38 Channel Design and Management

Kulbhushan Chandel

    1. Learning Outcome:

 

After completing this module, the students will be able to:

  • Understand the concept of distribution channel
  • Explain the role of distribution channel
  • Describe the forces which influence channel decision
  • Explain functions of channel management

    2. Introduction

 

The organisation produces goods and services with a view to sell them to the customers or consumers located at different places. The products produced will be of no use if they do not reach the consumers. The manufactures may sell their goods directly to the consumers in nearby areas by establishing sales outlets but it will not be possible when products have larger market and consumers are located at different areas. Therefore, it becomes essential to use some intermediaries that will facilitate continuous and large scale distribution of products.

 

3. Meaning of Distribution Channel

 

Distribution channel, also termed as marketing channel, refers to set of marketing institutions who participate in marketing activities and facilitate movement of goods or services from producer to ultimate consumer. The marketing institutions, also known as trade channels, distribution channels, intermediaries or middlemen, can be categorized as (i) merchant middlemen like wholesalers and retailers (ii) agent middlemen like commission agents, factors, brokers and so on (iii) facilitators such as insurance companies, bankers, transportation companies and warehouse keepers.

 

4. Role of Distribution Channels

 

Distribution channels have a distinctive role in the marketing process. They help in successful implementation of company’s marketing strategies. Channel members i.e. intermediaries perform different functions for smooth flow of goods and services from producer to users.

 

In general, the various activities undertaken by channel members are as follows:

  • physical movement of goods
  • transfer of title to goods or ownership
  • creating link with buyers and sellers
  • looking after various physical distribution functions
  • offering after-sales services to customers
  • matching goods to the requirement of customers
  • extending credit to retailers and buyers
  • providing marketing intelligence and sales forecasting services to suppliers
  • handling complaints of customers and managing sales returns
  • attractive display of goods at retail outlets
  • negotiating prices and other terms of sale
  • assistance to consumers through product demonstrations and special guidance
  • maintaining sales force to assist in selling
  • assuming risk regarding goods during their storage and physical movement

    It is to be noted that these functions are not performed by any one channel or individual. Different channel members perform different activities. Manufactures should decide which channel member will perform which function and co-ordinate their activities to ensure smooth flow of goods.

 

5. Types of intermediaries

 

Intermediaries are broadly classified as merchant intermediaries and agent intermediaries.

 

5.1 Merchant intermediaries: These middlemen take title to goods as well as their possession. They are buyers as well as sellers of goods. Merchant intermediaries are of two types:

 

5.1.1 Wholesalers: Wholesalers buy goods in bulk and sell them to retailers or large buyers like government or business houses. Wholesaler can be (i) full function wholesaler i.e. one who buys and sells products, carries stock, extends credit and sells goods in lots. He sometimes provides financial assistance to producers. (ii) convertor wholesaler i.e. wholesaler who sells goods after processing them and also performs the tasks of full function wholesaler, or (iii) drop shipper i.e. one who only book orders and passes on the instruction to manufacturers for despatch of goods. He does not store or deliver the product. He assumes the delivery of goods only in case default is made by buyer.

 

5.1.2. Retailers: Retailers usually buy in small lots from wholesalers. However, big retailers make bulk purchase from producers. Retailers deal directly with consumers and sell them goods in small quantities. They cater to the needs of local consumers. The retailers can be classified as:

 

(i) Itinerant Retailers  (ii) Convenience stores  (iii) Specialty stores (iv) Supermarkets (v) Departmental stores  (vi) Multiple shops or chain stores (vii) Consumer co-operatives

 

5.2 Agent intermediaries: These middlemen neither take possession of goods nor its title of ownership. They work on commission basis and assist manufacturer or merchant middlemen in buying and selling of goods. Agent intermediaries can be classified as:

 

(i) Broker:- He is an agent who takes no risk and represents buyer or seller in negotiating purchases or sales for his principal. He is given commission called brokerage when a transaction is stipulated. In distribution system, they can act as seller’s agent.

