Topic 10: Place/ Distribution Management

Distribution decisions focus on establishing a system that, at its basic level, allows
customers to gain access and purchase a marketer’s product. However, marketers may
find that getting to the point at which a customer can acquire a product is complicated,
time consuming, and expensive. The bottom line is a marketer’s distribution system must
be both effective (i.e., delivers a good or service to the right place, in the right amount, in
the right condition) and efficient (i.e., delivers at the right time and for the right cost).
Yet, as we will see, achieving these goals takes considerable effort.

Distribution decisions are relevant for nearly all types of products. While it is easy to see
how distribution decisions impact physical goods, such as laundry detergent or truck
parts, distribution is equally important for digital goods (e.g., television programming,
downloadable music) and services (e.g., income tax services). In fact, while the Internet
is playing a major role in changing product distribution and is perceived to offer more
opportunities for reaching customers, online marketers still face the same distribution
issues and obstacles as those faced by offline marketers.

In order to facilitate an effective and efficient distribution system many decisions must be
made including (but certainly not limited to):

 Assessing the best distribution channels for getting products to customers

 Determining whether a reseller network is needed to assist in the distribution
process
 Arranging a reliable ordering system that allows customers to place orders
 Creating a delivery system for transporting the product to the customer
 For tangible and digital goods, establishing facilities for product storage

Some terms in distribution

 Distribution refers to activities that make products available to customers when

and where they want to purchase them.
 A channel of distribution (sometimes called a marketing channel) is a group of
individuals and organizations that direct the flow of products from producers to
customers.
 An assortment is a combination of products put together to provide benefits.
 Direct channel movement is the movement of goods from the manufacturer
straight to the final consumer. On the other hand, indirect channel movement is
the movement of goods through the intermediaries who include agent,
wholesalers and retailers before finally selling a product to the final consumer
 A wholesaler is a channel member who purchases goods with the sole aim of
reselling them to another distributor preferably a retailer before final consumption
by the consumer.
 A retailer on the other hand is a channel member who purchases products with
the sole aim of reselling them to the final consumer.

1
What are Channels of Distribution?
For marketers, the distribution decision is primarily concerned with the supply chain’s
front-end or channels of distribution that are designed to move the product (goods or
services) from the hands of the company to the hands of the customer. All activities and
organizations helping with the exchange are part of the marketer’s channels of
distribution.

Channel levels

M A N U F A C T U R E R

Two level
channel A G E N T
One level
channel
Direct level
or Zero level W H O L E S A L E R

Three level channel

R E T A I L E R

U L T I M A T E C O N S U M E R

Channel Levels:
1. Direct Level or Zero Level ( Manufacturer to Consumer)
2. One Level channel ( Mfr- Retailer-Consumer)
3. Two level channel ( Mfr-Ws-Retailer-Consumer)
4. Three Level channel ( Mfr-Agent-Ws-Retailer-Consumer)

2
Distribution Systems

Mindful of the factors affecting distribution decisions (i.e., marketing decision issues and
relationship issues), the marketer has several options to choose from when settling on a
design for their distribution network. We stress the word "may" since while in theory an
option would appear to be available, marketing decision factors (e.g., product, promotion,
pricing, target markets) or the nature of distribution channel relationships may not permit
the marketer to pursue a particular option. For example, selling through a desired retailer
may not be feasible if the retailer refuses to handle a product.

For marketers the choice of distribution design comes down to the following options:

1. Direct Distribution Systems

2. Indirect Distribution Systems
3. Multi-Channel or Hybrid Distribution Systems

1. Direct

With a direct distribution system the marketer reaches the intended final user of their
product by distributing the product directly to the customer. That is, there are no other
parties involved in the distribution process that take ownership of the product. The direct
system can be further divided by the method of communication that takes place when a
sale occurs. These methods are:

