Regulation of

Prices

Block

4
DISTRIBUTION
UNIT 11
Channels of Distribution I
UNIT 12
Channels of Distribution II
UNIT 13
Physical Distribution

195
Pricing

196
UNIT 11 CHANNELS OF DISTRIBUTION-I Channels of
Distribution-I

Structure

11.0 Objectives
11.1 Introduction
11.2 What is a Channel of Distribution ?
11.3 Functions of Channels of Distribution
11.4 Channels of Distribution Used
11.4.1 Channels of Distribution Used for Consumer Goods

11.4.2 Channels of Distribution Used for Industrial Goods

11.5 Factors Influencing the Choice of Channel

11.6 Intensity of Distribution
11.7 Let Us Sum Up
11.8 Key Words
11.9 Answers to Check Your Progress
11.10 Terminal Questions

11.0 OBJECTIVES
After studying this unit, you should be able to:
• explain the meaning and role of distribution channels in overall
marketing of products;
• describe the common distribution channels used;
• outline the factors influencing the choice of a distribution channel; and
• explain the strategies relating to the intensity of distribution.

11.1 INTRODUCTION
You have already studied about the two important elements of marketing
mix, viz., product and pricing. You would, however, appreciate that merely
producing a good product which has the desired attributes and is beautifully
packed, branded and reasonably priced, does not ensure success in the
market. It is equally important that the product is made available at a place
where the customer would like to buy it. In other words, the product should
be available at the right time and at the right place. In order to ensure this,
each firm has to take certain strategic decisions for the systematic distribution
of its products. One such decision is regarding channels of distribution. The
present unit discusses this aspect. In this unit, you will study the meaning,
role and functions of a channel of distribution, factors influencing the choice
of a distribution channel and the strategies relating to the intensity of
distribution. 197
Distribution
11.2 WHAT IS A CHANNEL OF DISTRIBUTION ?
The distribution system is concerned with the movement of goods from the
point of production to the point of consumption which involves a variety of
functions. The main participant in the distribution system are: (1) the
manufacturers, (2) the intermediaries,(3) the facilitating agencies, and (4) the
consumers. Manufacturers produce the goods. This is the starting point in the
distribution system. The second category of participants i.e., intermediaries,
are involved in direct negotiation between buyers and sellers whether or not
they take title to goods. These intermediaries locate the manufacturers who
produce various products, identify the needs of the consumersand distribute
the goods. In the process, they perform various functions like buying, selling,
assembling, standardisation and grading, packing and packaging risk bearing,
etc. Facilitating agencies are the independent business organisations other
than intermediaries. These agencies facilitate the smooth distribution of
goods from producers, through intermediaries, to consumers. The major
facilitating agencies are banking institutions, insurance companies,
transportation agencies and warehousing companies. The fourth category of
participants in the distribution system i.e., consumers, are the final
destination for goods in the distribution system.

A Channel of distribution is mainly concerned with second participant i.e.,

the intermediaries. The term 'Channel of Distribution' refers to the route
taken by goods as they flow from the producer to the consumer. This flow of
goods may mean its physical distribution and/or the transfer of title
(ownership). Channels of distribution are mainly concerned with the transfer
of title to a product which may be effected directly or through a chain of
intermediaries. You know most producers do not sell goods directly to the
consumers. They make use of a variety of intermediaries known as
middlemen. These middlemen who take title to goods or assist in transferring
thetitle to goods as they move from the producer to the consumer is called the
channel of distribution. Thus, the channel of distribution is a network of
institutions that perform a variety of interrelated and coordinated
functions in the movement of goods from producers to consumers.

A distribution channel creates place, time, form and possession utilities

to the products by prompt and efficient performance of the function of
physical distribution. In modern societies the production of goods takes
place on a large scale in factories concentrated in few localities while the
consumers are scattered throughout the country. For instance, textile mills are
concentrated at few places like Bombay, Ahmedabad, Coimbatore, etc., while
the cloth is used by all the people in the country. Similarly, Maruti cars are
manufactured at Delhi while the users are spread in all parts of the country.
Something is true of agricultural commodities. Apples are produced mainly
in Kashmir Valley and Himachal Pradesh whereas they are consumed by
people throughout the country. Another such example is tea which is mainly
198 produced in Assam while it is consumed everywhere in the country. Thus,
most of the goods are produced at one place while they are consumed at Channels of
Distribution-I
various other places and therefore it is difficult for the consumers to contact
the producers directly. Similarly it is not possible for all the producers to
contact the consumers directly and sell the goods. Hence, it is essential to
move the goods from the place of production to the markets where consumers
can buy them. Otherwise, production has no value and it becomes waste. A
distribution channel helps in the movement of goods from producer to
consumer and, thus, creates place utility to the product.

There is another barrier which arises due to time lag between production and
consumption. The goods produced are not consumed at the same point of
time. Some goods are produced throughout the year, but their consumption is
seasonal. For example, umbrellas and raincoats are used only during rainy
season, woollen garments are used only during winter season. In some other
cases, goods are produced during specific season while they are consumed
continuously throughout the year. For example, food grains are produced by
farmers during a particular season but are consumed throughout the year.
Thus, in many cases, there is a time lag between production and
consumption. The distribution channel makes it possible for the
consumers to get the product whenever they want them and, thus,
creates time utility to the products.

Similarly, a distribution channel makes it possible for the consumer to get the
products in a convenient shape, unit size, style and package. Thus, it creates
convenience value. Distribution channel also makes it possible for the
consumer to obtain good at a price he is willing to pay and under conditions
which bring him satisfaction and pride of ownership. Thus, it creates
possession utility. Thus, it is the distribution system which moves the goods
from the place of production and makes them available to the consumers at
the right place, time and form.

11.3 FUNCTIONS OF CHANNELS OF

DISTRIBUTION
The functions performed by distribution channels may be grouped into three
categories as follows:
1) Transactional Functions
2) Logistical Functions
3) Facilitating Functions
1) Transactional Functions: Functions necessary to a transaction of the
goods are called transactional functions. Buying, selling and risk
bearing functions come under this category. Participants in the channel
of distribution undertake these three functions. Producers sell the goods
and intermediaries buy them. Later intermediaries sell the goods and
consumers buy them. Because of this buying and selling by the channel
participants, title to goods changes hands and goods flow from producer 199
Distribution to consumer. If there is no willingness for buying and selling, there
would be no transaction. When goods are bought, it involves risk also.
For instance, an intermediary bought goods from the producer with the
intention of selling at a profit. But he may incur loss due to fall in price.
All the participants in the distribution channel assume such risk of loss.

