Ownership of a product has to be transferred somehow from the individual or organization that makes it to the customer who needs and buys it. Goods also must be physically transported form where they are produced to where they are needed. Services ordinarily cannot be shipped but rather are produced and consumed in the same place.
Even before a product is ready for market, management should determine what methods and routes would be used to get it there. This means establishing strategies for the products: -
i) Distribution channel and
ii) Physical distribution
Between producers and the final users stands a marketing channel, a host of marketing intermediaries performing a variety of functions a variety of names. Some intermediaries such as wholesalers, retailers - buy; take title to and resale the merchandise. Others -such as brokers, manufacturer's representative, and sales agents - search for customers and may negotiate on the producer's behalf but do not take title to the goods.
The process of getting goods to customers has traditionally been called physical distribution. Physical distribution starts at the factory. Managers try to choose a set of warehouses (stocking points) and transportation carriers that will deliver produced goods to final destinations in the desired time and/or at the lowest total cost.
4.2 Distribution Channel
Distribution role within a marketing mix is getting the product to its target market. The most important activity in getting a product to market is arranging of its sale (and transfer of title) from producer to final customer. Other common activities (or functions) are promoting the product, storing it, and assuming some to the financial risk during the distribution process.
A producer can carry out these functions in exchange for an order (and, hopefully payment) from a customer. Or producer and consumer can share these activities. Typically, however, firms called middlemen perform some of these activities on behalf of the consumer or the producer.
A middleman is a business firm that renders services related directly to the sale/or purchase of a product as it flows form producer to consumer. A middleman either owns the product at some point or actively aids in the transfer of ownership. Often, but not always, a middleman takes physical possession of the product.
Middlemen are commonly classified on the bases of whether or not they take title to the product being distributed. Merchant middlemen actually take title to the products they help to market. The two groups of merchant middlemen are wholesalers and retailers. Agent middlemen never actually own the products, but they do arrange the transfer of title. Real estate brokers, manufacturer's agents, and travel agents are examples of agent middlemen.
4.2.1 Meaning of Distribution Channel
A distribution channel consists of the set of people and firms involved in the transfer of title to a product as the product moves form producer to ultimate consumer or business user.
A channel of distribution always includes both the producer and the final customer for the product in its present form as well as any middlemen such as retailers and wholesalers.
The channel for a product extends only to the last person or organization that buys it without making any significant change in its form. When its form is altered and another product emerges, a new channel is started. i.e. when lumber is milled and then made into furniture, two separate channels are involved. The channel for the lumber might be lumber mill-broker-furniture manufacturer. The channel for the furnished furniture might be furniture manufacturer -retail furniture -store-consumer.
Beside producer, middlemen, and final customer, other institutions aid the distribution process. Among these intermediaries are banks, insurance companies, storage firms, and transportation companies. However, because they do not take title to the products and are not actively involved in purchase or sales activities, these intermediaries are not formally included in the distribution channel.
4.2.2 Factors Affecting Choice of Channel
If a firm is customer oriented, consumer-buying patterns determines its channels. The nature of the market should be the key factor in management's choice of channels. Other considerations are the product, the middlemen, and the company itself. The various factors affecting choice of channels are as follows:-
126.96.36.199 Market Consideration
A logical starting point is to consider the target market-its needs, structure, and buying behavior:
a) Type of market:
Because ultimate consumers behave differently than business users, they are reached through different distribution channels. Retailers, by definition, serve ultimate consumers, so they are not in channels for business goods.
b) Number of potential customers
A manufacturer with few potential customers (firms or industries) may use its own sales force to sell directly to ultimate consumers or business users.
i.e. Boeing uses this approach in selling its jet aircraft for a large number of customers, the manufacturer would likely use middlemen.
c) Geographic concentration of the market
When most of firm's prospective customers are concentrated in a few geographic areas, direct sale is practical. When customers are geographically dispersed, direct sale is likely to be impractical due to high travel costs.
d) Order Size:
When either order size or total volume of business is large, direct distribution is economical. Thus a food products manufacture would sell directly to large grocery chains. The same manufacturer, however, would use wholesalers to reach small grocery stores, whose orders are usually too small to justify direct sale.
