3.05 Channels of Distribution
Textbook
Review pages 450 - 451
What is distribution?
The moving or transferring of the ownership of goods and services from the producer to the consumer
What is a channel of distribution?
The path (channel) a product travels from the producer (manufacturer) to the ultimate consumer
MARKETING MIX
Remember the 4 P’s of Marketing?PriceProductPlacePromotion
DISTRIBUTION = PLACE
Channel management tasks
MarketingPackagingFinancingStorageDeliveryMerchandisingPersonal selling
Channel management decisions
Select channel membersManage and motivate channel membersEvaluate channel members
What is the best means to distribute the product?
Channel design decisions….
Analyze customer needsSet channel objectivesIdentify major alternatives
Types of intermediariesNumber of intermediariesResponsibilities of intermediaries
SO……
Who is an intermediary (middleman)?
Channel members who assist the producer in getting the goods and services to the final user
The various intermediaries include:
Wholesalers Rack jobber Drop shipper
Retailers Brick-and-mortar Non-store
Agents
Wholesalers
Companies that purchase large quantities from manufacturers, store products in warehouses and sell them to other businesses.
Example: BiLo buys their canned vegetables from Del Monte or Green Giant manufacturers
Types of wholesalers
Rack jobber: A wholesaler that provides racks filled with merchandise in space that is leased from retailers.
Ex. Rack jobber provides displays with music CDs in a series of convenience stores; rack jobber and convenience stores split revenues from sales of the CDs
Types of Wholesalers
Drop shipper: A wholesaler that accepts an order and ships directly from the manufacturer without taking possession of the goods.
Ex. Fuller Supply Company buys coat hangers from the manufacturer and if a dry cleaner wants 200 boxes, they will ship directly from the manufacturer
Retailers
Businesses that sell products to the final user or consumer.Brick-and-mortar retail: A physical store that
sells their products directly to customers.Ex. Belk, American Eagle, CVS, Food Lion
Non-store retail: A way to reach customers through vending machines, direct mail, catalog retailing, TV home shopping, and e-tailing.Ex. Drink machines, L.L. Bean catalog, QVC, E-bay
Exclusive Dealers
Situation where suppliers and distributors enter into an exclusive agreement that only allows the named distributor to sell a specific product. For example, Apple had an exclusive distribution deal with AT&T to provide the iPhone to consumers.
Agents
An individual or business that connects the buyers and sellers. Agents do not own the products they sell i.e. no legal ownership of the productsEx. A REALTOR links the homebuyer to the
home seller
What is a direct channel?Distribution that occurs directly from
the producer to the consumer For example: A consumer buys
apples from an apple farmer Cuts out the middleman
What is an indirect channel?
Distribution that occurs through one or more intermediaries before reaching the final user
For example: The apple farmer sells his apples to Harris Teeter and Harris Teeter sells them to the consumer
Indirect channel is used….
When a producer doesn’t want responsibility for the selling activities of a large retailerProducer to agent to retailer to consumer
Because wholesalers usually buy in large quantitiesProducer to wholesaler to retailer to consumer
TRANSPORTATION SYSTEMS AND SERVICES
3.05
Physical distribution is…Organizing and moving products
through the channels aka: Logistics = ordering,
transporting, storing, handling and inventory control
The 3rd largest expensefor most businesses
#1 Materials #2 Labor
Physical distributionNeeds to be as efficient and cost effective
as possibleNeeds to be coordinated with other
business functions such asPurchasingFinanceProductionPackagingPromotion
Transportation is…
Physically moving from Place A Place B
Methods include:Trucking or motor carriers Railroads Marine shipping Pipelines Air cargo services
Transportation is…
Trucking or motor carriers: tractor trailersCommon carriers – provide transportation services to
any business in their operating area for a fee; multiple shippers may be consolidated into single truckloads
Contract carriers – for-hire carriers that provide equipment and drivers for specific routes, according to agreements between carrier and the shipper; less flexibility; one-time or continual basis
Private carriers – transport for an individual business; more expensive = more control
Exempt carriers – carry agricultural products; rates are lower
Transportation is….Intermodal combines two or more transportation
modes to maximize advantagesPiggyback service is carrying loaded truck trailers on
railroad flatcars; trucks take trailers to final destinationRailroads: move heavy and bulky freight
Coal, steel, lumber, grain, equipment; along rail linesTon mile is moving 1 ton (2,000 lbs) 1 mileCarload is minimum # of lbs. to fill a boxcar
Marine Shipping: within US and around world barges transport steel, iron ore, and grain; tankers;
merchant vesselsInland, intracoastal and international waterways
Transportation is…Pipelines: transport oil and natural gas
BP owns pipelines that move crude oil from Alaskan oil fields to the refineries
Product moves slowly but continuouslyAir cargo: High value, low-weight and
time-critical products; + speed - costFlowers shipped by air from Hawaii to NCSeafood shipped overnight Chocolates shipped from France
A transportation company…
Help move small packages from A to B
For example: US Postal Service
A transportation company…
UPSFedEx
Private companies that combine shipments from several businesses to help reduce costs to those businesses
Freight forwarders
Private companies that combine less-than-carload or less-than truckload shipments from several different businesses and deliver them to their destinations.