 

(ii) Sole selling agents:- They are given exclusive rights or franchise to sell manufacturer’s product in a given territory as per decided terms and conditions of agreement between manufacturer and distributor or sole selling agents.

 

(iii) Commission agents: They act as agents of manufacturer. They book orders and direct manufacturers to execute order at their own directly to buyers. They get commission for the services rendered by them. They ensure recovery of dues from buyers and get special commission for this called as del credere commission.

 

6. Channel Design or Channel Structure

 

Different channel members can be combined in various ways to create effective channel structure or design. Distribution channels can be primarily categorized as non-integrated and integrated.

 

6.1 Non- integrated channels

 

Non-integrated channels are also termed as conventional channels. These comprise of merchant middlemen (wholesalers and retailers), agents and brokers. Manufacturers and channel members behave autonomously except for negotiations over terms of sale. There is no central control or common programmes. The conventional channel choice includes decision regarding direct or indirect channel. Direct channel is short wherein a firm chooses to sell directly to consumers without engaging any middleman. Indirect channels are long as middlemen are engaged to channelize products to consumers. The preference for indirect channels will further include inter-alia the choice of indirect channel (i.e. wholesaler, distributor or retailer) suitable for achieving company’s marketing goals. The various channels followed for transferring the products to ultimate consumers have been described as follows:

  • Manufacturer-consumer(direct channel): This is the simplest of all available channels wherein products are transferred direct to consumer without using services of any middleman. Mail order selling, door to door selling or manufacturer’s outlets are few examples of direct sale. Advertising greatly contributes in effective direct selling. In this mode of selling, companies make use of their own staff directly.
  • Manufacturer- wholesaler- consumer: This channel makes use of only wholesaler as middleman in the chain of distribution. Wholesaler does not use the services of retailers and deals directly with customers. This channel is usually followed when there are large and institutional buyers such as government, hospitals, consumer co-operatives.
  • Manufacturer- retailer- consumer:In this channel, a company uses only one type of intermediary i.e. retailer for selling goods to consumers. He performs function of wholesaler such as financing, insurance, storage and transport. Departmental stores, supermarket, large mail order house, chain stores, discount house are common types of this channel. In this channel, manufacturer moves away from consumers by one step. In India, Bata India Ltd. uses this channel to sell its product through its own retail shops situated in many cities.
  • Manufacturer- wholesaler- retailer- consumer: This channel comprises of wholesaler and retailer. Products are routed from manufacturer to consumers through two types of intermediaries. It is traditional and popular channel in India which is used by large as well as small companies. This channel is used for drugs, groceries and other convenience goods. Hindustan Unilever Ltd. is one common example which is using this channel.

   This channel is suitable when (i) products are durable, (ii) products are not subject to fashion changes, (iii) wholesalers are specialized and (iv) manufacturer has limited funds.

  • Manufacturer- agent- wholesaler-retailer-consumer: In this channel, manufacturer engages agent middleman called sole selling agent or distributor at the primary stage of flow of goods. The agent sells the goods to wholesalers who further sell them to retailers. Sole selling agent works on commission basis. A number of textile mills in India make use of this channel and appoint sole agents for distribution.

The appointment of such agent help manufacturer in keeping themselves free from marketing operations.

 

The company can make exclusive choice of channel discussed above or it may make use of two or more channels. When company makes use of only one channel of distribution for its all types of products and in all markets, it is termed as single channel. The use of two channels by the company for selling its product to the consumers is referred to as dual channel. Company may use more than two channels depending upon size or density of market. It is termed as multiple channel.

 

6.2 Integrated channels: These are the networks in which channel members behave in a co-ordinated manner. These channels can be vertical or horizontal.

