Chapter 15, Class Notes

Contents of Notes

Introduction

Distribution-activities that make products available to customers when and where they need them.

A channel of distribution or marketing channel is a group of individuals and organizations that directs the flow of products from producers and customers.

Marketing Intermediaries link producers to other intermediaries or to the ultimate users of the product. Operate between the producer and the final buyer.

Types of utility distribution offers:

Each channel member has different responsibilities within the overall structure of the distribution of the system; mutual profit/success is obtained through cooperation.

The distribution system:

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Justification for Intermediaries

"we've eliminated the middle man and we're passing on the savings to you"-a typical broadcast from Supermarket XYZ

Why do we use intermediaries?

Without intermediaries:
May be able to reduce distribution costs, if the supermarket can perform those functions more efficiently than a wholesaler, but the supermarket inventory costs may increase as a consequence, therefore no savings and less efficient.

Number 1 Reason

Improve exchange efficiency.
There are certain costs associated with an exchange, therefore need to try to reduce the number of transactions (exchanges):

*Chicken                   *Customer1  With 1 intermediary---10 transactions

*Potatoes                  *Customer2  With no intermediaries---25 transactions

*Carrots        *          *Customer3

*Plates                    *Customer4

*Silverware                *Customer5
Without an intermediary, each buyer has to negotiate and exchange with each seller. With one intermediary, each buyer negotiates with one intermediary (as opposed to 5 sellers), and each seller negotiates with one intermediary (as opposed to 5 buyers).

Number 2 Reason

Intermediaries are specialists in the exchange process, provide access to and control over important resources for the proper functioning of the marketing channel. Division of labor.

Still need services that intermediaries (wholesalers, retailers etc.) provide; if they were eliminated then someone else would have to assume the tasks (either producer or customer). Functions can be shifted and shared among channel members, but cannot be eliminated, unless the buyer assumes them.

"you can eliminate the middle man, but you can't eliminate their functions"-a well accepted maxim in marketing.

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Functions of Intermediaries

Primary role of middlemen is to transform the assortment of products made by producers in the assortments desired by consumers.
Producers make narrow assortments in large quantities, consumers want broad assortments in small quantities, discrepancy in quantity and assortment.

Match Supply and Demand:

*Chicken                   *Customer1                 
*Potatoes                  *Customer2                 
*Carrots                   *Customer3
*Plates                    *Customer4
*Silverware                *Customer5
PRODUCER Specialization in production, economies of scale etc., therefore wants to produce large quantities but narrow product mixes.

efficiently

CUSTOMER Wants a broad assortment (products produced by many manufacturers) of products made available conveniently (within easy reach).

Other functions of intermediaries include:

A producer will use an intermediary when it believes that the intermediary can perform the function(s) more economically and efficiently than it can.

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Types of Channels of Distribution

Consumer Channels

Channels for Consumer Products.
Vertical dimensions, determined by the # in the channel.

Channel A:

Producer 
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Consumer
IE door to door purchases, Unsought products IE Encyclopedias. Fruit picking orchards.
Services often use direct channels since the service provider, in most cases, must be there to provide the service.
Simplest method, not necessarily the most effective.
Technological developments are making the direct channel more common: When you can use the media of communication to effect exchange...1-800#s, Credit Cards etc.

Handout...Microsoft's Ali Baba Software-Selling Plan Has Rivals Boiling.

Discusses Microsoft's method of distributing its software directly from its Window's CD.

Channel B:

Producer 
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Retailer
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Consumer
Large retailers, JC Penney, KMart, no discrepancy in quantity supplied and demanded. Popular for shopping products, clothing. Automobiles...cost of transportation and inventory is high.

Channel C:

Producer
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Wholesaler
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Retailer
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Consumer
Smaller retailers, widely distributed products, convenience products.

Channel D:

Producer
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 Agent
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Wholesaler
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Retailer
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Consumer
Mass distribution, IE processed food; also when there are a number of small producers etc. May be the most efficient distribution channel for consumer products. Convenience products.

Horizontal dimensions, the # of channel members at the same level. IE Chevrolet much wider distribution than Rolls Royce.

Business to Business Channels

Channel E:

Producer
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 Buyer
Very popular, especially for high cost items that need after sale support. Fewer customers clustered geographically. This is a more common structure than the direct channel in consumer markets.

Channel F:

Producer
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BB distributor
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 Buyer
Distributor takes title. Used when there are many customers. IE consumable supplies etc.

Channel G:

Producer
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 Agent
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 Buyer
When a company does not have a marketing department or sales force, the agent performs those tasks.

Channel H:

Producer
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 Agent
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Distributor
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Buyer
Used as above, with many customers, IE exporting.
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Multiple Marketing Channels

Dual Distribution
Use several types of channels simultaneously, IE when you have consumer and business to business markets. Set up 2 or more Marketing channels to attract the same target market or different target markets. Using two or more channels to attract the same target market can lead to channel conflict.

Handout...Time Warner to Launch...

