients that are also important. Thus, people and institutions
are frequently involved in distribution without ever physically coming into contact with the
product. Yet their contribution to distribution can be just as vital as the physical movement of
the product.

7.1. THE DISTRIBUTION CHANNEL

A channel of distribution may be defined as a sequence of marketing institutions, including
intermediaries, that facilitates transactions between producers and final user. The member or
facilitating institutions can be very small when the producer sells directly to user (no
intermediaries), or quite large when several types of intermediaries perform successive
operations in the product’s distribution. The first scenario is called a direct (or short)
channel; the second is an indirect (or long) channel. (See exhibit 7-1).

In the shortest direct channel, the manufacturer’s employees deal face-to-face or directly by
mail or telephone, with the end users. Another fairly direct channel is created when the
manufacturer operates sales branches and company- owned dealerships. In all these cases the
manufacturer assumes total responsibility for all of the functions (maintaining inventory,
delivering goods, and providing information to customers, promotion, and credit) necessary to
satisfy customer needs. The manufacturer has greatest control over the quality of customer
relationships. Selling prices, service and availability of product. But all this comes from a high
investment in facilities, inventories, and personnel, which perhaps could be spent more
profitably in the manufacturer’ principal expertise: manufacturing.
Although well established and large companies may have used a particular business channel
arrangement for many years, it is advisable to conduct a periodic channel audit and, if need,
restructure the channel. The channel audit is a comprehensive reappraisal of a company’s
approach to distribution. It identifies shifting customer emporographics and market behavior,
reassesses cost of using different types of intermediaries, and evaluates changes in corporate
distribution goals.
 Exhibit 7-1 channel length
A shorter direct A longer, more indirect
Channel channel

Manufacturer
Manufacturer

Direct sale Intermediary

Manufacturer’s agent

Business buyer

Industrial distributor
Intermediary

Industrial buyer

7.2. WHY
INTERMEDIARIES

Business marketers may choose to sell through intermediaries for a number of reasons, including
the following.

Transaction costs- every order incurs cost-contact costs, order filling costs, expediting costs and
lots of paperwork. By selling larger quantities to intermediaries, the manufacturer can reduce the
proportion of transaction cost per sales dollar.

Inventory costs- when an intermediary carries inventory, the manufacturer can reduce its own
level of inventory. By reducing its inventory levels, the manufacturer reduces inventory carrying
costs, which include storage costs, property taxes, insurance, cost of money invested in the
inventory, and so on.

Limited finances- even large corporations can have a difficult time raising enough money to
operate a nationwide network of wholly owned local distribution outlets. Despite the high cost,
some industries sell direct because customers demand personalized attention from the
manufacturer, or their equipment is too sophisticated to risk less than optimal installation by
intermediaries.

Narrow product line- few industrial manufacturers have a wide enough product line to generate
a high ratio of sales to direct calls by their sales force. Excessive selling costs suggest turning the
 job over to intermediaries, whose broader range of products (because they handle distribution
functions for a large number of manufacturers) generates higher returns per sales call.

Proximity- intermediaries offer much more immediate and local representation. Because they
are closer to their customers, they are better able to ascertain their customers’ needs and wants,
assess their credit rating, and offer speedy delivery, service, and individual attention than an
industrial manufacturer whose plant may be thousands of miles away.

Opportunity costs- manufacturers often have begun operation on the basis of their technological
and production expertise rather than on their marketing and distribution skills. Their return on
manufacturing investment, then, tends to be much higher than on investment in distribution.
Thus, it makes sense to let more efficient distribution specialists act as their intermediaries and
then to invest more in the manufacturing side of the operation. Doing so reduces the
manufacturers, opportunity costs- that is, the incremental gain forgone by not pursuing a higher-
yielding alternative.

7.3. TYPES
OF INTERMEDIARIES

Each channel system is designed to provide certain specific function or services. Channel length
or complexity depends on the number of functions or services required and the manner in which
they will be accomplished. Over the years, specialists have developed within channels when
certain functions or services required greater attention than others. To develop and an efficient
channel of distribution, one should be familiar with the various type of intermediaries available.
The following section describes the most common categories of intermediaries.