Provide logistics expertise to companies
INVENTORY STORAGE3.05
Methods to store merchandise…Storage: the holding of products until
they are sold; produced in large quantities; amount of goods stored is called inventoryHarry Potter books are held until the retailers
place their order
Storage is needed….
Until orders are received from customersProduction is greater than consumption or
demand decreasesCommodity storage makes agricultural
products available year-round Buy in bulkFaster delivery to customers
Methods to store merchandise…
Private vs. Public WarehousesPrivate warehouse: a facility designed to meet
the needs of the owner. It may be based on size, temperature control or refrigeration; costly to build and maintain
Ex. Carol’s Linens has its own private warehouse to replenish inventory when needed
Methods to store merchandise…
Public warehouse: Storage and handling facility that may be provided for any business willing to pay for the space; rent-a-warehouseSingletary Warehouse Company has a variety
of rental spaces to lease business owners. They offer refrigerated or temperature controlled space.
Methods to store merchandise… Distribution center: A storage facility used
to centralize and speed up the delivery of goods and reduce storage costsJC Penney’s has a distribution center in
Atlanta to reach all stores in the southeast
Methods to store merchandise…
Bonded warehouse: Private or public warehouse used to store products until federal taxes have been paid on the product(s)
U.S. Customs stores imported products
until duties have been paid
Methods of handling inventory include…
Products ordered by a business are received, checked, marked (priced), and transferred
Receiving record: document used to keep track of incoming inventory
Methods of handling inventory include…
Check the received merchandiseBlind check method Direct check method Spot check method Quality check method
Methods of handling inventory include…
Blind check method: writing a detailed list of merchandise and its quantity. This list is then compared to the actual invoice. This method is time consuming but is considered the MOST ACCURATE.
Methods of handling inventory include…
Direct check method: the merchandise is verified against the invoice or purchase order
Methods of handling inventory include…
Spot check method: Merchandise is randomly checked for quality and quantity.
Methods of handling inventory include…
Quality check method: Merchandise is inspected for workmanship and making sure there is no damage to merchandise.
Methods of handling inventory include…When merchandise has been received
and checked, other information must be marked on the merchandisePlacing the selling price on the merchandise
Cumberland = 1,2,3,4,5,6,7,8,9,0UPC (universal product codes)
Scanned at check out
Once marked, transferred to selling floor
Inventory is…
Storing of merchandise before it is soldPerpetual inventory controlPhysical inventory control
Inventory is…
Perpetual: Tracks inventory on a continuous basis. A company can track and know the value and quantity of products on hand at any timeHarris Teeter electronically restocks
items as they are sold; the scanner communicates to the warehouse that the item is in need of restocking
Inventory is…
Physical: Stock is physically counted periodically and verified for accuracy
Sam’s Club physically counts each item in the warehouse once each year
Distribution Planning
Marketing 3.05
Purpose of channel membersChannel members add value to a product by
performing certain channel activities expertlyMarketingPackagingFinancingStorageDeliveryMerchandisingPersonal selling
Distribution planning involves…
Decisions about a product’s physical movement and transfer of ownership from producer to consumer.
Some of the major considerations are:Multiple channelsControl vs. costsIntensity of distribution desiredInvolvement in e-commerce
Multiple channels….
Some products meet the needs of both industrial and consumer markets.
J & J Snack Foods sells its pretzels, drinks and cookies using multiple channels to:SupermarketsMovie TheatersStadiumsSchoolsHospitals
Control vs. CostsAll manufacturers and producers must
weigh the control they want to keep over the distribution of their products against the costs and profitability.Direct sales force – company employees are
expensive with payroll, benefits, expenses; may set sales quotas and easily monitor performance
Agents – work independently, running their own businesses; less expensive = less control; agents sell product lines that make them more money
Distribution IntensityDistribution intensity is how widely a
product will be distributed; marketers want to achieve the ideal market exposureExclusive distribution – protected territories
for distribution of a product in a given geographic area; business maintains tight control over a product Ex. Franchisor legally requires a franchisee to sell only the franchisor’s productsIntegrated distribution is where the manufacturer acts
as wholesaler and retailer for its own products. Ex. The Gap sells its clothing in company-owned retail stores.
Distribution Intensity
Selective distribution – a limited number of outlets in a given geographical area are used to sell the product. Very important to select channel members that can maintain the image of the product and are good credit risks, aggressive marketers and good inventory planners. Ex. Dana Buckman sells its clothing only through top department stores that appeal to the affluent customers who buy its merchandise. It does not sell in a chain megastore or a variety store.
Distribution Intensity
Intensive distribution – the use of all suitable outlets to sell a product. The objective is complete market coverage and the ultimate goal is to sell to as many customers as possible, wherever they choose to shop. Ex. Motor oil is sold in quick-lube shops, farm stores, auto parts retailers, supermarkets, drugstores, hardware stores, warehouse clubs, and other mass merchandisers.