 

(i) Vertical distribution channel or Vertical Marketing System(VMS): In this system manufacturers, wholesalers and retailers act as unified system. There are centrally managed programmes to achieve economies and marketing effectiveness. VMS can be of three types i.e. corporate, contractual and administered. In corporate vertical distribution channels, channel components are owned by one organisation. In contractual vertical distribution channels, there is integration of programmes of independent channel members on contractual basis. Their aim is to avail economies and increase market impact. Administered channels are those where marketing activities are co-ordinated through programmes developed by one or few firms. This type of system is led by manufacturer due to sheer power or size.

 

(ii) Horizontal distribution channels: Horizontal distribution channels means alignment of two or more firms with an aim to exploit marketing opportunities by themselves or through a third party.

 

7. Channel Selection

 

The companies can use different intermediaries to sell their products or it can directly sell to customers. The decision regarding the selection of channel structure will depend on various factors which are described as follows:

 

(i) Product

 

Product features like type, value and usage play a significant role in designing and selecting a channel. Custom made products require direct distribution to industrial user or consumer. Perishable goods require special handling and storage. These should be handled by intermediaries who specialize in selective distribution. A shorter and controlled channel can be used for distribution of such goods. Durable and standardized goods will require longer and diversified channel. Bulky products will tend to benefit from shorter channel. Expensive products need specialized channel system with showroom and financial strength. Industrial goods usually do not require intermediary.

 

Product positioning decision may affect the channel choice. For example, if packaged fruit juices are positioned as health drink, the company can make them available through fitness clubs or gyms in addition to other convenience goods channels.

 

(ii) Market

 

For consumer market, longer distribution channel will be preferred whereas in business market a shorter channel will serve the purpose. Retailers can be eliminated to sell industrial good. If the market size is small, direct selling will tend to benefit. However large market may require longer distribution channel.

 

The geographically concentrated markets may be approached through direct selling. Widely scattered markets will need longer distribution channel. Showrooms, special retail outlets and departmental stores can be used for urban markets. In rural markets, the channel selection will be limited to utilizing existing resources available in these areas. Channel selection decisions are also influenced by size and frequency of customers’ orders.

 

Buying habits and expectations of consumers will also affect the channel choice. Desire for credit, demand for personal service, preference for one stop shopping and willingness to spend, time and amount for buying are significant considerations to make a right choice for distribution channel. For instance, selective distribution through exclusive dealership will be preferred for sale of T.V. or refrigerators as after sales services are usually required.

 

(iii) Middlemen

 

Financial strength, infrastructural facilities, image and services of intermediaries are important considerations to make a right decision for distribution channel. Moreover, the channel which can penetrate large sales volume at lower cost will be preferred to minimize distribution cost. Middlemen who can provide desired marketing services will be given priority.

 

(iv) Company

 

New companies have to rely more on intermediaries due to lack of experience and knowledge about market. Established companies may prefer a shorter channel or direct marketing. A company wishing a greater control over channel will tend to benefit from shorter channel. Promotional activities of company can help the middlemen. Long channel of distribution can be profitable for companies which promote their products through advertising and sales promotion.

 

The reputation of company is important factor as companies enjoying good corporate image usually attract intermediaries. Such companies can make use of longer channel.

 

The size of company influences the pattern of channels. A large firm can prefer short channels as it may not need the services of warehousing or credit offered by intermediaries.

 

(v) Competitors

 

Channel design strategies are influenced by the preferences of competitor for distribution system. A company may adopt the similar channels or avoid the channels dominated by rivals and make use of exclusive distribution system. For instance, direct marketing or door to door sales may be adopted when other rival firms are using longer channels.

 

(vi) Marketing Environment

 

The prevailing environment may influence the preference for distribution channel. A company will prefer shorter and cheaper channel during recession. However, a long channel may be used during boom period. Technical innovations also affect the pattern of channels. For instance the cold storage facilities have made possible the distribution of dairy products or other perishable goods at distance places and enabled the companies to use middlemen.

 

(vii) Distribution intensity or purpose of using distribution channels

 

The company may have different purposes for distribution and it will design a distribution channel strategy accordingly. The company may aim at intensive distribution or selective or it may want exclusive distribution.