188.8.131.52 Product Consideration
While there are numerous product related factors to consider, we will high light three:-
a) Unit value:
The price attached to each unit of a product affects the amount of funds available for distribution. For example, a company can afford to use its own employee to sell a nuclear-reactor part that costs more than $10,000. But it would not make sense for a company sales person to call on a household or a business firm to sell a $2 ballpoint pen.
Some goods, including many agricultural products, physically deteriorate fairly quickly. Other goods, such as clothing, perish in a fashion sense. Perishable products require direct or very short channels.
c) Technical nature of a product:
A business product that is highly technical is often distributed directly to business users. The producer's sales force must provide considerable presale & post sale service. Wholesalers normally cannot do this.
184.108.40.206 Middlemen Consideration
A company may not be able to arrange exactly the channels it desires:-
a) Services provided by middlemen
Each producer should select middlemen offering those marketing services that the producer either is unable to provide or cannot economically perform.
For instance, firms form other countries seeking to penetrate business markets abroad commonly utilize industrial distributors because they furnish needed capabilities such as market coverage, sales contacts, and storage of inventories.
b) Availability of desired middlemen
The middlemen preferred by a producer may not be available. They may carry competing products ad, as a result, not want to add another line.
c) Attitude of middlemen toward producer's policies
When middlemen are unwilling to join a channel because they consider manufacturers policies to be unacceptable, the manufacturer has fewer channel options. Some retailers or wholesalers, for example, will carry a producer's line only if they receive assurance that no competing middlemen will carry the line in the same territory.
220.127.116.11 Company Consideration
Before choosing a distribution channel for a product, a company should consider its own situation:-
a) Desired for channel control
Some producers establish direct channels because they want to control their products' distribution, even though a direct channel may be more costly than an indirect channel. By controlling the channel, producers can achieve more aggressive promotion and can better control both the freshness of merchandise stocks and their product's retail prices.
b) Services provided by seller
Some producers make decisions about their channels based on the distribution functions desired (and occasionally demanded) by middlemen. For instance, numerous retail chains will not stock a product unless it is presale through heavy advertising by the producer.
c) Ability of management
The marketing experience and managerial capabilities of a producer influence decisions about which channel to use. Many companies lacking marketing know-how turn the distribution job over to middlemen.
d) Financial Resources:
A business with adequate finances can establish its own sales force, grant credit to its customers, and/or warehouse its own products. A financially weak firm uses middleman to provide these services.
If a company with an unproven product having low profit potential cannot place its products to middlemen, it may have no other option but to try to distribute the product directly to its target market.
Firms may rely on existing channel, or they may use new channels to better serve current customers and reach prospective customers. In selecting their channels, a firm should seek to gain a differential advantage.
Most distribution channels include middlemen, but some do not. A channel consisting only of producer and final customer, with not middlemen providing assistance, is called direct distribution.
In contrast, a channel of producer, final customer and at least one level of middlemen represent indirect distribution.
4.2.3 Major Channels of Distribution
Diverse distribution channels exist today. The most common channels for consumer goods, business goods, and services are described as follows:
18.104.22.168 Consumer Goods
Five channels are widely used in marketing tangible products to ultimate consumers:
a) Producer -------->Consumer
The shortest, simplest distribution channel for consumer goods involves no middlemen. The producer may sell from door to door or by mail.
b) Producer --------> retailer -------> consumer
Many large retailers buy directly form manufacturers and agricultural producers.
c) Producer --------> wholesaler --------> retailer------> consumer
If there is a traditional channel for consumer goods, this is it. Small retailers and manufacturers by the thousands find this channel the only economically feasible choice.
d) Producer --------> agent --------> retailer --------> consumer
Instead of wholesalers many producers prefer to use agent middlemen to reach the retail market, especially large-scale retailers.
To reach small retailers, producer often use agent middlemen, who in turn call on wholesalers that sill to large retail chains and/or small retail stores.