 Direct Marketing Systems – With this system the customer places the order either
through information gained from non-personal contact with the marketer, such as
by visiting the marketer’s website or ordering from the marketer’s catalog, or
through personal communication with a customer representative who is not a
salesperson, such as through toll-free telephone ordering.
 Direct Retail Systems – This type of system exists when a product marketer also
operates their own retail outlets.
 Personal Selling Systems – The key to this direct distribution system is that a
person whose main responsibility involves creating and managing sales (e.g.,
salesperson) is involved in the distribution process, generally by persuading the
buyer to place an order. While the order itself may not be handled by the
salesperson (e.g., buyer physically places the order online or by phone) the
salesperson plays a role in generating the sales.
 Assisted Marketing Systems – Under the assisted marketing system, the marketer
relies on others to help communicate the marketer’s products but handles
distribution directly to the customer. Other agents and brokers would also fall into
this category.

2. Indirect

With an indirect distribution system the marketer reaches the intended final user with the
help of others. These resellers generally take ownership of the product, though in some

3
cases they may sell products on a consignment basis (i.e., only pay the supplying
company if the product is sold). Under this system intermediaries may be expected to
assume many responsibilities to help sell the product.

Indirect methods include:

 Single-Party Selling System - Under this system the marketer engages another
party who then sells and distributes directly to the final customer. This is most
likely to occur when the product is sold through large store-based retail chains or
through online retailers, in which case it is often referred to as a trade selling
system.
 Multiple-Party Selling System – This indirect distribution system has the product
passing through two or more distributors before reaching the final customer. The
most likely scenario is when a wholesaler purchases from the manufacturer and
sells the product to retailers.

3. Multi-Channel (Hybrid)

In cases where a marketer utilizes more than one distribution design the marketer is
following a multi-channel or hybrid distribution system. The multi-channel approach
expands distribution and allows the marketer to reach a wider market, however, as we
discussed under Channel Relationships, the marketer must be careful with this approach
due to the potential for channel conflict.

Intermediaries

An intermediary is someone who mediates or brings about a settlement between two or

more persons. In distribution, these are the middlemen who form a link between the
original supplier / manufacturer and the ultimate buyer / consumer.

The following are the different types of intermediaries (channel members) who exist in
the channels of distribution:
1. Retailers: These are traders operating outlets which sell directly to households
(final consumers)
2. Jobbers: These buy from wholesalers and sell to smaller retailers who generally
are not served by larger wholesalers.
3. Wholesalers: Wholesalers stock a range of products from potentially competing
manufacturers which they sell to retailers. Many wholesalers specialize in
particular products.
Others
4. Distributors and dealers: These contract to buy a manufacturer’s goods and sell
them to customers. Their function is similar to that of wholesalers but they usually
offer a narrower product range e.g in case of car dealers, may be Toyota, Nissan,
etc only or a combination of a number of manufacturers. Distributors often
promote the products and provide after sales service.

4
5. Agents: These differ from distributors in that they do not purchase and resell the
goods but sell goods on behalf of the supplier and earn a commission on their
sales.
6. Franchisees: These are independent organisations who buy the right to own and
operate one or more units of the parent company. An initial fee and usually a
share of sales revenue is paid to the parent company for a specified period of time
to allow the franchisee trade under the patent name / trade mark of the parent
company e.g century bottling company (Uganda) has got a franchise from coca
cola – South Africa which in turn has a franchise from coca-cola international –
USA.
7. Multiple stores: These buy goods for retailing direct from the producer,
sometimes under their own label or brand name e.g supermarkets, departmental
stores, etc.
8. Direct sales / distribution methods: These include, mail order, telephone selling,
door-to-door selling, personal selling, suppliers’ retail outlets, e-bbusiness, etc.

Functions performed by middlemen/Intermediaries

1. Sorting out. The first step in developing an assortment is the separating of

conglomerates of heterogeneous products into relatively uniform, homogeneous groups
based on product characteristics such as size, shape, weight or color. Sorting out is
especially common in the marketing of agricultural products and other raw materials,
which vary widely in size, grade and quality and would be largely unusable in an
undifferentiated mass. A tomato crop, for example, must be sorted into tomatoes suitable
for canning, those suitable for making tomato juice and those to be sold in retail food
stores.