2) Logistical Functions: The functions involved in the physical exchange

of goods are called logistical functions. Distribution channel performs
some functions like assembling, storage, grading and transportation
which are essential for physical exchange of goods.

Goods are assembled in sufficient quantity to constitute an efficient

selling and shipping quantity. Sometimes, it is also necessary to
assemble a variety of goods to provide an assortment of items desired by
buyers. Grading and packing of goods facilitate handling and sale of
goods promptly. Proper storage of goods prevents loss or damage as well
as helps regular supply of goods to consumers whenever they want.
Transportation makes goods available at places where buyers are located.
In the channel of distribution all these functions are performed so that
goods may reach market place at proper time and may be conveniently
sold to the ultimate consumers.

3) Facilitating Functions: These functions facilitate both the transaction as

well as physical exchange of goods. These facilitating functions of the
channel include: post-purchase service and maintenance, financing,
market information, etc. Sellers provide necessary information to buyers
in addition to after sales services and financial assistance in the form of
sale on credit. Similarly, traders are often guided by producers to help
them in selling goods, while the traders also inform producers about the
customers' opinions about the products.
Thus a Channel of distribution performs a variety of functions such as
buying, selling, risk bearing, assembling, storage, grading,
transportation, post-purchase service and maintenance, financing, market
information, etc. But the relative importance of storage is more important
for perishable goods and bulky material such as coal, petroleum
products, iron, etc. In the case of automobiles and sophisticated
electronic goods like computers, after sales service is very important.
Check Your Progress A
1) What is a channel of distribution?
2) State whether the following statements are True or False.
i) Only buying and selling activities are carried on by a distribution
channel.
ii) Transportation is the primary function of a distribution channel.
iii) Risk bearing is one of the functions of a distribution channel.
iv) In a distribution channel facilitating agencies take title to goods.
200 v) Channels of distribution create convenience value to the goods.
11.4 CHANNELS OF DISTRIBUTION USED Channels of
Distribution-I

You have learnt about the nature and functions of channels of distribution.
We shall now discuss the channels of distribution commonly used by the
producers. By and large, channels of distribution used by marketer are as
below:
1) Direct channel of distribution, (2) Indirect channel of distribution,
(3) Multichannel distribution, (4) Digital marketing channel.

1) Direct Channels

When the producers sell their goods directly to the consumers, it is called a
direct channel. No middleman is present between the producer and the
consumer.

For direct selling, the first option involves supplying the product to the
customer using your own salesmen and arranging your own deliveries. The
second option is using the medium of post office. You obtain orders from
your customers who respond by mail or telephone to your advertisements or
to letters mailed directly to their houses. You deliver your products to them
through mail or through some other carrier. The next alternative is to
establish your own Retail Stores. Bata Ltd., for example, has established its
own retail stores throughout the country. This practice has also been adopted
on a smaller scale by a number of textile mills which have their own retail
shops like Calico Mills, Raymonds, etc. DCM has franchised a number of
retailers to sell their products to the consumers.

Direct channel is also called zero-level channel as there is no middleman

between producer and consumer. The three major ways of direct selling are
shown in Figure 11.1.

Producer Travelling Salesman Consumer

Producer
Retail Show/showroom Consumer

Producer Mail order/Telephone Consumer

Figure 11.1: Direct Channels of Distribution

An example of direct selling is provided by Eureka Forbes Ltd.(EFL), a

Bombay based company which markets vacuum cleaners and water purifying
equipment. It believes that if the market is in the customer's house, the best
way to get there is to knock at the door. The company has clearly
demonstrated that door-to-door selling can be effective in Indian conditions.
Its large number of sales force and reach over large number of cities and
201
Distribution towns make it the Asia's one of the largest commercial direct sales
organisation. They took the cue from Electrolux, the world’s leading
manufacturer of vacuum cleaners, and a firm believer in door-to-doorselling.

2) Indirect Channels

In the case of other products, it is not possible for the manufacturer to supply
goods directly to the consumers. So middlemen like wholesaler, retailer and
mercantile agents may be engaged in the channel of distribution. When the
middlemen are engaged in the distribution channel, it is called an
indirect channel. As shown in Figure 11.2 there could be four indirect
channels.

Producer Retailer Consumer

Producer
Wholesaler Consumer

Producer Wholesaler Retailer Consumer

Producer Agents Wholesaler Retailer Consumer

Figure 11.2 : Indirect Channels of Distribution

The manufacturer may supply goods directly to retail traders. In this case, the
producer ascertains the requirements of retailers at periodical intervals and
goods are supplied accordingly. As and when required, the retailer may also
procure goods from the producer’s godown located in that region. In the same
way, the producer can supply goods to the consumers by using the services of
the wholesale trader. Since there is only one middlemen, (either retailer or
wholesaler) in these two channels, this is referred to as one level channel.
Alternatively, the producer can use the services of the wholesaler as well as
the retailer. In this case the manufacturer may supply his products in bulk to
wholesalers. The retailer may buy periodically from the wholesaler and sell
the same to the consumers located in his locality. As there are two
middlemen (both wholesaler and retailer) in this channel, it is referred to as
two level channel. Another alternative channel of distribution consists of
mercantile agent, wholesaler and retailer. In this case, the manufacturer deals
with a mercantile agent. Then the wholesalers buy the goods from the agents
and sell the same to retailers. In turn the retailer sells it to the ultimate
consumers. This type of channel is referred to as three level channel as there
are three types of middlemen involved in the distribution.

202
3) Multichannel Distribution System Channels of
Distribution-I
As you know, manufacturers/producers may choose different channels to
distribute their products/services to the customers. They can distribute their
products/services directly or also indirectly. Today, as the companies have to
deal with diverse customer segments, these companies are adopting
‘multichannel distribution system’ which is also known as ‘hybrid
marketing channel’.

In the words of Philip Kotler, “A distribution system in which a single firm

sets up two or more marketing channels to reach one or more customer
segments.”

Thus, a multichannel distribution system is when the producers distributes

their products/services to customers via multiple channels, such as directly
through their own retail shops, salesman or an online market place or website
and also through agents, wholesalers and retailers.

Catalogs, telephone, internet Consumer

Segment 1

Consumer
Producer Retailers Segment 2

Business
Distributor Segment 1
Dealers
Business
Segment 2
Sales Force

Figure 11.3:Multichannel Distribution System

Source: Kotler, P. et. Al. (2017) Principles of marketing An Asian Perspective (Fourth
Edition), Pearson Education Limited, pg 383.

