Chapter 4: Designing and Managing Marketing Channels, and Wholesaling, Retailing, and Logistics Management

The Role of Marketing Channels

Today, only a small portion of the production is consumed at the production site, and a very small portion is purchased directly from the manufacturer. Most of the product is supplied to consumers by using various types of marketing channels. Both individual consumers and industrial buyers are aware that actually thousands of goods and services are available through a large number of various channel outlets. Therefore, marketing channels are viewed as “the routes to markets used to sell every product and service that consumers and business buyers purchase everywhere in the world”.

An effective distribution entails the coordination of the product, service, and information flow from manufacturer to final consumer or the industrial buyer. Most of the producers do not market their products and services directly to the final customers and users; instead, there are a number of diverse intermediaries undertaking a variety of functions between them. These intermediaries constitute distribution channels, also called marketing or trade channels. Normally, combinations of organizations specialized in producing, wholesaling, retailing, logistics, and many other areas combine their forces in marketing channel arrangements to make possible the delivery of goods and services to industrial users and end consumers. All these institutions or organizations depend on one another to serve effectively to customer demand. Therefore, marketing channel is defined “as sets of interdependent organizations involved in the process of making a product or service available for use or consumption”.

The economic impacts of marketing and logistics can affect individual consumers. These impacts can be explained through the concept of economic utility, which is the value or usefulness of a product in meeting customer needs and wants. In making goods and services available to customers, marketing and logistics channel members add value by creating the place, time, possession, and information utilities. Place utility is created by making the product and/or service available for customers in a location that is suitable to potential customers. Closely related to place utility is time utility, which refers to having goods and services when they are needed by customers. Form utility refers to product’s being in a form that can be used by customer, and is of value to customer. Possession utility is the value consumers put on buying a product and having the freedom to use the product.

It is important to understand the underlying reasons for the emergence of marketing channels. Marketing channels arise partly because they facilitate searching. Final customers are uncertain where to find the products or services they want, while sellers are uncertain how to attain final customer. Intermediaries in marketing channels facilitate search on both ends (final user and seller) of the channel. In addition to this, intermediaries in a marketing channel perform the function of sorting goods. The sorting function undertaken by intermediaries covers the functions of sorting, accumulation, allocation, and assorting. Sorting means breaking down a heterogeneous supply into separate stocks that are relatively homogeneous. Accumulation refers to bringing together similar inventory from a number of sources into a larger homogeneous supply. Allocation accounts for breaking down a homogeneous supply into smaller lots. Assorting stands for building up of an assortment of products for reselling in association with each other. This is very important because of the natural discrepancy between the assortment of goods or services made by a given producer and the assortment demanded by the final customer because intermediaries purchase large quantities from many producers and sort them into smaller quantities and broader assortments wanted by consumers.

Every producer would have to interact and contact with every potential buyer without channel intermediaries in order to create all possible market exchanges. Rationally used intermediaries reduce the number of contacts necessary to cover a market.

The ownership channel includes transferring of the title to the goods. The party owning the good almost always has the right to trade or sell it and takes the risks and bears the costs associated with having it in inventory. In the ownership channel, a common intermediary is the bank or financial institutions, which may assume temporary or partial ownership of goods as part of an ongoing transaction. The negotiation channel is the one in which buying and selling agreements are made. This could include transactions face to face or by telephone, e-mail, or almost any other form of communication. Brokers are associated with this channel. They are independent intermediary and paid to arrange a particular transaction. demanded by the consumer. Commonly used intermediaries in this channel are the logistics companies such as freight forwarder, whose function is to provide logistics services.

Distribution channels may vary in the number of intermediaries they contain. The manufacturer and final customer are the parts of every channel. The number of intermediary levels is used to designate the length of a channel. Collecting information about final consumers and exercising control over channel becomes more difficult for the manufacturer as the number of intermediaries increases.