2. Accumulation. Accumulation is the development of a bank or inventory of

homogeneous products which have similar production or demand requirements. Farmers
who grow relatively small quantities of tomatoes, for example, transport their sorted
tomatoes to central collection points, where they are accumulated in large lots for
movement into the next level of the channel.

3. Allocation. Allocation is the breaking down of large homogeneous inventories into

smaller lots. This process, which addresses discrepancies in quantity, enables wholesalers
to buy efficiently in lorry or container loads and then apportion products by cases to other
channel members. A food wholesaler, for instance, serves as a depot, allocating products
according to market demand.

4. Assorting. Assorting is the processes of combining products into collections or

assortments which buyers want to have available in one place. Assorting eliminates
discrepancies in assortment by grouping products to satisfy buyers.

5. Form Utility. Form utility is carried out by changing products from their original state
to a consumable state. For example, the changing of a concentrate of a soft drink like
Coca-Cola to a liquid form at Namanve.

5
6. Information provision. With information provision, middlemen carry messages from
manufacturers to the final consumer like how to use a product and back from the
consumer to the manufacturer thereby playing a role of promotion.

7. Provision of Finance. Middle men finance both the customer and the manufacturer.
By selling goods on credit to the final consumer on credit is a way of indirect financing
of consumers activities. Again by paying in advance helps the manufacturer carry out
his/her activities in advance.

8. Research. Research is another important duty that middlemen help a manufacturer

carry out i.e. they probe customers needs and wants. They also ask for suggestions and
queries which is valuable information for research.

9. Convenience. Middlemen provide products at the convenience of customers that is

they bring products into close proximity of consumers and as well as open their outlets in
the wee hours of the day when a manufacturer cannot open.

10. Risk taking is another important function carried out by middlemen i.e. storage of
products and then protecting them from theft, pilferage, fire etc.

11. Inventory management involves handling of creditors, debtors, cash payments, and
storage among others. This helps relieve manufacturers the hassle of having to deal with
many customers within the shortest time.

Factors considered when selecting a distribution channel

An effective distribution channel is the one that maximizes sales and profits, minimizes
costs, captures a big market share and is convenient to the entrepreneur, the channel
members and the customers.
It is of paramount importance for a marketer to select the right and strategic distribution
channel for his goods and services. He should take into consideration the costs involved,
volume of sales and analyse the profits expected from the alternative channels. The major
factors considered include the following:

1. Nature of product: The make or design or characteristics of the product matters a lot
in channel selection eg perishable and highly expensive products are usually distributed
directly or use level two channel e.g fruits, expensive home appliances like TVs, etc.
Industrial and bulky products which require after sale services like machinery, vehicles,
etc need short or direct channel of distribution.

2. Nature of the market: Where customers are geographically scattered and the order
values are also small, use of a longer channel is the best solution. Direct distribution
makes sense when the value of orders is big and customers not widely scattered or when
customers take on credit terms.

6
3. Nature of customers: The number of potential customers, their buying habits and
their geographical locations are key influences. Those with limited time use mail order
and internet purchases for example. Others may prefer goods delivered home directly.

4. Nature of business: This depends on size and financial ability of the business i.e if it
is large and has the financial capability, it may deal directly with the customers but when
the business is small it may use indirect channels. Some businesses require dealing
directly with the customer i.e services.

5. Nature of middlemen: When the available middlemen are not desirable and have no
expertise required, then direct selling may be necessary, but when they have the required
skills, indirect selling in the best option.

6. Nature and degree of competition: Competitors may have influenced the existing
Channels and are not willing to distribute the marketer’s products, then direct selling is
the best option. However, where the channels are stocking the competitors’ brands and
are willing to stock yours, indirect channel is the choice of the marketer.

7. Cost of distribution: If the cost of distribution is high, the marketer is advised to use
indirect channels (longer channels) as short channels will erode the profits of the firm.