  • Intensive distribution

   It means selling a product through all suitable wholesalers or retailers who will stock and/or sell the product. This distribution aims at maximum coverage. The company wants the product available at every possible outlets that customer may visit. The company should use intensive distribution for convenience goods (i.e. goods of daily use).

  • Selective distribution

   Here the purpose of distribution is to sell product only through those middlemen who will give special attention to the product. Wholesalers or retailers who have poor credit rating or place small or infrequent orders or provide poor services to customers are not preferred. Selective distribution is suitable for shopping goods such as clothing, footwear, washing machines and for industrial goods. It reduces competition between different channels.

  • Extensive distribution

   It refers to selling the product only through one middleman in a particular area. It involves a verbal or written agreement with channel member and he is granted exclusive rights to that product in his territory. Exclusive distribution is preferred when producers want to control prices and the services offered in a channel. The manufacturer can use extensive distribution for specialty goods like designer clothes or automobiles as these are expensive and require a high level of customer service. Even shopping goods may be sold through extensive distribution.

 

8. Significance of Distribution Channels

 

Distribution channels add value to the products by making them available at the right place, at the right time, in right condition and right quality to the consumers. Undoubtedly, manufacturer creates value utility by manufacturing the product but distribution channels create time and place utilities.

 

(i) Place Utility

Manufacturers usually concentrate at places where they get competitive advantage of production. However, consumers are dispersed and they want access to products or services. Distribution channels creates place utility in product by making them available at place where they are in great demand.

 

(ii) Time Utility

There is usually a time gap between production and consumption. Goods may be produced at one time and required at some other time. The channels of distribution try to match supply and demand by holding stock of these goods and providing them whenever demanded. Provision of credit enables manufacture to make consistent production. These activities thus create time utilities of product.

 

(iii) Ownership

Channels facilitate the transfer of ownership from supplier to buyer along with the possession of goods. They provide a mechanism to transfer the legal title to buyer.

 

(iv) Market Information

Channel intermediaries provide valuable information of needs of consumers to the manufacturers. They also inform and guide consumers about specific features of different products.

 

(v) Satisfaction

Intermediaries help in making merchandise available at right time and place. The needs and wants of consumers are satisfied at appropriate time. Thus, intermediaries add significant value to consumer articles as compared to the value added during manufacture which leads to high customer satisfaction.

 

9. Channel Management

 

The choice of appropriate channel does not guarantee the desired results unless these channels are properly managed. The channel management refers to providing compensation, motivation, co-ordination, control and co-operation of intermediaries. Management also handles conflict arising with channel members. These managerial functions are described as under:

 

(i) Providing compensation

When the intermediaries act as agent like brokers or selling agents they should be adequately compensated. Distributors or dealers also deserve compensation for their special commitments arising from exclusive distribution arrangements.

 

The basis for compensation is usually determined by trade customs, government directives or arrangements between trade or industry associations.

 

There exists different ways to compensate intermediaries. Commission is paid to agents for services rendered by them which may extend to order booking, financing, promotion, negotiation or debt recovery. Commission is calculated as a certain percentage of the total volume of sales or amount generated by salesman. Del-credere commission is paid to agents who guarantee payment from customers in case of credit sales. It is calculated on a certain percentage of total amount collected. Broker gets brokerage as a certain percentage of total sales assisted. Trade discount is paid as a reward to compensate merchant middlemen appointed as dealers or distributions for exclusive services rendered and controls accepted. It is given at a certain percentage of invoice price of goods purchased by them. Quantity discounts are provided to agent or merchant middleman as incentive to work harder and to increase sales. It is paid as a certain percentage of sales.

 

(ii) Motivation

In the competitive environment, there is no barrier as to the entry of manufacturers or intermediaries which affect the trade relations of existing parties. It is essential to sustain interest of middlemen and motivate them to work harder. Apart from compensation and profit margin, some other methods can be adopted to motivate intermediaries. Dealers’ advisory council may be set up by company which will hold meetings to discuss problems, offer suggestions and provide other needed help to implement market plans. It will personalize and improve relations with dealers. Co-operative advertising may be initiated with dealers in their respective areas and cost may be shared. Sales executive may establish personal relations with dealers by visiting markets periodically. Missionary salesman can be sent to dealers to assist them solicit orders in their territories. Training may be imparted to dealer’s salesman for assisting their sales efforts.