Figure 11.3 shows a multichannel distribution system. The manufacturer/

producer has adopted four different channels to distribute its products/
services. For selling products to consumer segment 1, he uses catalogs,
telephone and internet. The products are distributed through retailers to
consumer segment 2.The distribution to Business segment 1 is done through
distributors and dealers, and to Business segment 2 through its own sales
force.
203
Distribution 4) Digital Marketing Channels

With the advent of technology, there is an explosive growth of digital

marketing channels which allows the producers or manufacturers and even
the resellers to offer their products/services to the customers via websites,
mobile applications and social media.

A company can sell its product directly through its own website to the
ultimate consumers removing the intermediaries form their marketing
channel or it can also refer its customers to their resellers website.

Hotels and travel tickets booking through Trivago.in, downloading music

online from apple iTunes, selling and purchasing product from Amazon.com
or Flipkart are all examples of digital marketing channel.

As consumers are becoming more familiar with the use of technology, this
new form of marketing channel is slowly cutting the traditional brick-and-
mortar form of distribution channel.

You have understood that there are number of channels of distribution

prevalent. From the producer's point of view, more the number of middlemen
used, lesser is the control he can have over the distribution. Let us now
examine how these channels of distribution vary from one type of product to
another. Basically we can classify the goods into two categories: 1) consumer
goods, and 2) industrial goods. Let us now discuss briefly about the channels
of distribution used for these two categories of products.

11.4.1 Channels of Distribution Used for Consumer Goods

You know, the goods which are consumed by the household consumers are
called consumer goods. Under this category, you can find a very wide range
of items such as food items, stationery, cars, clothing, Shoes, household
electrical appliances, TV sets, mobile phones, etc. The channel of distribution
used for different products is not the same. Channels are different from one
type of product to the other. Look at Figure 11.4 carefully.Itgives the idea
about the channels of distribution for some of the consumer goods.

As shown in the figure, consumers sometimes go directly to the factory and

buy the goods or order the goods from the catalogue. Durable consumer
goods like cars, clothing, furniture, textbooks, shoes, etc., are generally
distributed through retailers. In many cases, showrooms are established by
the manufacturer himself which undertake the retail trade. For example, Bata
Shoe Company sells shoes through its showrooms. Consumer goods like auto
spare parts, stereos, video recorder, etc., are distributed through wholesalers
and retailers. Consumer goods of daily need like food grains, sugar, salt,
edible oil, soap, paper, pencils, etc., are generally distributed through agent or
broker, wholesaler and retailer.

204
 Channels of
Distribution-I
Producer Producer Producer Producer

Agent/Broker

Wholesaler Wholesaler

Retailer Retailer Retailer

Consumer Consumer Consumer Consumer

Catalogue shopping, Cars, Clothing Stereos, Video Food items

Direct factory buying Furniture, Textbooks recorders, Auto parts

Figure 11.4 : Channel of Distribution for Consumer Goods

11.4.2 Channels of Distribution Used for Industrial Goods

As you know, the goods which are consumed for further production of goods
are called industrial goods. Under this category, there are variety of products
such as machinery, equipment, industrial raw materials (e.g., sugarcane,
cotton, coffee, oilseeds, iron ore etc.), electrical and electronic components,
etc. The channels of distribution are not similar for all the products under this
category. Look at Figure 11.5 carefully. It presents the major channels of
distribution for some of the industrial goods.

High value industrial goods like mainframe computers, aircraft, heavy

machinery, etc. are supplied directly to the buyers. In these cases
manufacturers procure orders by email on the basis of catalogues and price
lists. Sometimes salesmen are also used to contact the buyers. Relatively less
expensive items like trucks, conveyor systems, etc., are supplied through
distributors. You know industries consume many agricultural products. For
instance, tea leaves are processed to prepare tea powder which we use for
preparing tea. Agricultural products like corn, coffee, soyabeans, etc., are
procured by the industrial buyers through agent middlemen. When electrical
components are imported from foreign markets, they are procured through an
agent and industrial distributor.

205
Distribution
Producer Producer Producer Producer

Agent Agent

Industrial Industrial
Distributor Distributor

Industrial Buyer Industrial Buyer Industrial Buyer Industrial Buyer

Mainframe Electrical components

Conveyor Systems, Industrial food
Computers, Aircraft, from Foreign Markets
Truck products (corn,
Heavy Machinery
coffee, soybeans,
etc.)
Figure 11.5 : Channels of Distribution for Industrial Goods

Check Your Progress B

1) Distinguish between a direct channel and an indirect channel.

2) From which type of intermediary (wholesaler/retailer/dealer/showroom)

you buy the following items.

Items Types of Intermediary

i) Bread ………………………………..
ii) Milk ………………………………..
iii) Shoes ………………………………..
iv) Wooden Furniture ………………………………..
v) TV Set ………………………………..
vi) Children's Garments ………………………………..
vii) Vegetables ………………………………..
viii) Sweets ………………………………..

3) Visit a localRetail Store in your neighbourhood area and find out what
type of items he procures from manufacturers, wholesalers and
distributors.

4) Write the names of two items which are distributed under the following
channels:

i) Manufacturer consumer.

206 ……………………………………………………………………………
ii) Manufacturer wholesaler consumer Channels of
Distribution-I
…………………………………………………………………………

iii) Manufacturer wholesaler retailers consumer

……………………………………………………………………………

11.5 FACTORS INFLUENCING THE CHOICE OF

CHANNEL
We have learnt that there are a number of channels used for distributing the
goods. There are direct channels and indirect channels, short channels as well
as long channels. We also learnt that the different channels are used for
different types of products. When there are alternative channels available, the
selection of an appropriate channel becomes a very important decision for the
producers. The choice of a channel for distribution of any product should be
such that it should effectively meet the needs of customers in different
markets at reasonable cost. The factors which generally influence the choice
of the channel of distribution may be categorised under four group as
follows:

1) Market considerations
2) Product considerations
3) Middlemen considerations
4) Company considerations

Product Considerations

1) Perishability: The nature of the product influences the choice of

channel. Perishable products like eggs, milk, etc., are supplied either
directly or through the short channels. If long channels are opted for
perishable goods, they may get spoiled by the time they reach the
consumer. So products which are perishable must be speeded through the
short channels.

2) Bulkiness: In the case of heavy and bulky products (e.g., cement, steel,
heavy machinery, etc.) where distribution and handling costs are more,
short channels are preferred. On the other hand, long channels are found
in the case of light-weight and small-size items like dress material,
readymade garments, pocket calculators, stationery, toothpaste,
toothbrush, etc.