7.3.1. Merchant intermediaries- merchant intermediaries are wholesale industrial distributors who
buy and own the goods they handle. The majority of these distributors provides the broadest
range of services and is consequently called full service wholesalers. They generally carry a
broad line of staple, nonperishable items, accessories, and supplies and sell to retailer or
industrial users. Their functions or services include stocking, delivery, credit, and promotion.
The single-line wholesaler restricts it offering to a certain type of product, such as industrial
chemicals, and provides more specialized service to industrial buyers.
Limited-function wholesalers do not provide as wide a range of services as the full service
wholesalers. This is because the customer does not require as extensive an array of functions or
services and is unwilling to pay for unnecessary extras. The cash-and-carry wholesaler, for
example, does not provide credit or delivery. The drop shipper (or desk jobber) does not
physically stock products but orders goods to be shipped directly from manufacturer to user.
The truck (or wagon) jobber carries all its stock in a truck and provides quick, regular
deliveries, usually of perishable goods, such as cutting tools. The mail order distributor
depends on a catalog to obtain sales
7.3.2 Agent intermediaries- in contrast to merchant intermediaries, agent intermediaries do not
buy or own the goods they sell. Agent intermediaries also fall into several categories,
characterized by the extent of their services. Commission merchants generally handle
commodities that are valuable to distant suppliers because of their wealth of local market
information. Manufacturers’ agents act as the sales force for several manufacturers who
cannot afford their own sales forces. Brokers bring buyers and sellers together through their
knowledge of market availability and requirements. Used machinery is often handled by
industrial brokers. Auction companies provide display areas and facilitate negotiation among
sellers and buyers.

7.4 MAJOR INDUSTRIAL CHANNELS

Although many different business channel structures may be employed, the most popular
involves the manufacturers selling through an industrial distributor to the end user. Since
industrial distributors and manufacturers’ agents account for the majority of all business
transactions, the remainder of this chapter will focus on them.

7.4.1 Industrial distributors

Industrial distributors contact customers, provide delivery, may do some assembly or finishing of
products, offer repair service, handle credit, and provide a wide product assortment to industrial
buyers generally. Distributors take title (ownership) to the goods they sell. Hence they can set
their own selling prices (and margins) for the goods; usually maintain adequate inventories, and
every carry competing products. Distributors range from single location owner-managed
companies to multi branch corporations.

The distributor’s outside salespeople act as “order getters”, calling on customer accounts and
prospecting for new customers, solving technical problems, and maintaining customer service.
Although the distributor may be small in comparison with national marketers, the firm is likely
to be large, interdependently owned business in its own local community, providing a full range
of service to its customers.

The distributor’s inside salespeople who have a high level of product expertise and stock
availability knowledge, act as “order takers” by telephone. They also process orders, schedule
deliveries, and answer customer queries. A growing percentage of women are now functioning
as inside telephone and counter sales people.

Product carried- distributors handle maintenance, repair, and operating supplies (MRO items)
such as lubricants, paint, and machine parts to create immediate availability when required. They
also stock original equipment supplies for OEM, including such items as power transmission
components, fasteners, and electronic memory chips, which become part of the manufacturer’s
finished product. Distributors also handle accessory equipment used in the operation of the
customer’s business, such as power tools and hoists, as well as machines such as lathes and
presses that are used to machine meal and convert raw materials.

Broad categories of distributors

There are three broad categories of merchant distributors: general line, specialty, and
combination house.

1. General line distributors- general line distributors maintain inventories of a broad range
of industrial items. To the trade, they are often referred to as “mill supply houses” and are
known as “the supermarkets of industry” because of their extensive assortments. When
customers have large annual requirements made up of small, frequent purchases, the
general line distributors also establish specialist departments in some product line. These
specialist departments can provide customers with better service.
2. Specialists- A limited-line distributor specializes in a narrow line of relates products such
as abrasives, cutting tools, or power transmission equipment. Surveys suggest that
specialty distributors are growing in numbers relative to other distribution types. The
specialist offers customers a high degree of technical expertise, problem-solving
capability, and application know-how. Some specialists perform special services such as
assembly or sub manufacturing to better serve customers and differentiate themselves
from competitors.
3. Combination house- the combination house sells to other customers in addition to
industrial manufacturers. It operates in both industrial and customer markets. An
electrical distributor may sell lighting fixtures to retailers and institutions in addition to
the construction industry and manufacturers.

7.4.2 Manufacturers’ agent is an independent business establishment that, on a continuous

contractual basis in a limited or exclusive geographic territory, sells part of the output of two or
more client manufacturers. The products handled are complementary or related to one another
but are non-competing. The agency:

 Does not take title (or ownership) to the goods in which it deals,
 Has little control over prices, credit, or other terms of sale, and
 Is paid on commission.

The main different between a manufacturers’ agent and a distributor lies in the “title”. Because
manufacturers’ agents do not take title to the goods, they cannot set price and usually don’t
maintain inventories. The items they sell usually are shipped directly from the manufacturer’s
factory to the customer.

Manufacturers’ agents are known by a variety of names, including manufacturers’ representative,

“rep”, M/A, sales agent, and agent. Typically the “rep” has had many years of experience in a
well-established company before becoming a manufacturers’ agent. Indeed, the majority have
been successful direct salespeople for large firm who escaped the bureaucracy of a corporate
environment to go it alone.

Trend toward manufacturers’ agents

Sales costs- industrial sales call cost have increased dramatically and make agents important
partners.

Specialized market segments- industrial manufacturers are finding new sales opportunities in
narrow market segments outside their traditional markets which can best be served by agents.

