BUAD 307 DISTRIBUTION Lars Perner, Ph.D., Instructor 1 DISTRIBUTION Intermediaries—functions Intermediaries—structures and their justifications Selectivity of distribution—do we want our product available at K- Mart? Parallel Distribution Structures Diversion

BUAD 307 DISTRIBUTION Lars Perner, Instructor 2 Intermediaries Tend to Reduce Costs and Add Value Specialization of Labor –Development of expertise in specific area –Spreading of costs over more products Overcoming Discrepancies –Quantity –Assortment –Temporal

BUAD 307 DISTRIBUTION Lars Perner, Instructor 3 Discrepancies Quantity: Delivering products in quantities desired –By end consumer –By retailers Assortment: Wholesalers and retailers can combine products from several manufacturers for convenience of –Retailers –Consumers Temporal: Having products available at the right time—e.g., –Thanksgiving Turkeys –Summer fashions

BUAD 307 DISTRIBUTION Lars Perner, Instructor 4 Intermediaries: Adding Value MANUF. 1 MANUF. 2 MANUF. 3 WHOLE- SALER (or agent) 1 WHOLE- SALER (or agent) 2 RETAILER PRODUCTS FROM OTHER MANUFS. Value added: Breaking bulk (quantity discrepancy reduced) Consolidating supplies (assortment discrepancy reduced) Holding inventory (temporal discrepancy reduced)

BUAD 307 DISTRIBUTION Lars Perner, Instructor 5 Distribution Efficiencies Certain VERY LARGE retail chains—e.g., Wal-Mart and Safeway—may be able to distribute more efficiently than independent wholesalers –Integration with own demand forecasts For most other retailers, buying through wholesalers is more efficient

BUAD 307 DISTRIBUTION Lars Perner, Instructor 6 Potential Channel Structures (U.S.) Agents/ Brokers Wholesalers Retailers Customer Producer Wholesalers Retailers Customer Producer Customer Producer Retailers Customer Producer Regional Wholesalers Retailers Customer Producer National Wholesalers

BUAD 307 DISTRIBUTION Lars Perner, Instructor 7 Approaches to Distribution These strategies require tradeoffs: –Wide--essential to low involvement goods –Selective--desire to maintain image –Exclusive--very high prestige needed or very high service requirements

BUAD 307 DISTRIBUTION Lars Perner, Instructor 8 Product Characteristics That May Favor Direct-to-Customer Sales High need for customization—especially if the work can be done by the customer Rapid decline in the value of inventory High value/bulk ratio Low need for customer to manually inspect the product Highly specialized product requiring a very large assortment of inventory

BUAD 307 DISTRIBUTION Lars Perner, Instructor 9 Parallel Distribution Structures (Multi-channel Distribution) MANUFAC- TURER DISTRI- BUTOR RETAILER MAJOR CHAIN (e.g., Wal-Mart) FACTORY OUTLET DIRECT MARKETING

BUAD 307 DISTRIBUTION Lars Perner, Instructor 10 Diversion Products often end up where manufacturers did not intend them to go –Trade promotions in one region Within countries (Difficult to do today since sales at a given time can be verified by scanner data) Between countries--different price sensitivities and structures may exist (e.g., pharmaceuticals, luxury autos –“Over-purchases” by small authorized retailers to supply unauthorized distributors (e.g., Levis’ for Costco)— disliked by full service retailers who have to compete

BUAD 307 DISTRIBUTION Lars Perner, Instructor 11 Over-Purchase Diversion Example Joe’s Jeans Shop normally buys and sells 500 pairs of Levi’s XBM/P jeans per week at $22.00 and sells at $32. A “consolidator” asks Joe to buy his usual 500 plus an extra 200. This increase is not big enough to make Levi’s suspicious. The consolidator pays Joe 200*($22+$3)=$5,000. Joe makes an extra $3*200=$600. The consolidator resells to a large discount chain.

BUAD 307 DISTRIBUTION Lars Perner, Instructor 12 Retail Trends Divergence—growth in both low cost, low service and high cost, high service stores more than in the middle Growth of –Mega stores: large stores with a wide assortment (e.g., Wal-Mart) – Category killers: stores emphasizing an area (e.g., electronics) Large buying power based on large volume purchases within select categories Tendency to make large deals early on in order cycle –Manufacturer gets a large quantity guaranteed sale –Category killer gets a low price