3) Technical nature of the product: Sophisticated electrical and

electronics equipment which require careful handling are also generally
distributed directly or through short channels. In the case of sophisticated
equipment like computers and xerox machines, considerable amount of
presale and post sale service is required. Wholesalers and retailers may
not be able to provide such services. So manufacturers often distribute 207
Distribution them directly. However, simple mechanical products like electronic toys,
time-clocks, etc., are supplied through long channels for intensive
distribution.

4) Product value: Unit value of the product is also an important

consideration while deciding the channel of distribution. Normally larger
channels are preferred for products whose unit value is low. However,
short channels may be equally economical when such products are sold
in bulk or are combined with other products.

Market Considerations

1) Size of the customers: If the number of customers is large, long and

multiple channels are necessary for intensive distribution of goods. Short
channels and direct selling are possible in the case of fewer customers
purchasing large quantities at regular intervals and if they are
concentrated in a small area.

2) Potential volume of Sales: The choice of channel depends upon the

target volume of business. The ability to reach target customers and the
volume of sales varies among different channels. If one outlet is not
adequate for achieving the target, more channels need to be used. Of
course, the competitive situation must be taken into account while
examining the potential volume of sale through different channels.

3) Concentration of buyers: If the buyers are concentrated in a few areas,

it is possible for the manufacturer to establish sales divisions in such
areas and sell directly to the buyers. Thus, short channels may be feasible
when buyers are concentrated in fewer locations. On the other hand, if
buyers are spread over a large geographic area, channels may become
uneconomical and the manufacturer may have to go for long and
multiple channels.

4) Size of the purchase order: Manufacturer can distribute directly or

through a short channel in the case of large scale buyers. Normally long
channels are effective and economical in the case of buyers whose
purchase orders are usually too small to justify direct sale.

Middleman Considerations

1) Types of middlemen: Availability of suitable middlemen in the channel

of distribution is another factor in the selection of the channel. This is
because different functions like standardisation, grading, packing,
branding, storage, after-sale servicing, etc., are expected to be performed
by middlemen. Efficiency of distribution depends upon the size, location
and financial position of middlemen. If the middlemen in a specific
channel are dependable and efficient, that channel may be preferred by
producers.
208
2) Channel competition: There are different situations in which Channels of
Distribution-I
manufacturers compete with each other for availing the services of
particular wholesalers. Similarly, wholesalers often compete with each
other to deal with particular retailers or carrying particular brands of
products. Sometimes producers use the same channel which is used by
their competing producers. If any producer arranges exclusive
distribution through a particular wholesaler, the other producers also do
the same. Thus selection of a channel may depend on the competition
prevailing in the distribution system.

3) Availability of middlemen: The producer may wish to make use of the

services of specific category of middlemen, but such middlemen may not
be available in the market. They may be carrying the competitors'
products and may not wish to add another product line. In such
situations, the manufacturer has to make use of the services of the
middlemen whoever available in the market.

Company Considerations

1) Cost of distribution: The various functions carried out in the channel of

distribution add to the cost of distribution. While choosing a channel, the
distribution costs of each channel should be calculated and its impact on
the consumer price should be analysed. A channel which is less
expensive is normally preferred. Sometimes, a channel which is
convenient to the customers is preferred even if it is more expensive. In
such cases the choice is based on the convenience of the customers rather
than the cost of distribution.

2) Long-run effect on profit: Direct distribution, short channels, and long

channels have different implications with regard to the profits in the
short-run and long-run. If demand for a product is high, reaching the
maximum number of customers through more than one channel may be
profitable. But the demand may decline in course of time as competing
products appear in the market. It may not be economical than to use long
channels. So while choosing a channel one should keep in mind the
future market implications as well.

3) Experience and ability: A manufacturer who has reasonable experience

and expertise in marketing the products may prefer to distribute his
products on his own.

But the manufacturers who do not have marketing know-how prefer to

make use of the services of middlemen.

4) Financial strength: Lots of financial resources are required to establish

a distribution system. So only a financially strong manufacturer can
establish his own distribution system and a financially weak firm may
have to depend on middlemen.

209
Distribution 5) Extent of channel control: Producers who want good control over the
distribution of their products prefer short channels. Controlling of the
channels is necessary to undertake aggressive promotion, to maintain
fresh stocks and retail prices.

Thus, in making a choice, the manufacturer has to consider his objectives,

resources and the channels available to him, nature of the product and
characteristics of the buyers. He would like to use the channel of distribution
which will produce the combination of sales volume and cost that yields him
the maximum amount of profit. There are no set guidelines for channel
selection and the manufacturer will have to make his own decision in the
light of his own judgment and experience. However, companies douse
multiple channels of distribution to ensure that their products reach the
maximum number of people.

The task of manufacturer does not end after the channels have been selected.
He has to review the services performed by the agencies involved at fairly
frequent intervals, keep in close touch with the developments related to the
distribution of his product and seek to improve his marketing methods
constantly. He may also realise that the best channel when the product was
introduced, may not be the most effective one when the product is
established. The following criteria may be used for the evaluation of channel
members: i) their sales performance, (ii) their marketing capabilities, iii) their
motivation to increase the volume of sales, (iv) competition faced by them,
and (v) their growth prospects.

11.6 INTENSITY OF DISTRIBUTION

As discussed earlier, the number of levels in a channel may range from one
level which is the most direct (manufacturer-user) upto three levels,
depending upon various factors. After deciding the number of levels, each
firm has to decide about the number of intermediaries at each level of the
channel. Here comes the question of intensity of distribution. Intensity of
distribution refers to the number of intermediaries at each level of
marketing channel. Let us assume that a manufacturer of refrigerators has
opted for a one level structure consisting of the manufacturer, retailer and
consumer. The decision with respect to intensity of distribution in this case
concerns the number of retailers who would be selling the firm's product. In
other words, whether a few retailers would be entrusted the role of
distribution or a very large number of retailers would be employed to
distribute the firm's products. In short, three broad alternative options are
available to a firm with regard to intensity of distribution. These are: 1)
intensive distribution, 2) selective distribution, and 3) exclusive distribution.
Let us learn them in detail:

1) Intensive Distribution Policy: Intensive distribution policy refers to

sale of products through a very large number of outlets. This policy aims
210
 at giving maximum exposure to the product for sale in the market. Channels of
Distribution-I
Generally the producers of convenience goods such as soft drinks,
cigarettes, eggs, bread, toilet soap, biscuit, toothpaste, chewing tobacco,
etc., adopt the policy of intensive distribution. All these products have
low unit cost but are purchased frequently and have large turnover.