A direct marketing channel, also named as a zero-level channel, is the shortest and simplest of distribution channels, and it does not contain any intermediary manufacturer and consumer. Since there is no intermediary in the channel, it is viewed as direct distribution. It consists of a manufacturer selling directly to the final consumer. This alternative is to market directly to consumers via the internet, mail order, tele marketing,various types of door-to-door selling including home parties, or manufacturer-owned stores.

A one-level channel includes one selling intermediary such as a retailer. There is only one intermediary involved, and the retailer is located between the manufacturer and the consumer. This type of distribution alternative is most common in consumer goods such as agricultural goods and household goods. A two-level channel consists of two intermediaries such as wholesaler and retailer. This type of distribution channel is typically preferred in consumer goods moreover, it is also best fitted and most economical for smaller manufacturers and smaller retailers. The wholesaler is required for retailers since they are smaller, and they may not be able to utilize the advantages of economies of scale on their own. A three-level channel contains three intermediaries such as wholesales, jobbers, and retailers.

Channel Design Decisions

Channel analysis and decision making are the two significant issues for the maximum effectiveness of the channel. Channel design refers to those decisions involving the development of new marketing channels or modifying the existing channels. Producers usually encounter the questions of “what is ideal” and “what is practical” in designing their marketing channels. A new company usually begins a local operation selling in a limited market by using existing channels and intermediaries. A producer with a limited resource generally begins with selling in a certain limited market area. In such a case, making decisions on the best channels may not be a problem; however, the producer needs to convince one or few good intermediaries to handle the product lines. If the company is successful, it might branch into new markets. The company may have to use different channel intermediaries in different markets. The company might sell directly to retailers in smaller markets, or it might sell through distributers in larger markets or international markets. It might use exclusive franchising in one country or sell through available outlets in another country. Moreover, the company might use internet store that sells directly to hard-to-reach customers.

Marketing channel design, like all marketing strategy decisions, must first focus on analysis of customer needs and wants because channel design is highly influenced by customers’ needs and wants. Therefore, designing a marketing channel begins with finding out what target consumers want from the channel. This analysis must incorporate two interrelated stages: Identification and selection of target market segments, and analysis of customer purchasing behavior. The customer is the keystone in any channel design, and therefore, the size, geographic distribution, buying habits, outlet preferences and usage patterns of customers must be taken into account when making channel design decisions.

Channel objectives define what role is expected to be played by the channel in achieving overall marketing objectives of the company. For this reason, companies should state their channel objectives in terms of targeted level of customer service output. The company should decide on which market segment to serve and the most suitable channels to use in each case. The ultimate goal is to minimize costs for customers while sustaining the desired service level for channel members in order to maximize profits for the company. Identifying market segments and associated service levels make it easier to decide on the best channel fit. Every company should take into account certain considerations and constraints including customers, products, intermediaries, competition and environmental factors when designing its specific distribution channel objectives.

Channel design must take into account the strengths and weaknesses of different types of intermediaries, services provided by them, availability of desired intermediaries and compliance with manufacturers policies. The manufacturer must find intermediaries to provide marketing services which cannot provide as economically as intermediaries can or cannot provide at all. For example, manufacturer’s representatives are able to contact and handle the distribution at a low cost per customer since the total cost is shared by several customers, but the selling effort per customer is less intense.

The channel objectives should also be aligned with the external environment of the company such as economic conditions, legal regulations, constraints, quotas, tariffs, and incentives. For example, when economic conditions are depressed, some companies use the internet channel to sell their products. Legal regulations and restrictions also affect the channel design.

Producers may choose from wide variety and rage of channel alternatives for serving customers, including its sales force to dealers, agents, brokers, distributers, direct mail, telemarketing, and the internet. Each channel and intermediary may provide specific advantages and benefits, and create difficulties for the company. A manufacturer’s sales forces may handle complex products and carry out complex transactions, but they are costly. Making use of the internet as a channel is much less expensive, but it may not handle the complex product. Distributors may create sales by using their contacts, but the producer may lose the direct control over the channel. Therefore, in the third stage of channel design, the major channel alternatives need to be identified by the company in terms of types of intermediaries, the number of intermediaries, and the terms and responsibilities of each channel member.

