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10.9: Summary

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    27970
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    • Contributed by John Burnett
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    The complex mechanism of connecting the producer with the consumer is referred to as the channel of distribution. This chapter has looked at the evolution of the channel, as well as theoretical explanations for the distribution channel phenomenon. Five "flows" are suggested that reflect the ties of channel members with other agencies in the distribution of goods and services. A channel performs three important functions: (a) transactional functions, (b) logistical functions, and (c) facilitating functions. Channel strategies are evident for service products as well as for physical products. Options available for organizing the channel structure include: (a) conventional channels, (b) vertical marketing systems, (c) horizontal channel systems, and (d) multiple channel networks. Designing the optimal distribution channel depends on the objectives of the firm and the characteristics of available channel options.

    The primary members of distribution channels are manufacturers, wholesalers, and retailers, Retailing is all activities required to market goods and services to the ultimate consumer. This makes retailers who perform such activities an important link in the channel of distribution for many consumer products.

    Wholesaling involves all activities required to market goods and services to businesses, institutions, or industrial users who are motivated to buy for resale or to produce and market other products and services. Wholesalers provide a linkage between producers and retailers or industrial users.

    Physical distribution management involves the movement and storage of materials, parts, and finished inventory from suppliers, between middlemen, and to customers. Physical distribution activities are undertaken to facilitate exchange between marketers and customers. The basic objective of physical distribution is to provide an acceptable level of customer service at the lowest possible cost. This is done using the total cost concept, which requires that all the costs of each alternative distribution system be considered when a firm is attempting to provide a level of customer service.

    Channels exhibit behavior, as people do, and this behavior needs to be coordinated and managed in order to reach desired objectives. The four dimensions of behavior examined are role, communication, conflict, and power. Strategies for effective channel management include: (a) analyze the consumer, (b) establish channel objectives, (c) specify the channel tasks, (d) select the appropriate channel from available alternatives and (e) evaluate the results. The chapter concludes with a discussion of the legal factor impact on channels.

    Key terms

    Exchange function Sales of the product to the various members of the channel of distribution.

    Physical distribution function Moves the product through the exchange channel, along with title and ownership.

    Marketing channel Sets of independent organizations involved in the process of making a product or service available for use or consumption as well as providing a payment mechanism for the provider.

    Routinization The right products are most always found in places where the consumer expects to find them, comparisons are possible, prices are marked, and methods of payment are available.

    Retailing Involves all activities required to market consumer goods and services to ultimate consumers.

    Nonstore retailing Sales made to ultimate consumers outside a traditional retail store setting.

    Wholesaling Includes all activities required to market goods and services to businesses, institutions, or industrial users.

    Conventional channel A group of independent businesses, each motivated by profit, and having little concern about any other member of the distribution sequence.

    Vertical marketing system Come about when a member of the distribution channel assumes a leadership role and attempts to coordinate the efforts of the channel.

    Channel role Defines what the behavior of the channel member should be.

    Channel conflict Personal and direct friction; often suggests a potential confrontation.

    Channel power A willingness to use force in a relationship.

    Questions

    ➢ Discuss the difference between the theories of the sorting concept and the postponement concept.

    ➢ What are the five important "flows” that link channel members and other agencies together in distribution? Explain each type.

    ➢ Define the following three channel functions: (1) transactional, (2) logistical, and (3) facilitating. What would happen to these functions if the middlemen were eliminated from the chain linking manufacturer to consumer?

    ➢ Why are channels of distribution important for service products?

    ➢ Compare the characteristics of the three forms of vertical marketing systems: administered, contractual, and corporate.

    ➢ What are the advantages to wholesalers of contractual arrangements forming cooperatives with retailers? What are the advantages to retailers?

    ➢ What is an ancillary structure? What is its function in the distribution channel?

    ➢ How do economic conditions of inflation, recession, and shortages impact upon the channel environment?

    ➢ Discuss situations in which channel conflict may be desirable. How should conflict that produces negative effects be managed?

    ➢ Why do organizations need to effectively manage their channels of distribution? What happens when they do not?

    ➢ How does ineffective channel management affect consumers? An organization's revenue stream?

    ➢ What role does technology play in channel management? What types of technology can organizations use to improve channel management?

    ➢ Do you see sources of conflict in this new arrangement?

    ➢ How will role determination be determined?

    Project

    Starting with a well-known manufacturer, trace the various channel intermediaries employed. Draw a channel diagram.

    Case application

    Connecting channel members

    Brokers are in the midst of an identity crisis. Today's brokers represent more than 3.000 manufacturers comprising nearly 60 per cent of all commodity volume in package goods and 80 per cent of US grocery warehouse withdrawals. Many brokers rank among the top 10 vendors of their major retail customers. Much to their continuing frustration, however, many manufacturers are experimenting with some combination of broker and direct resources in an attempt to deal with the new marketplace. Some of these models are working, but managers are not.

    "While each manufacturer must develop a host of different strategies to match that of individual customers, the broker has the luxury to organize his total strategies around his individual customers," says National Food Brokers Association (NFBA) president and CEO Robert Schwarze. Brokers have always been regarded for their local market expertise, but the rapid shift to micromarketing is now regarded as their opportunity to ultimately weave themselves into the very fabric of their principles' go-to-market approach.

    Consumers have a lot of shopping alternatives and are taking advantage of them, which is driving manufacturers and retailers to look for consumer information to give them a competitive edge. In just a few years, as brokers have accelerated their use of data, the number of brokers having online access to syndicated data has expanded to more than 200, according to an Andersen Consulting Survey.

    Traditionally, panel and retail census data have been used by manufacturers to understand the components of volume and to determine what they can do to grow volume, including the primary variables of penetration and buying rates. Now these same consumer dynamics can be used to understand retail-shopping behavior. Instead of simply measuring how many households buy a particular brand, the data measure how many shoppers who buy the brand shop at a particular retailer or retail channel. Depending on where the manufacturer fits on the scale will affect how one thinks about marketing and promotion.

    "In the final analysis, understanding a retailer's position in the market is the key," said A C Nielsen consumer information and national sales vice president Tod Hale. The knowledge about the competitive frame, including individual retailer shopper demographics, purchase behavior in a category, and measures of loyalty by account, are increasingly essential to promotional planning and evaluation. The ability to compare and contrast behavior in different accounts is essential to uncovering the opportunities.

    References

    1Wroe Alderson, "Factors Governing the Development of Marketing Channels," in R.M. Clewett (ed.), Marketing Channels for Manufactured Products, Homewood, IL: Richard D. Irwin. 1954, pp. 5-22.

    2James L. Heskett, Marketing, New York: Macmillan Publishing Co., Inc., 1976, pp. 265-267.

    3Roger M. Pegram, "Selecting and Evaluating Distributors," New York: The Conference Board, Business Policy Study No. 116, 1965, p. 24.

    4Louis W. Stem, and Ronald H. Gorman, "Conflict in Distribution Channels: An Exploration," in Distribution Channels: Behavioral Dimensions, ed. Louis W. Stern, New York: Houghton-Mifflin Co., 1969, p. 156.

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