The objective of this policy is to reach every potential buyer so that not
even a single chance of making a sale is missed. It enables the firm to
spread distribution overhead cost over a wider network of dealers and
minimise delay in communication in reaching a large number of buyers.
However, it is an expensive policy as the firm has to collect and serve
small orders from a large number of outlets.

2) Selective Distribution Policy: As the name suggests, this policy puts a

limit to the number of outlets that will be carrying a product. Thus, as
against using all possible intermediaries at a particular level, a careful
selection is made of the outlet through which the product will be
distributed. The manufacturers of shopping goods such as fabrics, fans,
washing machines, coolers, TV sets, mopeds, scooters, etc., (for the
purchase of which the consumers are willing to make some extra efforts)
generally opt for selective distribution.

The policy is more suitable for products having brand preferences

because the consumers of such products are expected to approach the
channel used by the firm. As the marketing firm does not have to
dissipate its efforts over many outlets, including many marginal ones,
this policy is less costly than the intensive distribution policy.Also it
enables the manufacturer to gain adequate market coverage with greater
control as compared to the intensive policy.

3) Exclusive Distribution Policy: Under this policy, a limited number of

dealers are granted the exclusive right to distribute the firm's products in
their respective territories. Under this policy, there is an agreement
between the manufacturer and middlemen where the manufacturer
commits to channelise his products exclusively through the middleman
in the whole market or a part thereof. The middleman, in turn, serves the
manufacturer exclusively in terms of the products handled and the
market served. When an agreement is made with an agent middlemen, it
is known as sole selling agency. But when such agreement is between a
manufacturer and a merchant, it is known as dealership at wholesale
level and distributionship at retail level.

Exclusive distribution policy is particularly suitable for those products

which are slow-moving, have high unit value and require after sales
service. Thus, a large number of manufacturers of mopeds, scooters,
cars, trucks, etc., adopt exclusive distribution policy for their products.
For example, Maruti Udyog Ltd., Ashok Leyland. Bajaj Scooters, and

211
Distribution Lohia Machines Ltd., have appointed dealers/distributors in different
territories for the distribution of their products.

The policy of exclusive distribution allows maximum control over

prices, promotion, services, etc., by the manufacturer firm. Thus,
exclusive distribution is usually undertaken when the manufacturer
desires more aggressive selling on the part of middleman or when
increased control over distribution is deemed to be important. Another
advantage of exclusive distribution is that it leads to specialisation on the
part of the dealer which results in improved after-sales services to the
customers. However, there may be problems in getting cooperation from
the dealers. As such there is a need for careful management of the
channel members in this arrangement. Also, many a time such
arrangements in our country have been declared anti-competitive by the
Competition Commission.

The decision with respect to intensity of distribution is an important

aspect of channel structure and is often considered as a key factor in the
firm's basic marketing strategy. It also reflects the firm's overall business
policies. For example, marketing strategy that seeks to blanket the
market with a product would require a channel structure that has a very
high level of distribution intensity. But a low intensity or a high degree
of selectivity would be required to be built into the channel structure
when the marketing strategies focus on carefully chosen target market. In
general, when a firm's basic marketing strategy requires mass appeal for
its products, intensive distribution is used. But when the strategy calls for
stressing more narrow segmentation, a more selective channel is used.

Check Your Progress C

1) Distinguish between multiple channels of distribution and intensive

distribution.

2) Distinguish between selective distribution and exclusive distribution.

3) What is intensity of distribution?

4) List out the factors which influence the choice of channels of

distribution.

5) State whether the following statements are True or False.

i) Normally direct channel is preferred for heavy engineering

machinery.
ii) Intensive distribution policy is followed for distributing bread.
iii) Intensive distribution means using multiple channels for the same
product.
iv) Direct channel is suitable when there are a few big buyers
212 concentrated in one area.
 iv) Manufacturer can have more control over distribution in the case of Channels of
Distribution-I
show channels.

11.7 LET US SUM UP

Channel of distribution refers to a network of institutions that perform a
variety of interrelated and coordinated functions in the movement of products
from producer to consumers. Distribution channels play a very important role
in achieving the marketing objectives of an organisation. They create time,
place, ownership and convenience utilities to the product and thereby add to
its value. The functions performed in the channels of distribution are of three
kinds: (i) transactional functions which are necessary for purchase and sale,
(i) logistical functions which are required for physical exchange of goods,
and (iii) facilitating functions which facilitate the transactions as well as
physical exchange.

Channels of distributions can be grouped into two categories: (1) direct

selling by manufacturers (direct channel) and (2) use of middlemen such as
agents, wholesalers and retailers (indirect channel). Channels of distribution
for consumer goods of daily use consist of agents or brokers, wholesalers,
and retailers as intermediaries. Durable consumer goods are generally
distributed through showrooms of manufacturers, or through retailers called
dealers. Capital goods are often sold directly by manufacturers. Sometimes
distributors, dealers or agents are employed for supply of such goods.

The choice of a channel for the distribution of any product depends upon a
number of factors such as characteristics of the product (perishability,
bulkiness, technical nature, unit value), nature of the market (size of the
customers, concentration of buyers, size of purchase order, potential volume
of sales), middlemen considerations (type of middlemen, channel
competition, availability of middlemen) and company considerations (cost of
distribution, long-run effect on profits, experience and ability, financial
strength, extent of channel control). However, while selecting the channel,
manufacturer will have to make decision in the light of his own judgment and
experience. Normally most of the companies use multiple channels of
distribution to ensure that their product reaches the maximum number of
people.

The channels of distribution perform all such functions which facilitate

transfer. A significant decision in the area of channels is with respect to
intensity of channels which means deciding about the number of
intermediaries to be used at each level of marketing channel. The three
alternative options with respect of intensity of distribution are (i) intensive
distribution, (2) selective distribution, and (3) exclusive distribution. In
general, when a firm's basic marketing strategy requires mass appeal, for its
products, intensive distribution policy is adopted. But when the strategy calls
for stressing more narrow segmentation, a more selective channel is used.
213
Distribution
11.8 KEY WORDS
Channel of Distribution: A network of institutions that perform all the
activities necessary for moving a product and its title from the manufacturer
to the ultimate consumers or users.

Digital Marketing Channels: Use of online or internet enabled marketing

channels for distribution of goods and services.

Direct Distribution: The method of distribution under which manufacturers

directly sell the product to consumers without engaging any intermediary.

Exclusive Distribution: Distribution of products through some limited

outlets which are granted exclusive rights to distribute the firm's products in
their respective territories.

Indirect Distribution: The method of distribution under which the products

are moved from producers to users with the help of one or more
intermediaries.