 

(iii) Co-ordination

There is a need for coordination of activities of intermediaries participating in distribution channel of company. Integration of company activities and channel operations is required for achieving organizational goals and increasing market impact. Co-ordination for distribution channels tasks may be attained between company and its intermediaries or intermediaries inter se. If company uses multiple channels or dual channel, it needs to secure co-ordination between members of different channels. In case company desires that intermediaries follow a uniform pricing policy or maintain requisite levels, it will require co-ordination for resale pricing and inventory levels.

 

For co-ordination, communication between marketing executives and intermediaries plays a pivotal role. It may be in written form or oral. Oral communication can be in form of personal visits or telephonic conversation. Written communication may include correspondence or reports.

 

(iv) Control

It is necessary to exercise control over behavior of channel members to facilitate the achievement of company’s marketing goal. Effective control will discourage some unethical activities of intermediaries like hoarding, speculative activities to create shortage or black marketing. Control can be exercised regarding provision of credit to customers, physical layout of store, salesman training, ability to handle competitive brand, resale pricing and choice of shop location or sales quota.

 

The quantitative method used to exercise control over channel member behaviour includes measuring sales volume and profit margin against standard laid down, assessing number of times orders delayed or amount of expenditure on advertising product. In qualitative term it can be evaluated in terms of number and nature of complaints received. Intermediaries performing well can be rewarded with more margins or promotional allowances. For poor performers company can resort to reduction in margins, withdrawls of exclusive rights or slowing down deliveries etc.

 

(vi) Co-operation

For a peaceful and healthy work environment, it is necessary to foster co-operation in the distribution channel system. Company should consider its intermediaries as an extension of organisation and adjust its policies to serve interest of channel member & its own. Motivation will help in securing co-operation.

 

(vii) Conflict management

 

Channel conflict means a situation where one channel member perceives that another channel member or manufacturer’s behaviour is such that is restricting him from achieving his goals. Intermediaries may have conflicts with manufacturer when they feel (i) discriminating behaviour of manufacturer, (ii) following of dual distribution policy by manufacturer to compete with intermediaries, (iii) unreasonable re-sale price maintenance requirements of manufacturers (iv) bypassing wholesalers.

 

Manufacturer may have conflict with intermediaries when he feels (i) dealers do not perform desired function (ii) dealers violate territorial restrictions (ii) dealers neglect manufacturer’s brand and prefer competitive brands (iv) regular complaints against dealers.

 

Various conflict management strategies can be followed viz (i) bargaining strategy (ii) boundary strategy (ii) inter penetration strategy (iv) supra organizational strategy.

 

Bargaining strategy involves a company negotiator who uses reward, coercion or referral to resolve conflict. This strategy requires mutual trust and willingness to compromise. This strategy is suitable when channel faces an external threat such as change in legislation or emergence of more efficient channels. Boundary strategy involves appointing some person as liaison officer to operate at market where both manufacturers and intermediaries meet. Inter penetration strategy refers to penetrating into the attitudes of intermediaries through meetings, working lunch or posting company’s executive at dealer’s organisation to understand and mould him as per company needs. Supra organizational strategy is followed when company feels functional interdependency and needs the support of channel members. It consists of conciliation, mediation and arbitration. Conciliation involves resolving of dispute by parties themselves. In mediation there is an active participation of neutral third party who may suggest suitable ways to resolve conflict. In arbitration, both parties present their arguments to one or more arbitrators whose decision is final and binding. In India, many companies usually incorporate an arbitration clause in agreement with intermediaries.