Dual distribution
A manufacturer may sell its products through multiple outlets at the same time:Toll-free phone systemCompany websiteMultiple retailers
Horizontal and Vertical Conflict
Horizontal Conflict: occurs between channel members at the same levelGood, old-fashioned business competitionEx: two retailers selling pet supplies compete to sell
to the same target marketVertical Conflict: occurs between channel
members at different levels within the same channelProducers and wholesalers or producers and
retailers
LEGAL CONSIDERATIONS, ETHICS, CUSTOMER SERVICE AND TECHNOLOGY
3.05
Legal considerationsFranchisor requirements of franchisee is
legal. Ex. McDonalds’ requires franchisees to purchase all their supplies from them; requires facilities built to corporate standards. Etc.
Closed territories - Part of an economy or market not open to new entrants or foreigners. McDonald’s won’t allow 2 McDonalds on the same corner or within a certain mileage.
Anti-trust laws
Sherman Act - US federal legislation of 1890 that prohibited the creation of monopolies by outlawing direct or indirect attempts to interfere with the free and competitive nature of the production and distribution of goods. Amended by the Clayton Act of 1914.
Anti-trust lawsClayton Act - US federal legislation of 1914
that amended the anti-monopoly provisions of the Sherman Act of 1890 to include prohibition of (1) price discrimination and tying arrangements, (2) sales based on exclusive-dealing contracts, (3) mergers and interlocking directorates where "the effect of such acquisition may be substantially to lessen competition, or tend to create a monopoly in any line of commerce
Robinson-Patman Act of 1936
the Act prohibits sales that discriminate in price on the sale of goods to equally-situated distributors when the effect of such sales is to reduce competition. Price means net price and includes all compensation paid. The seller may not throw in additional goods or services. Injured parties or the US government may bring an action under the Act.
Customer service and appropriate channel management
Ensures timely delivery of productsEffective communication is important
Order processingCorrect shipping informationCorrect productsHandling complaintsReducing the probability of complaintsNice and friendly people
Bad Customer service and Channel ManagementVendor consistently has back orders
Product not available when ordered Coercion – large business threatening to
stop using a supplier unless given major concessionsTying agreement - Purchase agreement in which
the customer is forced to purchase a slow-selling or unknown brand or product with a fast-selling or well known one. Such coercion is usually illegal.
Customer Service and Channel ManagementGrey-market strategy – selling product in
foreign countries for a lower price than customers can get domestically
Full-line forcing - Producer or supplier insistence that the dealer must carry the full range of products in the line. This policy may not be illegal if it can be established that it serves a legitimate business need.
Slotting allowance or feeSum paid by a vendor or manufacturer to a
retail chain or establishment for (1) making room for a product on its store shelves, (2) making room for the product in its warehouse, (3) entering the product data in its inventory system, and (4) programming its computers to recognize the product's bar code. In the US, slotting fees often run up to $50,000 or more per product per store, on an annual basis. Also called slotting allowance.
Use of Technology in Distribution
Some businesses have the capacity to distribute most or all of their products through the internete-commerce: Products are sold to customers
and industrial buyers through the Internet.e-marketplace
Satellite tracking = a dispatcher has current knowledge of a delivery truck’s location and destination
Use of Technology in Distribution
Tracking of packageBar coding on packagePackage scanned at transition points in
distribution chainCustomer uses internet to follow package along
distribution chain; e-mail may be usedGlobal distribution: in some countries the postal
service is not reliable; package tracking facilitates global trade
Use of Technology in Distribution
ProblemsCost of technologyChanging technology = updating equipmentNeed for compatible systems within and
between countries
Channels of Distribution
US Post Officehttp://www.youtube.com/watch?
v=VQReRnmCaqA&feature=related&safety_mode=true&persist_safety_mode=1
UPShttp://www.youtube.com/watch?
v=2C5KDH2o28o&feature=related&safety_mode=true&persist_safety_mode=1&safe=active
Extreme Engineering
http://www.youtube.com/watch?v=Eg4lnKPBcqk&feature=related&safety_mode=true&persist_safety_mode=1
Ship Catastrophe
http://www.youtube.com/watch?v=8HFARxn73dk&feature=related&safety_mode=true&persist_safety_mode=1
http://www.youtube.com/watch?v=BX3kFCgvKp4&feature=related&safety_mode=true&persist_safety_mode=1
Dell Computers
http://www.youtube.com/watch?v=EEhNkzdKyrw&feature=related&safety_mode=true&persist_safety_mode=1
Amazon.comhttp://www.youtube.com/watch?
v=i6H7nfHjHtY&feature=related&safety_mode=true&persist_safety_mode=1
Coca-cola
http://www.youtube.com/watch?v=jRo8_XBCSvw&feature=related&safety_mode=true&persist_safety_mode=1&safe=active