Intensive Distribution: Distribution of products through a very large

number of intermediaries at each level of marketing channel.

Multiple Channels of Distribution: Simultaneous use of different channels

for the same product.

Selective Distribution: Distribution of products through a limited number of

intermediaries at each level of the distribution channel.

11.9 ANSWERS TO CHECK YOUR PROGRESS

A 2 i) False ii) False iii) True iv) False
v) True

C 5i) True ii)True iii) False iv)True v)True

11.10 TERMINAL QUESTIONS

1) A new soft drink manufacturing company which has successfully
launched its cola and lemon drinks in Mumbai is planning to introduce
these products to the other three metropolitan cities in the country. What
kind of distribution channel would you recommend to the company?
What factors would you take into consideration while selecting the
appropriate channel for this company?

2) In your opinion which policy (intensive, selective, or exclusive) is

suitable for distributing the following products? Give reasons also.

i) Cotton fabrics
ii) Readymade garments for children
214
 iii) Industrial machinery Channels of
Distribution-I
iv) Soft drinks
v) Washing machines
vi) Fast food products like Potato Chips, Noodles, etc.

3) A company at present is selling its products directly to institutions and

other buyers through a network of fifty salesmen. You have to persuade
the company to discontinue direct selling and switch over to selling
through intermediaries. What do you suggest.

4) What is a channel of distribution ? What factors do you keep in mind

while selecting distribution channel for your product ?

5) Channels of distribution are different for different products. Why ?

6) What do you mean by direct channels and indirect channels? Explain the
channels used for consumer goods and industrial goods.

7) A channel of distribution creates various utilities to the product ?Discuss.

8) “As consumers are becoming familiar with technology, a new form of

marketing channel is cutting the traditional brick & mortar form of
distribution channel.” Comment.

Note: These questions will help you to understand the unit better. Try to
write answers for them. But do not submit your answers to the University for
assessment. These are for your practice only.

215
Distribution
UNIT 12 CHANNELS OF DISTRIBUTION-II

Structure

12.0 Objectives
12.1 Introduction
12.2 Meaning and Role of Middlemen
12.3 Types of Middlemen
12.3.1 Functional Middlemen

12.3.2 Merchant Middlemen

12.4 Wholesalers
12.4.1 Classification

12.4.2 Functions

12.4.3 Services

12.5 Retailers
12.5.1 Functions

12.5.2 Services

12.5.3 Classification

12.6 Trends in Wholesaling and Retailing

12.7 Let Us Sum Up
12.8 Key Words
12.9 Answers to Check Your Progress
12.10 Terminal Questions

12.0 OBJECTIVES
After studying this unit, you should be able to:

• explain the meaning and role of middlemen in the distribution of goods;

• classify the middlemen;
• describe the functions of mercantile middlemen;
• discuss the meaning, importance, functions and classification of
wholesalers and retailers; and
• explain the recent trends in wholesaling and retailing.

12.1 INTRODUCTION
In the previous unit you have learnt that a number of intermediaries such as
agents, distributors, wholesalers, retailers, etc., operate in moving the goods
216 from producers to consumers. To be able to appreciate the channel system
fully, it is important to understand the specific roles performed by each of Channels of
Distribution-II
these intermediaries. In this unit, you will study the role of intermediaries,
classification of intermediaries, and specific functions and services rendered
by wholesalers and retailers. It also explains the recent trends in wholesaling
and retailing.

12.2 MEANING AND ROLE OF MIDDLEMEN

The term middlemen refer to the business organisations which are the link
between producers and consumers of goods, and render services in
connection with the purchase and/or sale ofproducts as they move from
producer to the consumers.

Some people often question the wide use of middlemen and feel that it may
not only delay the availability of goods but also add to the cost of distribution
and hence, the price charged from customers may be higher. But it is not the
case in practise. In fact, the middlemen play a very useful role in the
distribution of goods by providing a variety of functions at reasonable cost.
They undertake all the channel functions (such asassembling, grading,
packaging, storing, financing, risk-bearing, etc.). We may however put them
more specifically as follows:

1) Creation of utilities: By performing various functions in the process of

distribution middlemen create place utility, time utility, convenience
utility and ownership utility in the goods and services. Thus, the channels
greatly help in market by adding value to the products. In fact, in the
case of several consumer products, the value added in distribution is
higher than that added during manufacture/production.

2) Economy in effort: Middlemen greatly increase the efficiency of the

exchange process by reducing the amount of effort on the part of the
manufacturers contacting the consumers. This, in turn, reduces the total
cost of distribution of the products. For example, assume that there are
five manufacturers and ten customers. Now look at Figure 12.1 carefully
and study the number of contacts required when all the five
manufacturers contact the ten customers directly. Study Figure 12.2
carefully where the manufacturers used the services of a middleman.

It is evident from the figures that there is considerable economy of effort in

the second case (Figure 12.2) where a middleman is in the distribution
process. There isa net saving of 35 contacts in this situation as compared to
the first situation in which there is no intermediary. Assuming that it costs
Rs. 20 to make one contact, the cost of distribution in the first situation would
be Rs. 1,000 as compared to Rs.300 in second situation.

217
 Distribution

Manufacturers Manufacturers Manufacturer Manufacturers

s

Customers Customers Customers Customers Customers Customers Customers Customers Customers

Figure 12.1: Number of contacts when the Manufacturers Contact the Customers

Manufacturers Manufacturers Manufacturers Manufacturers

Middlemen

Customer Customer Customer Customer Customer Customer Customer Customer Customer Customer Customer

Figure 12.2: Number of Contacts when the Services of a Middleman is used

3) Market coverage: With the increasing liberalisation in trade, the

products manufactured at one place have to be distributed throughout the
length and breadth of not only one country but many nations of the
world. This vast coverage is possible only through effective management
of the distribution channels.

4) Provide local convenience to consumers: Merchant middlemen like

retailers are located at convenient shopping centres. They provide ready
delivery of goods to the consumers at the convenient points.

1) Provide field stocks: The agents and wholesalers are spread all over the
country. They buy in bulk and keep the goods in stock. The retailers can
approach them any time andbuy their requirement. The producers,
therefore, need not stock their goods in different cities which would be
quite a cumbersome activity involving huge investment and management
problems.

2) Financing: The agents finance the distribution activity in many ways.

They often pay cash for their bulk purchases from the producers and
even advance money to them against their orders. The funding of field
218 stocks is thus fully handled by the middlemen.
7) Servicing: They arrange for the after sales services and handle all kinds Channels of
Distribution-II
of complaints by the consumers locally. The manufacturer does not have
to open his own service centres at all places.