8. Degree of control of the distributed products: Where the marketer has a big a big
interest in controlling the distribution of the products due for security reasons e.g guns or
quality control issues by avoiding counterfeit products, direct channel is desirable but if
such controls are not necessary then longer channels are preferable.

9. Reputation and reliability of the channel members: If the channel members are
reputable enough and are reliable, then longer channel option is the option and vice versa.

10. Availability of storage facilities: If the channel members have good storage facilities
to maintain quality of products and constant supply to customers, then indirect
distribution is preferred. Where such facilities are lacking, direct distribution is the best
option.

11. Nature of the supplier: A strong financial base gives the supplier the option of
buying and operating their own distribution channel e.g Bata shoe company.

12. Location of customers: When customers are near and can be easily reached, direct
channel is the best option but where the customers are far, it is better to use a long
channel where the channel members have the experience of the local market.

7
 Costs of Using Channel Members

 Loss of Revenue – Resellers are not likely to offer services to a marketer unless
they see financial gain in doing so. They obtain payment for their services as
either direct payment (e.g., marketer pays for shipping costs) or, in the case of
resellers, by charging their customers more than what they paid the marketer for
acquiring the product (termed markup). For the latter, marketers have a good idea
of what the final customer will pay for their product which means the marketer
must charge less when selling the product to resellers. In these situations
marketers are not reaping the full sale price by using resellers, which they may be
able to do if they sold directly to the customer.
 Loss of Communication Control – Marketers not only give up revenue when
using resellers, they may also give up control of the message being conveyed to
customers. If the reseller engages in communication activities, such as personal
selling in order to get customers to purchase the product, the marketer is no longer
controlling what is being said about the product. This can lead to
miscommunication problems with customers, especially if the reseller embellishes
the benefits the product provides to the customer. While marketers can influence
what is being said by training reseller’s salespeople, they lack ultimate control of
the message.
 Loss of Product Importance – Once a product is out of the marketer’s hands the
importance of that product is left up to channel members. If there are pressing
issues in the channel, such as transportation problems, or if a competitor is using
promotional incentives in an effort to push their product through resellers, the
marketer’s product may not get the attention the marketer feels it should receive.

Channel Arrangements

The distribution channel consists of many parties each seeking to meet their own business
objectives. Clearly for the channel to work well, relationships between channel members
must be strong with each member understanding and trusting others on whom they
depend for product distribution to flow smoothly.

For instance, a small sporting goods retailer that purchases products from a wholesaler
trusts the wholesaler to deliver required items on-time in order to meet customer demand,
while the wholesaler counts on the retailer to place regular orders and to make on-time
payments.

Relationships in a channel are in large part a function of the arrangement that occurs
between the members. These arrangements can be divided in two main categories:

1. Independent Channel Arrangements

2. Dependent Channel Arrangement

8
Independent

Under this arrangement a channel member negotiates deals with others that do not result
in binding relationships. In other words, a channel member is free to make whatever
arrangements they feel is in their best interest. This so-called "conventional" distribution
arrangement often leads to significant conflict as individual members decide what is best
for them and not necessarily for the entire channel.

On the other hand, an independent channel arrangement is less restrictive than dependent
arrangements and makes it easier for a channel members to move away from
relationships they feel are not working to their benefit.

Dependent

Under this arrangement a channel member feels tied to one or more members of the
distribution channel. Sometimes referred to as "vertical marketing systems" this
approach makes it more difficult for an individual member to make changes to how
products are distributed. However, the dependent approach provides much more stability
and consistency since members are united in their goals. The dependent channel
arrangement can be broken down into three types:

