Supply Chain Management : Distribution
Alongside product management, promotion, and pricing, distribution is one of the four key components of marketing. In simple terms, distribution provides an inlay between the producer of a product and the seller of that product. After a product is made, it is usually then sold to a distributor, who in turn will sell the product either directly to customers, or to retailers who will in turn sell it to customers.
What is Distribution?
Throughout history, distribution has been related to questions in the field of logistics, namely, how does one get a particular product to a customer. Thus, the distribution end of supply chain management must contend with such decisions as to whether to sell the product directly, or through a retailer; whether the product should be distributed on a wholesale basis; whether the product should be sold via multi level marketing channels; whether members of the channel should share advertising costs, etc.
The Channels of Distribution
Quite often, there is a chain of intermediaries who pass the product down to other organizations. The product might change hands several times before it eventually reaches the customer. This is what the “distribution channel” means. The producer has to take in to account the fact that each level of the distribution channel might have particular needs they are hoping to have fulfilled by the product – and that is before it even reaches the end user!
Several distribution channel options might be available, depending on the exact nature of the product or service you are offering. It might be best, for example, for you to eliminate the channel altogether and sell direct via the Internet, mail order, or the telephone. Or you can go through an agent, who will sell your product directly on behalf of you. Alternately, you can use a distributor, who will sell your product to retailers. They, in turn, will make sure your product get to end customers.
There are many ways by which a product might be sold. But services are also sold in this fashion. Hotels often sell their service, which is essentially a room, via travel agents, airlines, centralized Internet portals, etc.
In fact, recent years have seen a number of innovations in the sector of service distribution. One instance has been a vast increase in rental services as well as franchising. Rental services these days might offer anything from tools through televisions and beyond.
There has also been a lot of integration in the service industries, with two or more related services coming together to offer related services. This is particularly evident in the area of tourism and travel. Sometimes, you can rent a car, book a flight, and book a hotel all on the same website. There is also an increasing demand for retail outlets for services. In shopping centers, you can easily find travel agencies, real estate companies, and more service providers.
There can be a number of different levels to each distribution channel. There is the zero level channel, which involves distribution with no intermediaries whatsoever. The one level channel involves one intermediary – in the case of consumer goods, this usually refers to the retailer. If it is industrial goods we are talking about, then that one intermediary will generally be a distributor. For smaller markets, using a zero or one level scheme can be quite practical and effective.
For larger markets, however, it is generally better to use a two level system, which will involve a wholesaler. This enables a ton of smaller retailers to receive and sell the product. The Japanese market uses even further levels than this, having evolved a highly complex distribution system for even simple consumer items.
In the realm of supply chain management, of course, we must also take in to consideration the relationship among the various members of the distribution channel. Generally, the relationship among the players can be described in one of three ways. First, there is the conventional channel relationship, which involves a bunch of middlemen passing the goods on from the producer to the end user. Then, there is the single transaction relationship, wherein a channel is set up for only one transaction. This frequently happens when a piece of real estate is sold, for example. Then there is the Vertical Marketing System, or VMS, in which disparate distribution elements are all integrated in to one cohesive system.
Keep in mind that a lot of the marketing techniques that you apply to external customers of your company can also be applied to each division’s internal customers, as well. This might come about in the form of a formalized arrangement, wherein goods are transferred to different units in the distribution channel at a “transfer price.” When this happens, all sides should view the interaction as a normal relationship between a buyer and a seller. The same marketing techniques can thus be employed.
What’s more, administrative and service divisions of the business can also employ marketing techniques. These techniques can be used to optimize their relationship with their customers, who may only be the other members of the organization. The way that non-profit organizations have typically dealt with their clients is a good example for this.
Management of Distribution Channels
It is important to make a wise, informed decision about how extensive your business’s distribution channel shall be. If you want to achieve wider distribution, then the cost will be a lot lower if you use intermediaries. In fact, the vast majority of product manufacturers are unable to sell directly to customers, as it would be way too costly for them. The bigger the producer, the more intermediaries should be used in order to have a cost effective operation.
Most of the concepts surrounding distribution channels are related to costs. Many of the practical matters relating to distribution channels, however, have to do with customer control. A lot of businesses think that by selling their product in to the distribution channel, their role in the matter has come to an end and they no longer have to do any work. But in order to be effective, it is vital for businesses to take a market-oriented approach and manage every level of their product’s distribution until it arrives at the end user.
There are three levels of channel distribution membership. The first one is intensive, wherein a large majority of the resellers are stocking the product. The normal pattern, however, is selective distribution. In this membership model, only suitable resellers are selling the product. Finally, there is exclusive distribution, in which only selected resellers are permitted to sell the product – this is usually one seller per geographical region.
Sometimes it can be tough for suppliers to motivate their distribution team to provide the sales they require. There are many ways a company might motivate their distributors to make more sales on behalf of their organization. One way is through “bribery,” wherein you offer a better profit margin to tempt your distributors to push your product rather than the competition’s. Alternately, competition might be offered to the sales personnel of the distributor, tempting them to push the product. There is another side of the spectrum wherein the personnel of the agent are trained to the same standard as the supplier’s own sales staff. These instances are quite rare, though.
A vital element of supply chain management is the management and monitoring of the distribution channels. Just like a company’s own sales and distribution departments have to be overlooked and taken care of, each level of the distribution chain will have to be managed in a similar vein. In reality, however, most companies utilize a mixture of different distribution channels. They might help compliment a direct sales team, call on bigger accounts, work with agents, or help take care of smaller accounts and prospects.
One of the more recent developments in distribution is the concept of vertical marketing. This unites the producer, wholesalers, and retailers in to one integrated channel. Sometimes this happens as a result of one of the members of the distribution chain owning the others outright – this is referred to as “corporate systems integration.” For example, a supplier might own its own retail outlets; in this case, it is called “forward integration.” “Backward integration,” in which the retailer owns its own suppliers, is a much more common example. The furniture retailer, MFI, falls in to this category, as they own Hugena, who manufactures their kitchen and bedroom units. Another integration model occurs via franchising, as is the case with McDonald’s fast food restaurants. Another model occurs with simple cooperation, in the sense that Marks & Spencer cooperates with their suppliers.
Another approach is via a contractual system. These are often dictated by retail or wholesale cooperatives.
Then there are administered marketing systems. When one member of the distribution chain with more power is able to use its position to coordinate the activities of other members, then there could be said to be an administered marketing system. Typically, it is the manufacturer who has the dominant position in this scenario.
The point of vertical marketing is to give everyone on the distribution channel some power over what goes on there – especially the retailers and suppliers. Research shows, however, that it is best to pursue these strategies at the mature stage. If one sets out at an early stage of the product using these methods, it could do more harm than good in terms of profits.
These methods can also pull attention away from more important business matters. Theoretically, suppliers do not do well in retail situations, whereas retailers should focus on selling rather than on bothering with manufacturing facilities.
Then there is horizontal marketing, which is used less often and has less to do with marketing. It typically refers to situations in which several non competing businesses work together on a venture because it is beyond their capacity to go at it alone.