8) Help in promotion: They also help the sales promotional activity through
displays and salesmanship. It is literally impossible for the producers to
organise such activity more effective through any other means. Even
otherwise, the middlemen being local people are more effective.

Apart from the variety of services provided by the middlemen, what makes
their role more important is the fact that they handle them more efficiently
and usually at a reasonable cost. They are better equipped to perform these
functions because they possess special knowledge and skills, experience and
contacts. The manufacturers would find it very difficult to organise the
distribution network and provide the necessary funds. You should remember
that the distribution of goods and provision of essential services is a gigantic
task which involves huge funds and management problems. By making use
of middlemen the manufacturers are freed from the botheration of
distribution. They can concentrate on production activity which may be more
profitable. Not only that, in case of mass consumption items it is almost
impossible to the producers to organise direct sale in every nook and corner
of the country.

12.3 TYPES OF MIDDLEMEN

Different types of middlemen participate in the process of movement of
goods and its title from producers to ultimate users. These may broadly be
grouped into two categories as: 1) primary participants and 2) ancillary
participants.

The primary participants are the individuals or organisations which

undertake to perform the negotiatory functions of selling and transferring title
of the goods to others, These participants are called the channel members.
The ancillary or facilitating participants, on the other hand, are the group
of institutions and parties that assist channel members (primary participants)
in performing the distribution tasks. They do not take part in the channel
decisions but only provide services to channel members once the basic
channel decisions have been made. The most common facilitating
participants are financing institutions, public warehouses, transportation
companies and advertising agencies. Of course some of these services can be
undertaken by the channel members themselves. For example, a merchant
wholesaler can operate private warehouse and trucks. But the essential
feature of the facilitating participants is that they assume limited risk or no
risk in the functioning of the channel.

We will study in detail about the facilitating participants in Unit 13. We shall
concentrate the discussion on primary participants in this unit. Broadly
speaking primary participants may be further classified as: 1) functional 219
Distribution middlemen or mercantile agents, and 2) merchant middlemen. Now let us
study these two categories in detail.

12.3.1 Functional Middlemen

Those who undertake various marketing functions in the process of
distribution of goods without having ownership rights are called functional
middlemen. These functional middlemen operate on behalf of owners. They
perform a specific function or undertake general functions relating to
purchase and sale. These middlemen are called 'mercantile agents'.
Depending on the functions performed, the functional middlemen may be
classified into five categories. Let us discuss them briefly.

1) Factors: A middleman who keeps the goods of others and sells them
with the approval of the owner is known as a 'factor'. The goods are
normally in his possession or under his control. With the approval of the
owner the factor can sellthe goods as agent, or sell in his own name, or
pledge goods in his possession or can do all such acts as can be done by
the owner of the goods. After the sale of goods,he receives the payment
from the buyer. He receives commission at a fixed percentage on sales
from his principal.

2) Brokers: They take neither possession nor acquire ownership of the

goods, but only serve to bring the buyers and sellers together. They
negotiate purchase and sale of goods on behalf of other parties. Their
task is over as soon as the buyer and the seller come to terms in respect
of the purchase of sale of the goods. When a broker acts, onbehalf of the
buyer, he is known as buying agent. If the owner of goods employs
abroker for sale of the goods, the broker is known as a selling agent. The
broker works for a certain percentage of commission on the business
transacted by him on behalf of his principal.

3) Commission Agents: They also sell goods on behalf of the sellers. But
they differ from brokers in that they not only negotiate the sale of goods
but also take possession of the goods and make arrangements for the
transfer of title to the goods. The commission agent has to perform the
functions of warehousing, grading, packing or sampling in addition to
assembling and dispersion. For their services, the commission agents get
a certain percentage of commission on sales. If the commission agent is
authorised to sell on credit and agrees to bear the risk of bad debts for
some additional commission, he is known as a del credere agent.

4) Del Credere Agents: Generally if any mercantile agent sells goods on

credit with the approval of the owner, he is not responsible for any loss
which may arise due tonon-payment by the buyer. The owner or
principal has to bear the risk of loss on account of such bad debts. When
a mercantile agent sells the goods on credit and assumes the risk of bad
debts, he is known as a del credere agent. For bearing such risk of bad
220
 debts, additional commission as a fixed percentage of the amount of Channels of
Distribution-II
credit sales is given to him. This additional commission is called del
credere commission. In other words, the del credere agent bears the loss
which may arise on account of bad debt and the owner is protected
against the loss.

5) Auctioneers: Middlemen appointed as agents to sell goods by auction

are known as auctioneers. They assemble goods from different parties
and act on their behalf to sell them to intending buyers. The date and
time of auction are announced in advance. Goods are displayed for
inspection by interested buyers. Bids are then invited by the auctioneer
from those present at the time of auction. Sometimes a minimum price is
fixed for specific items known as reserve price and bids are not
accepted below that reserve price. The goods are sold to the highest
bidder. The auctioneer gets commission from the principal (seller) as a
percentage on the sale price.

12.3.2 Merchant Middlemen

Middlemen who act on their own right buying and selling goods at a profit
are called merchant middlemen or merchants. They acquire title to the
goods and bear the risks of trade besides performing various functions like
storing, grading, packing and packaging, etc. Merchant middlemen may be
divided into two categories.

1) Wholesale traders
2) Retail traders

Channel Participants

Primary Participants Ancillary Participants

Merchant Mercantile Financial Public Transport Advertising

Middlemen Agents Institution Ware Company Agency
House

Wholesalers Retailers Brokers Commission Factors Del Auctioneers

agents credere
Agents

Figure 12.3 :Classification of Middlemen

221
Distribution Merchants who buy goods from producers or manufacturers or their agents
and sell the same to industrial consumers or retail traders are known as
wholesale traders. The middlemen who buy goods from producers or
wholesalers and sell the same to ultimate consumers are known as retail
traders. Thus, retailers act as the final link in the channel of distribution.
You will study in more detail about wholesalers and retailers later in this unit.

Look at Figure 12.3 carefully for the summary of the discussion on

classification of middlemen.

Check Your Progress A

1) Differentiate between functional middlemen and merchant middlemen.

2) Differentiate between broker and commission agent.

3) Who is a middleman?

3) State whether the following statements are True or False.

i) Middlemen who undertake marketing functions without having title

to goods are called merchant middlemen.
ii) Middlemen do not bear risk in the distribution of goods.
iii) With the approval of the owner, a factor can do all such acts as can
be done by owner of the goods.
iv) A del credereagent is not responsible for any loss which may arise
due to non payment by the buyer.
v) Brokers operate only on behalf of buyers,
vi) In the process of distribution, functional middlemen do not take title
to goods.