22.214.171.124 Business Goods
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 term industrial distributor and merchant wholesaler are synonymous. The four common channels for business goods are: -
a) Producer--------> user
This direct channel accounts for a greater dollar volume of business products than any other distribution structure. Manufactures of large installations, such as airplanes, generators, and heating plants, sell directly to users.
b) 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.
c) Producer--------> agent--------> user
Firms without their own sales departments 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.
d) Producer ------->agent-------> 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 direct selling. Or decentralized inventory may be needed to supply users rapidly; in which case the storage services of an industrial distributors are required.
The intangible nature of services creates special distribution requirements. There are only two common channels for services:
a) Producer--------> consumer
Because a service is intangible, the production process and/or sales activity often require personal contact between producer and consumer. Thus a direct channel is used. Direct distribution is typical for many professional services, such as health care and legal advice, and personal services, such as hair cutting and weight-loss counseling. However, other services, including travel, insurance, and entertainment, may also rely on direct distribution.
b) Producer--------> agent--------> consumer
While direct distribution often is necessary for a service to be performed, producer consumer contact may not be required for distribution activities. Agents frequently assist a services producer with transfer of ownership (the sales task) or related tasks. Many services notably travel, lodging, advertising media, entertainment, and insurance are sold through agents.
4.3 Physical Distribution
Physical distribution is a necessary as well as a costly activity. According to one executive at Procter & Gambler, the average time required to move a typical product form "farm to shelf" is four to five months. Although it takes only about 17 minutes to actually produce a product, the rest of the time is spent in logistical activities - storage, handling, transportation, packing and so on.
In the developed economies, the distribution sector typically accounts for one-third of the gross domestic product (GDP). Furthermore, international logistics costs can account for 24 to 24 percent of the sales value of a product, a significant difference from the 8 to 10 percent for domestic shipment.
After a company establishes its channels of distribution, it must arrange for the physical distribution of its products through these channels. Physical distribution, which we use synonymously with logistics, consists of all the activities concerned with moving the right amount of the right products to the right place at the right time. In its full scope, physical distribution for manufacturers includes the flow of raw materials form their sources of supply to the production line and the movement of finished goods from the end of the production line to the final users' locations. Middlemen manage the flows of goods onto their shelves as well as from their shelves to customers' homes, stores, or other places of business.
The activities comprising physical distribution are:-
- Inventory location and warehousing
- Materials handling
- Inventory control
- Order processing
A decision regarding any one of these activities affect all the others. Location of a warehouse influences the selection of transportation methods and carriers. The choice of a carrier influences the optimum size of shipment.
4.3.2 Strategic Use Of Physical Distribution
The strategic use of physical distribution may enable a company to strengthen its competing position by providing more customer satisfaction and/or by reduction operating costs. The management of physical distribution can also affect a firms marketing mix particularly product planning, pricing, and distribution channels. Each opportunity is described below.
- Improve customer service
A well -run logistics system can improve the service a firm provides its customers whether they are middlemen or ultimate users. To ensure reliable customer service, management should set standards of performance for each subsystem of physical distribution.
- Reduce distribution costs
Many avenues to cost reductions may be opened by effective physical distribution management. For example, eliminating unneeded warehouses will lower costs. Consolidating stocks at fewer locations may reduce inventories and their attendant carrying costs and capital investment.
- Create time and place utilities
Storage, which is a part of warehousing, creates time utility. Storage is essential to correct imbalances in the timing of production and consumption.
Transportation adds value to products by creating place utility.
- Stabilize prices: -
Careful management of warehousing and transportation can help stabilize prices for an individual firm or for an entire industry. If market is temporarily glutted with a product, sellers can store it until supply and demand conditions are better balanced.
4.3.3 Tasks of Physical Distribution
Physical distribution refers to the actual physical flow of products. In contrast, physical distribution management is the development and operation of processes resulting in the effective and efficient physical flow of products. An effective physical distribution system is built around five interdependent subsystems: inventory location and warehousing, materials handling, inventory control, order processing, and transportation. Each must be carefully coordinated with the others.
126.96.36.199 Inventory Location and Warehousing
The name of the game in physical distribution is inventory management. One important consideration is warehousing, which embraces a range of functions, such as assembling, dividing (bulk-breaking), and storing products and preparing them for reshipping. Management must also consider the size, location, and transportation of inventories. These four areas are interrelated. The number and locations of inventory sites, for example, influence inventory size, and transportation methods.