A company should identify the types of channel members available to perform its channel work effectively. In many industries, almost all competitors use the same kind of intermediaries. Therefore, companies are not faced with many alternatives, but in some industries, there may be certain limited channel alternative. For example, suppose a manufacturer has developed a new industrial product, and this product has a market in several different markets.

Companies must also make a decision on and identify the number of channel members to use at each level of the marketing channels. This decision is especially important in the design of retail distribution systems. The number of intermediaries to be used in each distribution stage depends on the company’s desired market coverage and market segment, but in some cases intermediary imposes this number on the manufacturer.

Intensive distribution means placing the products or services in as many outlets as possible considering the customers buying habits and preferences. The main idea behind intensive distribution is having the goods ready at wherever the consumer might be. Convenience stores provide location and time convenience for customer. Producers of convenience products typically seek intensive distribution. These products and services must be available where and when customers want them. For example, bread, soft drink, newspaper, snack food, toothpaste, candy, razor blade, gum, and other similar products are sold in millions of various outlets to provide consumer convenience.

Exclusive distribution refers to utilizing only a limited number of intermediaries within a given market. Some companies deliberately restrict the number of intermediaries serving their products in exclusive distribution. In this type of distribution, the producer gives just a limited number of dealers the exclusive right to distribute its goods in their territories. This type of distribution is usually found in the distribution of luxury brands such as luxury automobiles, some major appliances, some woman’s apparel brands, and jewelry. Products distributed through this channel are usually seldom purchased and used for a long period of time. By granting exclusive distribution, the producer expects more dedicated and knowledgeable selling.

Selective distribution stands somewhere between intensive and special distribution in terms of number of intermediaries utilized. It is based on using only some of the intermediaries willing to carry a particular product. Selective distribution is often used for specialty products and durable consumer products, and the like. For example, furniture, most consumer electronics, and home appliances are distributed in this way. Consumers spend time buying these products and visit very few sales outlets to compare their price, color, style, and after sales services.

Terms and conditions of each channel member including price policies, conditions of sale, territorial rights of distributers, and specific services to be carried out must be agreed between a producer and the intermediaries. For example, once a producer’s list price and discounts for intermediary is determined, and, then each channel member’s territory is defined. In the case of exclusive distribution and franchise, mutual services and duties need to be clarified carefully between the producer and the intermediary.

Channel Management Decisions

Channel management decisions include selecting, training and motivating channel members, and evaluating their performance. Companies also face modifying channel design and arrangements over time and consider expansion into global markets as they grow.

Intermediaries vary according to their availability, suitability, type, and the quality of service they can provide. Marketing managers must consider certain characteristics of channel members in selecting qualified intermediaries. In general, intermediaries are selected by means of considering the number of years in business, locations, other lines carried, growth and profit record, financial strength, reputation, and cooperativeness. If the intermediary is a sales agent, the producer also looks at the number and types of other product lines carried, inventory turnover rate, and the adequacy of the staff.

Keeping in mind that all firms that are included within a distribution channel are in essence interdependent organizations with various aims and goals, the need for power emerges naturally to prevent chaos. Bearing in mind that all parties must align their activities to match the aims and goals of the distribution channel as a whole rather than their own, there must be a certain channel leader to influence the channel members’ actions accordingly. Channel leadership requires channel power. Channel Power is defined as the ability to change channel members’ behaviors. Manufacturers can use five types of power to ensure cooperation:

Coercive power is used if the intermediary fails to cooperate. The punishment can be withdrawal of a resource, termination of relationship etc., however, this kind of power may result in resentment of the counter party and result in bigger conflicts.

