Structure of Distribution Channels, its Functions, and Nature of Supply

Chain Management

Marketing Intermediaries in the Distribution Channel

A distribution channel is made up of marketing intermediaries, or
organizations that assist in moving goods and services from producers to end users
and consumers. Marketing intermediaries are in the middle of the distribution
process, between the producer and the end user. The following marketing
intermediaries most often appear in the distribution channel:

Agents and brokers: Agents are sales representatives of manufacturers and

wholesalers, and brokers are entities that bring buyers and sellers together. Both
agents and brokers are usually hired on commission basis by either a buyer or a
seller. Agents and brokers are go-betweens whose job is to make deals. They do not
own or take possession of goods.

Industrial distributors: Industrial distributors are independent wholesalers that buy

related product lines from many manufacturers and sell them to industrial users.
They often have a sales force to call on purchasing agents, make deliveries, extend
credit, and provide information. Industrial distributors are used in such industries as
aircraft manufacturing, mining, and petroleum.

Wholesalers: Wholesalers are firms that sell finished goods to retailers,

manufacturers, and institutions (such as schools and hospitals). Historically, their
function has been to buy from manufacturers and sell to retailers.

Retailers: Retailers are firms that sell goods to consumers and to industrial users for
their own consumption.
 At the end of the distribution channel are final consumers and industrial
users. Industrial users are firms that buy products for internal use or for producing
other products or services. They include manufacturers, utilities, airlines, railroads,
and service institutions such as hotels, hospitals, and schools.
Figure 1 shows various ways marketing intermediaries can be linked. For
instance, a manufacturer may sell to a wholesaler that sells to a retailer that in turn
sells to a customer. In any of these distribution systems, goods and services are
physically transferred from one organization to the next. As each takes possession
of the products, it may take legal ownership of them. As the exhibit indicates,
distribution channels can handle either consumer products or industrial products.

Non-traditional Channels
 Often nontraditional channel arrangements help differentiate a firm’s product
from the competition. For example, manufacturers may decide to use nontraditional
channels such as the internet, mail-order channels, or infomercials to sell products
instead of going through traditional retailer channels. Although nontraditional
channels may limit a brand’s coverage, they can give a producer serving a niche
market a way to gain market access and customer attention without having to
establish channel intermediaries. Nontraditional channels can also provide another
avenue of sales for larger firms. For example, a London publisher sells short stories
through vending machines in the London Underground. Instead of the traditional
book format, the stories are printed like folded maps, making them an easy-to-read
alternative for commuters.
Kiosks, long a popular method for ordering and registering for wedding gifts,
dispersing cash through ATMs, and facilitating airline check-in, are finding new uses.
Company A stores use kiosks as a product locator tool for consumers and
salespeople. Kiosks on the campuses of a University allow students to register for
classes, see their class schedule and grades, check account balances, and even
print transcripts. The general public, when it has access to the kiosks, can use them
to gather information about the university.

The Functions of Distribution Channels

Why do distribution channels exist? Why can’t every firm sell its products
directly to the end user or consumer? Why are go-betweens needed? Channels
serve a number of functions.

Channels Reduce the Number of Transactions

Channels make distribution simpler by reducing the number of transactions
required to get a product from the manufacturer to the consumer. For example, if
there are four students in a course and a professor requires five textbooks (each
from a different publisher), a total of 20 transactions would be necessary to
accomplish the sale of the books. If the bookstore serves as a go-between, the
number of transactions is reduced to nine. Each publisher sells to one bookstore
rather than to four students. Each student buys from one bookstore instead of from
five publishers (see Figure 3).
 Dealing with channel intermediaries frees producers from many of the details
of distribution activity. Producers are traditionally not as efficient or as enthusiastic
about selling products directly to end users as channel members are. First,
producers may wish to focus on production. They may feel that they cannot both
produce and distribute in a competitive way. On the other hand, manufacturers are
eager to deal directly with giant retailers, such as Walmart, which offer huge sales
opportunities to producers.

Channels Ease the Flow of Goods

Channels make distribution easier in several ways. The first is by sorting,
which consists of the following:
• Sorting out: Breaking many different items into separate stocks that are similar.
Eggs, for instance, are sorted by grade and size. Another example would be
different lines of women’s dresses—designer, moderate, and economy lines.
• Accumulating: Bringing similar stocks together into a larger quantity. Twelve large
Grade A eggs could be placed in some cartons and 12 medium Grade B eggs in
other cartons. Another example would be to merge several lines of women’s
dresses from different designers together.
• Allocating: Breaking similar products into smaller and smaller lots. (Allocating at
the wholesale level is called breaking bulk.) For instance, a tank-car load of milk
could be broken down into gallon jugs. The process of allocating generally is done
when the goods are dispersed by region and as ownership of the goods changes.
Without the sorting, accumulating, and allocating processes, modern society
would not exist. Instead, there would be home-based industries providing custom or
semicustom products to local markets. In short, society would return to a much
lower level of consumption.
A second way channels ease the flow of goods is by locating buyers for
merchandise. A wholesaler must find the right retailers to sell a profitable volume of
merchandise. A sporting-goods wholesaler, for instance, must find the retailers who
are most likely to reach sporting-goods consumers. Retailers have to understand
the buying habits of consumers and put stores where consumers want and expect
to find the merchandise. Every member of a distribution channel must locate buyers
for the products it is trying to sell.
Channel members also store merchandise so that goods are available when
consumers want to buy them. The high cost of retail space often means many
goods are stored by the wholesaler or manufacturer.
Distribution (place) includes the efficient managing of the acquisition of raw
materials by the factory and the movement of products from the producer or
manufacturer to business-to-business users and consumers. Place includes such
activities as location selection, store layout, atmosphere and image-building for the
location, inventory, transportation, and logistics. Logistics activities are usually the
responsibility of the marketing department and are part of the large series of
activities included in the supply chain.
Distribution channels are the series of marketing entities through which
goods and services pass on their way from producers to end users. Distribution
systems focus on the physical transfer of goods and services and on their legal
ownership at each stage of the distribution process. Channels reduce the number of
transactions and ease the flow of goods.
 An economic activity is linked to a complex system of suppliers and
customers, which must be supported by a transport system. The system as a whole
is known as a supply chain. A supplier can be another’s customer, depending upon
its position along the chain. Thus, a supply chain is a relative concept, but it is
commonly applied to the whole sequence as an activity. Often retailing eventually
acts as the final customer. Actors such as manufacturers, distributors, or retailers
are placing orders, and the fulfillment of these orders results in their transportation.
A supplier maintains outbound inventory (parts or raw materials ready to be
distributed) while a customer maintains inbound inventory (parts or finished goods
ready to be transformed or consumed). A manufacturer also has an in-process
inventory, which implies all the parts currently used in the fabrication process.