188.8.131.52 Materials Handling
Selecting the proper equipment to physically handle products, including the warehouse building itself, is the materials handling subsystems of physical distribution management. Equipment that is well matched to the task can minimize losses from breakage, spoilage, and theft. Efficient equipment can reduce handling costs as well as time required for handling. Containerization is a cargo-handling system that has become standard practice in physical distribution. Containerization minimizes physical handling thereby reducing damage, lessening the risk of theft, and allowing for more efficient transportation.
184.108.40.206 Inventory Control
Maintaining control over the size and composition, of inventories, which represent a sizable investment for most companies, is essential to any physical distribution system. The goal of inventory control is to fill customers' order promptly, completely, and accurately while minimizing both the investment and fluctuations in inventories.
220.127.116.11 Order Processing
Still another part of the physical distribution system is a set of procedures for receiving, handling, and filling orders. The order processing subsystem should include provision for billing, granting credit, preparing invoices, and collecting past-due accounts. Consumer ill will results if a company makes mistakes or is slow in filling orders. That's why more and more companies have turned to computers to execute most of their order processing activities.
A major function of the physical distribution system in many companies is transportation - shipping products to customers.
Too often, a company attempts to minimize the cost of only one aspect of physical distribution - transportation. For example, management might be upset by the high cost of airfreight. But the higher costs of airfreight may be more than offset by savings from
- Lower inventory costs
- Less insurance and interest costs
- Lower crating costs and
- Fewer list sales due to out of stock conditions. The point is not that airfreight is the best method of transportation. Rather the key point is that physical distribution should be viewed as total process, with all the related costs being analyzed. Management must decide on both the mode of transportation and the particular carriers.
1. Modes of Transportation
The availability of transportation is one important factor affecting a company's site selection, to move a product both between counties and with in a country.
These are three fundamental modes of transportation
- Water (ocean & inland) and
- Land (rail & truck)
Air and ocean shipment are appropriate for transportation between countries, especially when the distance is considerable and the boundaries are not joined.
Inland water, rail, and track are m ore suitable for inland and domestic transportation. When countries are connected by land, it is possible to use rail and truck to move merchandise from locations.
2. Factors Determining Mode of Transportation
The appropriate transportation mode depends on
- Market location
- Cost and
- Product nature
A firm must consider market location. Contiguous markets can be served by rail or truck. To move goods between continents, ocean or air transportation is needed.
Speed is another consideration. When speed is essential, air transport is without question the preferred mode of distribution. Air transport is also necessary when the need is urgent or when delivery must be quickly completed as promised. For perishable items, a direct flight is preferable, because a shorter period in transport reduces both spoilage and theft.
Finally cost must be considered as well. Cost is directly related to speed, a quick delivery costs more. But there is a trade-off between the two interms of other kinds of savings. Packing costs for the air freight are less than for ocean freight because for air freight the merchandise does not have to be in transit for a long period of time and the hazards are relatively low.
2. Comparison of Transportation Methods
Once product has been designed and priced, the next decision management must make is how to distribute the goods into the final customers. In the process, management must decide on
- Channels of distribution and
- Physical distribution.
Channels of distribution is a set of peoples and firms involved in the flow of title to the product as it moves from point of production to ultimate consumption. A channel includes producers, final customers and any middlemen that participate in the process.
A variety of channels are used to distribute consumer goods, business goods, and services. Numerous factors needed to be considered is selecting a distribution channel. The primary consideration is the nature of the target market. Others relate to the product, the middlemen, and the company itself.
Physical distribution is the flow of the products from supply sources to the firm and then from the firm to its customers. The goal of physical distribution is to move the right amount of products to the right place at the right time.
The operation of physical distribution system requires management's attention and decision-making in five areas:
- Inventory location and warehousing
- Materials handling
- Inventory control
- Order processing and
They should not be treated as individual activities but as interrelated components within a physical distribution system. Effective management of these five activities require an understanding of distribution centers, economic order quantity, just-in-time processes, and inter-modal transportation.