 Corporate – Under this arrangement a supplier operates its own distribution

system in a manner that produces an integrated channel. This occurs most
frequently in the retail industry where a supplier operates a chain of retail stores.
 Contractual – Under this arrangement a legal document obligates members to
agree on how a product is distributed. Often times the agreement specifically
spells out which activities each member is permitted to perform or not perform.
This type of arrangement can occur in several formats including:
o Wholesaler-sponsored – where a wholesaler brings together and manages
many independent retailers including having the retailers use the same
name
o Retailer-sponsored – this format also brings together retailers but the
retailers are responsible for managing the relationship
o Franchised – where a central organization controls nearly all activities of
other members
 Administrative – In certain channel arrangements a single member may dominate
the decisions that occur within the channel. These situations occur when one
channel member has achieved a significant power position. This most likely
occurs if a manufacturer has significant power due to brands in strong demand by
target markets (e.g., Procter &Gamble) or if a retailer has significant power due to
size and market coverage (e.g., Wal-Mart). In most cases the arrangement is
understood to occur and is not bound by legal or financial arrangements.

9
Level of Distribution Coverage

The marketer must take into consideration many factors when choosing the right level of
distribution coverage. However, all marketers should understand that distribution creates
costs to the organization. Some of these expenses can be passed along to customers (e.g.,
shipping costs) but others cannot (e.g., need for additional salespeople to handle more
distributors). Thus, the process for determining the right level of distribution coverage
often comes down to an analysis of the benefits (e.g., more sales) versus the cost
associated with gain the benefits.

Additionally, it is worth noting that for the most part distribution coverage decisions are
of most concern to consumer products companies, though there are many industrial
products that also must decide how much coverage to give their products.

There are three main levels of distribution coverage - mass coverage, selective and
exclusive.

 Mass Coverage - The mass coverage (also known as intensive distribution)

strategy attempts to distribute products widely in nearly all locations in which that
type of product is sold. This level of distribution is only feasible for relatively low
priced products that appeal to very large target markets (e.g., see consumer
convenience products). A product such as Coca-Cola is a classic example since it
is available in a wide variety of locations including grocery stores, convenience
stores, vending machines, hotels and many, many more. With such a large number
of locations selling the product the cost of distribution is extremely high and must
be offset with very high sales volume.
 Selective Coverage - Under selective coverage the marketer deliberately seeks to
limit the locations in which this type of product is sold. To the non-marketer it
may seem strange for a marketer to not want to distribute their product in every
possible location. However, the logic of this strategy is tied to the size and nature
of the product’s target market. Products with selective coverage appeal to smaller,
more focused target markets (e.g., see consumer shopping products) compared to
the size of target markets for mass marketed products. Consequently, because the
market size is smaller, the number of locations needed to support the distribution
of the product is fewer.
 Exclusive Coverage - Some high-end products target very narrow markets that
have a relatively small number of customers. These customers are often
characterized as “discriminating” in their taste for products and seek to satisfy
some of their needs with high-quality, though expensive products. Additionally,
many buyers of high-end products require a high level of customer service from
the channel member from whom they purchase. These characteristics of the target
market may lead the marketer to sell their products through a very select or
exclusive group of resellers. Another type of exclusive distribution may not
involve high-end products but rather products only available in selected locations
such as company-owned stores. While these products may or may not be higher

10
 priced compared to competitive products, the fact these are only available in
company outlets give exclusivity to the distribution.

Relationship Issues in Channels

A good distribution strategy takes into account not only marketing decisions, but also
considers how relationships within the channel of distribution can impact the marketer’s
product. In this section we examine three such issues:

1. Channel Power

A channel can be made up of many parties each adding value to the product purchased by
customers. However, some parties within the channel may carry greater weight than
others. In marketing terms this is called channel power, which refers to the influence one
party within a channel has over other channel members. When power is exerted by a
channel member they are often in the position to make demands of others. For instance,
they may demand better financial terms (e.g., will only buy if prices are lowered, will
only sell if price is higher) or demand other members perform certain tasks (e.g., do more
marketing to customers, perform more product services). Channel power can be seen in
several ways:

 Backend or Product Power – Occurs when a product manufacturer or service

provider markets a brand that has a high level of customer demand. The marketer
of the brand is often in a power position since other channel members have little
choice but to carry the brand or risk losing customers.
 Middle or Wholesale Power – Occurs when an intermediary, such as a wholesaler,
services a large number of smaller retailers with products obtained from a large
number of manufacturers. In this situation the wholesaler can exert power since
the small retailers are often not in the position to purchase products cost-
effectively and in as much variety as what is offered by the wholesaler.
 Front or Retailer Power – As the name suggests, the power in this situation rests
with the retailer who can command major concessions from their suppliers. This
type of power is most prevalent when the retailer commands a significant
percentage of sales in the market they serve and others in the channel are
dependent on the sales generated by the retailer.

