Channels of Distribution Chapters 15, 16 Any series of firms that participate in the flow of goods from producer to final user.  Short: producer → consumer  Long: producer → wholesaler → retailer → consumer

Distribution & Supply Chain Management

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Channels of Distribution Distribution is a major cost of most consumer items. costs for manufacturer to ship to middleman or retailer. cost of handling at middleman and/or retailer’s distribution center. cost for retailer to unload, display, and process

Why Use Middlemen? Middlemen are used because they oftentimes can perform certain functions more efficiently than producers. selling transporting warehousing, inventory collecting payment

What do Middlemen do? Middlemen adjust discrepancy of quantity: they buy in large amount, and sell in smaller quantities discrepancy of assortment: middlemen typically offer a complementary mix of goods

What Do Middlemen Do? buy in large quantities from manufacturers and sell in smaller quantities to retailers, other business (breaking bulk) accumulate a variety of complementary goods, thus simplifying customers’ purchasing function they have a sales force and serve a local market territory, and know these customers very well provide local warehousing, inventory for quicker delivery

Con’t some take title to goods, thus improving cash flow of manufacturer some grant credit to customers, making it easy to buy provide market information to manufacturer In effect, a middleman takes over the marketing and selling functions for a manufacturer

Manufacturers Ideally Prefer Selling Direct to Customer Have more control over marketing mix (price, promotion, distribution). To ensure an aggressive marketing and selling effort. Middleman may not give manufacturer’s product adequate attention, considering that they sell a large variety of goods.

However, to have a direct channel a manufacturer must have: Its own salesforce (but expensive and time consuming) A system of distribution centers and workers  Long-haul and local delivery trucks Billing, accounts receivable, and other administrative people

But … Many manufacturers are too small, and cannot afford high level of fixed costs. Many lack marketing expertise. Some are seasonal business, which precludes full time marketing operation.

Middlemen provide economies of scale, efficiencies All marketing functions have to be performed by someone.  Depends on who can do it most efficiently  sometimes manufacturer, sometimes middleman  You can replace the middlemen, but not the functions they perform.

To determine the optimal method, must look at “total costs.”  Faster methods of shipping cost more, but can decrease warehousing and inventory expenses.  Slower methods of shipping cost less, but can lead to increased warehousing and inventory expenses.

Which Conditions Favor the Use of a Direct Channel? The seller has only a few, large customers With large purchase size (full truckloads) technical products broad product line

Which Conditions Favor an Indirect Channel (that is, using middlemen)? Many customers Customers are spread out all over Many customers are small or medium size Manufacturer has narrow product line Customers need very quick delivery, so local inventory is needed