 

10 Summary Distribution channel refers to set of marketing institutions who participate in marketing activities and facilitate movement of goods or services from producer to ultimate consumer. The marketing institutions can be categorized as (i) merchant middlemen like wholesalers and retailers (ii) agent middlemen like commission agents, factors, brokers and so on (iii) facilitators such as insurance companies, bankers, transportation companies and warehouse keepers. Middlemen provide various services like warehousing, extending credit, transfer of ownership, collection and transmission of information about market and customers and risk taking. Different channel members can be combined in various ways to create effective channel structure or design and ensure smooth flow of goods and services.

 

Distribution channels can be non-integrated or integrated. Non-integrated channels, also termed as conventional channels, refer to system in which manufacturers and channel members behave autonomously except for negotiations over terms of sale. There is no central control or common programmes. The conventional channel choice includes decision regarding direct or indirect channel. Direct channel is short wherein a firm chooses to sell directly to consumers without engaging any middleman. Indirect channels are long as middlemen are engaged to sell products to consumers.

 

Integrated channels are the networks in which channel members behave in a co-ordinated manner. These channels can be vertical or horizontal. In vertical integration system, manufacturers, wholesalers and retailers act as unified system. There are centrally managed programmes to achieve economies and marketing effectiveness. Vertical integration system can be of three types i.e. corporate, contractual and administered. Horizontal distribution channels refer to alignment of two or more firms with a view to exploit marketing opportunities by themselves or through a third party. The company may have different purposes for distribution and it will design a distribution channel strategy accordingly. The company may aim at intensive distribution or selective or it may want exclusive distribution. With a view to achieve the distribution coverage objectives, company should design its distribution strategy by considering product, market, middlemen, company, competitors and marketing environment.

 

There is a need to manage distribution channels properly to achieve desired results. Therefore, management/ marketing manager performs various functions like providing compensation, motivation, co-ordination, control and co-operation of intermediaries. Management also handles conflict arising with channel members by following various conflict management strategies viz (i) bargaining strategy (ii) boundary strategy (ii) inter penetration strategy (iv) supra organizational strategy.

   Learn More

Few important sources to learn more about Channel Design and Management :

  1. Bearden, Ingram, Laforge (1995). Marketing: Principles and Perspectives, Irwin Inc.
  2. Cannon, Tom. Basic Marketing: Principles and Practice, 3rd Edition, A.I.T.B.S. Publishers, Delhi.
  3. Davar S. Rustom, Davar R.Sohrab, Davar R.Nusli (2000). Salesmanship and Publicity, Vikas Publishing House Pvt. Ltd., New Delhi.
  4. Dalrymple and Parsons. Marketing Management: Text and Cases, 6th Edition, John Wiley & Sons, Inc.
  5. Gandhi,C J (1998). Marketing- A Managerial Introduction, Tata McGraw Hill, New Delhi
  6. Havaldar and Cavale (2011). Sales and Distribution Management: Text and Cases, 2nd Edition, Tata McGraw Hill Education Private Limited, New Delhi.
  7. Kotler, Philip (2002). Framework for Marketing Management, Pearson Education (Singapore) Pte. Ltd., Indian Branch, Delhi.
  8. Sherlekar,A.S.(1996). Marketing Management, Himalaya Publishing House, Mumbai.
  9. Venugopal, Pingali (2011). Sales and Distribution Management: An Indian Perspective, SAGE Publication India Pvt. Ltd.

    Points to Ponder

 

(i) Distribution channel refers to set of marketing institutions that participate in marketing activities and facilitate movement of goods or services from producer to ultimate consumer.

(ii) The marketing institutions can be categorized as (a) merchant middlemen like wholesalers and retailers (b) agent middlemen like commission agents, brokers (c) facilitators like bankers.

(iii) Different channel members can be combined in various ways to create effective channel structure or design.

(iv) The channel management refers to providing compensation, motivation, co-ordination, control and co-operation of intermediaries.

(v) Various conflict management strategies can be followed viz (a) bargaining strategy (b) boundary strategy (c) inter penetration strategy (d) supra organizational strategy.