2. Channel Conflict

In an effort to increase product sales, marketers are often attracted by the notion that sales
can grow if the marketer expands distribution by adding additional resellers. Such
decisions must be handled carefully, however, so that existing dealers do not feel
threatened by the new distributors who they may feel are encroaching on their customers
and siphoning potential business. For marketers, channel strategy designed to expand
product distribution may in fact do the opposite if existing members feel there is a
conflict in the decisions made by the marketer. If existing members sense a conflict and

11
feel the marketer is not sensitive to their needs they may choose to stop handling the
marketer’s products.

3. Need for Long-Term Commitments

Channel decisions have long-term consequences for marketers since efforts to establish
new relationships can take an extensive period of time while ending existing relationships
can prove difficult. For instance, Company A, a marketer of kitchen cabinets that wants
to change distribution strategy, may decide to stop selling their product line through
industrial supply companies that distribute cabinets to building contractors and instead
sell through large retail home centers. If in the future Company A decides to once again
enter the industrial supply market they may run into resistance since supply companies
may have replaced Company A’s product line with other products and, given what
happened to the previous relationship, may be reluctant to deal with Company A. As
another example of problems with long-term commitments, building contractors may be
comfortable purchasing kitchen cabinets from industrial suppliers. If Company A decides
to change their reseller network they may find it difficult to regain the building contractor
customer base, who may continue to purchase from the industrial suppliers but are now
purchasing products from Company A’s competitors. In this case, Company A may have
to give serious thought to whether breaking their long-term relationship with industrial
suppliers is in the company’s best interest.

Establishing Channel Relationships

Since channel members must be convinced to handle a marketer’s product it makes sense
to consider channel partner’s needs in the same way the marketer considers the final
user’s needs. However, the needs of channel members are much different than those of
the final customer. Resellers seek products of interest to the reseller’s customers but are
also concerned with many other issues such as:

 Delivery – Resellers want the product delivered on-time and in good condition in
order to meet customer demand and avoid inventory out-of-stocks.
 Profit Margin – Resellers are in business to make money so a key factor in their
decision to handle a product is how much money they will make on each product
sold. They expect that the difference (i.e., margin) between their cost for
acquiring the product from a supplier and the price they charge to sell the product
to their customers will be sufficient to meet their profit objectives.
 Other Incentives – Besides profit margin, resellers may want other incentives to
entice them especially if they are required to give extra effort selling the product.
These incentives may be in the form of additional free products or even bonuses
(e.g., bonus, free trips) for achieving sales goals.
 Packaging – Resellers want to handle products as easily as possible and want their
suppliers to ship and sell products in packages that fit within their system. For
example, products may need to be a certain size or design in order to fit on a
store’s shelf, or the shipping package must fit within the reseller’s warehouse or
receiving dock space.

12
  Training – Some products require the reseller to have strong knowledge of the
product including demonstrating the product to customers. Marketers must
consider offering training to resellers to insure the reseller has the knowledge to
present the product accurately.
 Promotional Help – Resellers often seek additional help from the product supplier
to promote the product to customers. Such help may come in the form of funding
for advertisements, point-of-purchase product materials, or in-store
demonstrations.

Question:

a) Movit Products Limited is planning to expand its distribution network in its target
market especially East Africa. Using your marketing management knowledge,
advise them on the factors they should consider when selecting the intended
distribution channels.
b) Explain to them the functions these channels are likely to perform for the
improvement of their overall business performance.

13