Opening new territories- as industrial development expands into new geographical regions,
industrial manufacturers have difficulty justifying the use of their direct sales force. Adolescent
markets have insufficient sales potential to support direct selling. However, manufacturers’ reps,
who offer a much broader product assortment than any of their manufacturers can, provide
industrial manufacturers a fixed cost of sales entry to such sparse markets.

Increasing travel costs- when potential customers are widely separated or distant from the
company’s head office, the use of manufacturers’ agents over direct selling has increased
because of rapidly growing cost of travel.

Advantages offered by manufacturers’ agents

Manufacturers’’ agents as a distribution channel offer the manufacturer a number of potential

advantages, particularly when compared with the manufacturing firm using its own direct sales
force. Predictable, stable sales cost- manufacturers’ agents are paid a straight commission on
sales. Thus, the manufacturer knows exactly how much its sales expensive will be.
Manufacturers’ reps can be less expensive because they are paid only if they bring in orders. The
manufacturer does not pay a regular salary plus benefits for orders that are not coming in, as
would be the case with its own sales people.

More aggressive representation- few corporate salespeople are paid on straight commission,
but the manufacturers’ agent is. This is a strong incentive for highly motivated agents.

Synergy in complementary lines- because a rep handles compatible products from several
manufacturers, the sale of one product is likely to lead to the sale of others. Consider the
example of a customer buying a single lamp: the manufacturers’ agent for the electrical
instrument firm may also describe his or her related lines and often secures orders for sockets,
panels, meters, or switches from the same customer during the same sales call.

Minimal training- the rep is an experienced professional salesperson, with an in depth

knowledge of a particular industry and territory. At most, the manufacturers’ agent needs
familiarization with a new principal’s product line.
Instant marketing- the manufacturers’ agent has an established market or regular customers
with whom the firm has built rapport. For manufacturer who is either introducing a new product
(especially one that does not fit its traditional markets) or wishing to exploit sparse markets with
mature products, the M/A is an “in-supplier” whose built-in customers offer immediate coverage
in his or her territory.

Nurture for small customers- both manufacturers and distributors prefer to deal with larger-
volume accounts. Thus, their smaller buyers often receive short shrift. Manufacturers’ agents
aggressively cultivate small accounts and develop new markets.

Permanence of representation- all too frequently the young direct salesperson may cost the
industrial manufacturer a couple of hundred thousand dollars to train, only to be lost to another
firm just as he or she is about to become productive. On the other hand, the manufacturer’s rep
firm has its roots in its local territory, and its major asset is customer base.

Disadvantages of using manufacturers’ agents

From the perspective of the business principal, the use of manufacturers’ agents is not without
some limitations, including the following:

Loss control- as with direct sales people who operate on a full commission basis,
manufacturers’ agents avoid and administrative or reporting functions that are not directly related
to generating sales. There is no guarantee the agent will use the principal’s promotional materials
properly. The agent may exploit immediately profitable sales rather than maximizing long-run
potential. The agent may devote more time to its other principals’ products than the industrial
manufacturer would wish. Solution: the principals should outline expectations clearly in its
contract with the agent. Control needs are obviated if the manufacturer’s products yield better
than average profit potential.

Partial attention- since the manufacturers’ agent represents several manufacturers; it cannot
give full attention to any one product line all the time. Indeed, the agent may devote more time to
the other firms it represents that the industrial manufacturer would wish. This becomes
particularly annoying when the manufacturer expects detailed call reports, extensive missionary
selling, or extra pre/post sale service. Solution: such extra attention should be specified in the
contract with the agent, specific fees for services should be negotiated, or higher commission
rates should be established.

Customer patronages preferences- some customers want to deal directly with the industrial
manufacturer’s own sales force; others have strong loyalty to a particular manufacturers’ agent.
Solution: assess prospects’ preferences before establishing a new perspective.
Administrative procedures- each rep has its own internal procedures. Thus, the proliferation or
policies and procedures faced by manufacturer may be equal to the number of reps the
manufacturer deals with. Solution: offer consulting assistance and be adaptable.

Government contract- different government agencies have varying policies toward

manufacturers’ representatives. Solution: investigate government agency policies and specify
which government departments or agencies will be retained by the manufacturer as “house
accounts” these house accounts should be clearly specified in the contract signed with the rep.

Circumventing the agent- the great fear of the manufacturers’ agent is that the agency will build
a substantial account from nothing only to have the manufacturer take it away from the rep and
sell direct. This leads to secrecy by the rep about the agency’s accounts. Alternatively, some
industrial manufacturers who terminate a manufacturers’ agent find that also lose their customers
because strong personal relationships keep customers loyal to their agent and their loyalty is
transferred to the agent’s new supplier. Solution: maintenance of open communication between
manufacturer and agent, together with clear conditions surrounding terminations, can reduce
these potential conflicts.