This article discusses Time Warner developing additional distribution channels, adopting dual distribution. The idea is to find efficient ways to make your product available to your customers. It is very important however to avoid Return to Contents

Wholesale Intermediaries

Wholesale transactions are all transactions except the transaction with the ultimate consumer.

Classification of a wholesaler or retailer is determined by the purchaser, not by the price. If over 50% of sales is with other intermediaries then the intermediary is a wholesaler. If over 50% of sales is with the consumer, then the intermediary is a retailer.

Firms can engage in wholesaling activities without being wholesalers.

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Nature and Importance of Wholesaling

Approximately a $1.94 trillion industry in the US
300,000 wholesaling establishments in the US
Employ 6.5 million people, down from 6.57 million in 1989
Very competitive. Wholesalers will be eliminated from a channel if they do not perform valuable functions effectively and efficiently.
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Types of Wholesale Intermediaries

2 Types of intermediaries:

Merchant Wholesalers

Take title.
Account for approximately 83% of wholesalers, 50% of wholesale sales. Employ 4.5 million people.
Two types:

Agents and Brokers

Negotiate purchases, expedite sales but do not take title.
Functional middlemen, that bring buyers and sellers together.
Compensated with commission.

Agents represent buyers and sellers on a permanent basis.
Brokers represent buyers and sellers on a temporary basis.

10.4% of wholesalers total sales volume.

Manufacturers Sales branches and offices

Resemble merchant wholesalers operations, 9% of wholesale establishments and generate 31% of wholesale sales. Manufacturer owned. Return to Contents

Vertical Marketing Systems

The traditional view of channels focuses on buyers and sellers in direct contact. IE don't look beyond the next level. The systems view focuses on a framework for the whole distribution system.

A Vertical Marketing System (VMS) is a marketing channel that a single channel member coordinates. The channel member manages channel activities to achieve efficient, low cost distribution aimed at satisfying the target market customers. There are three types of Vertical Marketing Systems, Corporate, Administered and Contractual.

Corporate VMS

More than one stage of the distribution channel under one ownership, IE supermarket chains that own processing plants and large retailers that purchase wholesaling and production facilities.

Examples:

Administered VMS

Channel members are independent with a high level of interorganizational management by informal coordination. Agree to adopt uniform accounting policies etc., and promotional activities.
One Channel member dominates, has a channel leader.

Examples:

Channel Leader-Effectiveness of channel hinges on channel leadership. Leader must possess channel power. Power can come in the following forms:

Contractual VMS

Most popular VMS, interorganizational relationships formalized through contracts that spell out each members rights and obligations. IE McDonald's and KFC. Franchise organizations 1/3 retail sales and 500,000 outlets.

Wholesaler sponsored, IGA stores-independent retailers band together under contractual leadership of a wholesaler.
Supervalue Stores, largest food wholesaler in the US, offers a broad package of services to 2800 independent food retailers that voluntarily enter into a buying contract.
Retailer sponsored cooperatives which set up, own and operate their own wholesalers.

Handout...Focusing on the Distribution of TV Programming

Moving from an administered VMS to a contractual/corporate VMS system. The networks are losing their channel power, since there are now six of them competing for the same amount of affiliates as when it was only ABC, NBC and CBS. Now the networks are contracting (Contractual VMS) with the affiliates in the hope they will stay loyal to them, or increasing the size of the contracts, or even taking some form of ownership stake (corporate VMS).

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VMSs try to overcome:

Channel Conflict

Channel members may disagree on the best methods to attain goals. Inevitable when individual short run goals are not compatible. Can occur between firms at the same level, or between firms at different levels. Want to maximize profits and autonomy.
Channel members belong to different channel systems, creating potential conflicts. Producers may try to circumvent intermediaries.

Handout...Whats wrong with selling used CDs.

This article is an excellent example of channel conflict. The retailers are selling used CDs, and the distributors are not happy, since they receive no revenue from this product, and it competes with their product. They retaliate by removing advertising monies etc. Other issues include distributors using mail order wholesale clubs to sell CDs, which is a form of Dual Distribution since they compete directly with the traditional retailers, and sell their product very inexpensively...this is also a source for used CDs, as is the return policies of the retail stores etc.
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Selection of Distribution Channels

Should determine what the final buyer wants and determine the best way to reach them. Marketing Oriented!!
Determined by:
  1. Organizational Goals, Objectives (same day delivery), resources and capabilities. Companies with wide product mixes can sell more directly to the retailers, have more promotional skills etc. (P&G)
  2. Market Characteristics, Geography, greater distance use more intermediaries, market density, clustering, market size etc., industrial vs. consumer, Buyer Behavior, Where?/How?/ May need creativity , L'Eggs
  3. Product Attributes, IE Need to provide a service. Perishability-short channels, storage requirements, space, fashion, size (reduce handling), complexity, standard.
  4. Environmental Forces, IE Competition, Technology
Need to determine the # of Intermediaries
Determine the channel width, intensity of distribution, the products market exposure.