Reward power is the ability to influence others’ actions with the promise of a reward such as funds at the end. This type of power yields better results; however, as in human beings, intermediaries may also expect a reward every time the producer asks a certain behavior to occur.

Legitimate power enables manufacturers to make the intermediary perform its duty as stated in the contract.

Expert power comes from manufacturers’ specific knowledge and know-how; however, as the expertise is transferred to the intermediaries, this power may lose its strength.

Referent power comes from manufacturer’s reputation in the market, and the distribution channel members are proud to be associated with the manufacturer and use this affiliation as a reference to obtain other sources, gain trust, show case success or get new customers.

Channel Intergration Systems

Distribution channels are very dynamic. New wholesaling and retailing institutions emerge; new channel systems evolve. Therefore, the following section analyzes the recent growth of vertical, horizontal, and multichannel systems.

Vertical marketing systems (VMS), a new form of channel coordination, offer a more effective channel arrangement. Conventional or traditional distribution channels are customary channels consisting of independent manufacturers, wholesalers, and retailers. Each member of the channel is a separate entity, and at the expense of maximizing the profits of the entire channel system, seeks to maximize its own profits. In general, no channel member has full and considerable control over other members of the channel.

Horizontal marketing system is the marketing system created by two or more unrelated companies at the same channel level, which put together resources and programs temporarily or permanently to capture marketing opportunities.

In recent years, many companies have increasingly used hybrid channels and multichannel marketing to reach the same or different markets, because today, customers want to find the same product in different type of channels. Vatan Bilgisayar’s use of both physical store and internet store for computer sales is an example of multi-channel usage.

Conflict and Cooperation in Distribution Channels

Companies in the channel must work in a harmony to find better ways to bring value to final customers. Although the distribution channel is well designed and managed, there may sometimes be conflicts among channel members. Conflict in the distribution channel is defined as “the behavior of at least one of the parties to perceive the other as a competitor to obtain scarce resources and therefore to hurt or even destroy it”.

Horizontal channel conflict takes place between channel members at the same level. Vertical channel conflict refers to the conflict in the distribution channel at different levels. Multichannel conflict is a kind of channel conflict originating from the competition at the same channel level that sells to the same market, but between different types of intermediaries.

Retailing and Wholesaling

The distribution of consumer goods begins with the producer and ends with the end consumer, but most of the time there is an intermediary between them, which is a retailer. Almost all businesses including producers, wholesalers, and retailers sell goods to consumers, but the retail trade is actually done by retailers because it is their business.

Wholesaling is an intermediate step in a channel extending from producer to the final user, and companies engaged in primarily in wholesaling activities are called wholesalers. Wholesaling refers to business establishment that do not sell product to a significant degree to end consumers.

Logistics Management

After selecting channels and identifying the intermediaries to be used, the second aspect of the distribution channel, issues related with physical distribution and logistics through these channels emerges. In the past, planners of physical distribution typically considered distribution activity with products at the plant, and then tried to find low-cost solutions to deliver the products to customers. Nevertheless, today’s integrated logistics systems begin with the customers and market place and operates backward to the production site or even to the sources of supply.

Logistics is defined as “the process of planning, implementing and controlling the efficient, cost-effective flow and storage of raw materials, in-process inventory, finished goods and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirements”.

Logistics serves as a bridge between production and consumption points separated by time and distance. The primary objective of logistics management is to move the inventory in a supply chain effectively and efficiently.

Transportation is simply defined as the movement of people and goods from one location to another. It is considered as the physical link connecting the firm to its suppliers and customers. Transportation plays a key role in every supply chain and logistics system because products are rarely produced and consumed in the same location.

There are several important factors affecting the decision making related to transportation: These factors can be classified as product attributes, market attributes and customer characteristics, various attributes of different transport modes, and decisions for transport provision.

Third party logistics service providers perform any or all of the functions required to get their clients’ product to the market. They provide producers with a wide range of logistics services, from inventory control, warehousing, and transportation management to customer service and fulfillment.