12.4 WHOLESALERS
Simply stated, wholesalers are those who happen to be engaged in
wholesaling or wholesale trade. In a broad sense, any individual or business
firm selling goods in relatively large quantities to buyers other than the
ultimate consumers may be called a wholesalers. Thus manufacturers who
sell their products directly to retailers may be regarded as wholesalers.
However, in a more specific sense the term wholesaler may be defined as
a merchant middlemen engaged in buying and reselling of goods to
retailers and other merchants, or to Industrial or Commercial users.
Wholesalers do not sell the products to ultimate consumers. The wholesalers
belong to the category of merchant middlemen who acquire title to the goods
they handle. Agents or brokers may also act as wholesale middlemen but they
do not acquire the title to goods. Wholesalers act as middlemen between
producers or importers of goods on the one hand, and retailers orindustrial

222
 users on the other. The goods traded by wholesalers may include: agricultural Channels of
Distribution-II
commodities, forest products, minerals as well as manufactured goods.

Manufacturing companies often do not have adequate capital to employ

salesmen to contact the large number of retailers. Many small retailers run
their business in remote areas and to contact them may be too expensive.
Moreover, small retailers generally prefer to buy products in small quantities
due to their limited capital, lack of market information and sources of supply.
The wholesalers solve the problems of manufacturers as well as small
retailers. A wholesaler can place sufficiently large orderwith the
manufacturer keeping in view the requirements of a number of small retailers
in his area. In that process, the wholesaler is in a position to meet the small
orders of retailers.

From the society's point of view, distribution of goods may be efficient

because of the specialised knowledge and skill of wholesalers. On the other
hand, manufacturers can concentrate on efficient production of goods.
Naturally, they do not undertake the distribution of their products because
their efficiency in manufacturing would suffer on account of divided
attention.

12.4.1 Classification
Wholesalers may deal in a large or limited variety of products, restrict their
activities mainly to wholesaling or perform various functions incidental to
their trade, and may operate in small or large geographical territories.
Accordingly, wholesalers may be classified on three different bases: (1)
merchandise dealt with, (2) method of operation, and (3) coverage of
geographical area. Look at Figure 12.4 for classification of wholesalers.
Wholesalers

Based on Based on Method of Based on Geographical

Merchandise Operation Coverage

General General Speciality for Service Limited Local District Regional/

Merchandise line Single Line Wholesalers Function Wholesalers Wholesalers National
Wholesalers Wholesalers Wholesalers Wholesalers Wholesalers

Figure 12.4 : Types of Wholesalers

Merchandise Basis

On the basis of goods dealt with by the wholesalers, we may distinguish three
types of wholesalers:
223
Distribution i) General merchandise wholesalers – those deal in two or more
unrelated types of products. For instance, a merchandise wholesalers are
those who deal in a number of consumer durables like electrical goods,
sports goods, cosmetics, hosiery etc.

ii) General-line wholesalers – those who carry a number of goods in the

same product line. For instance, a wholesaler may carry convenience
goods of daily household necessity like soaps, detergents, toothpaste,
razor blade etc., or may stock cereals and provisions like wheat, rice, dal
etc.

iii) Single-line or specialitywholesalers-those who restrict their operation

to a narrow range of products or specific products. Wholesalers dealing
in a few varieties of (cloth), or carrying varieties of printing paper only
may be called speciality wholesalers, or single-line wholesalers.

Method of Operations

On the basis of the method of operations, wholesalers may be divided into

two categories:

i) Service wholesalers - Those who perform a variety of functions like

advertising, grading, branding, packaging, etc., on behalf of
manufacturers and retailers.

ii) Limited function wholesalers - Those who undertake to carry out a few
limited functions, like packaging or grading.

Geographical Covered

On the basis of the geographical coverage of dealings, wholesalers may be

grouped into three types:

i) Local wholesalers — those who restrict their operation to a particular

city or town and supply products to retailers in that area.

ii) District wholesalers - those who have dealings with retailers located in a
district.

iii) Regionalor national wholesalers — those who specialise in products

having a nationalmarket and are nationally advertised. They have
dealings with retailers located in a region or a country.

12.4.2 Functions
In the preceding section we have learnt that wholesalers perform limited
functions or undertake a variety of functions. Actually, the functions of a
wholesaler depend upon the nature of the products dealt with and the
business policy of that particular wholesaler. Of course every wholesaler
must carry out the minimum functions of buying, storing and supplying one
or more products. Besides these primary activities, several other functions
224 may also be performed by wholesalers.
The wholesalers perform the following important functions of marketing: Channels of
Distribution-II
1) Assembling: The wholesaler collects varieties of products from different
manufactures and keeps them in stock for sale to the retailers at the time
when they need them.

2) Dispersion: The products assembled and stocked by the wholesalers are

supplied to the retailers who may be widely scattered.

3) Warehousing: The goods purchased by the wholesalers from the

manufacturers and producers have to be stocked in warehouse pending
for their sale to the retailers. The arrangement for such storage is the
responsibility of the wholesalers.

4) Transportation: The wholesaler has to move the goods from the various
factories to his own warehouse and from there to the retail stores. He
may do so either by employing his own vans or by hiring public carriers.

5) Financing : The wholesaler in most cases provides goods on credit to

the retailers.

6) Risk-assuming: The wholesaler assumes the risk arising out of the

changes in prices and demand as also loss due to spoilage or destruction
of goods in his warehouse.

7) Grading and Packaging: The wholesaler has to sort out different grades
of products according to quality and other considerations and pack the
goods into smaller lots for retailers.

8) Price fixation: The prices of goods which consumers have to pay

depend upon the prices fixed by wholesalers and charged from retailers.
This is an important function performed by wholesalers because a
number of factors including prices of competing goods, effect of prices
on demand, etc., have to be taken into account.

12.4.3 Services
We have already learnt how wholesalers serve manufacturers and retailers by
buying goods in large quantities, holding stocks and supplying smaller
quantities to the retailers. In that way the wholesalers act as a bridge between
producers and retailers. Let us now examine closely the services rendered by
wholesalers to the manufacturers and retailers.

Services to Manufacturers: Wholesalers provide the following services to

the manufacturers:

1) The wholesalers place large orders with the manufacturers or procure

large quantities of goods from manufacturers. Thereby manufacturers are
relieved of the task of marketing their goods, and they can concentrate on
production only. Manufacturers need not necessarily hold large stocks in

225
Distribution their godown. Hence, there is saving of expenses on storage and
warehousing.

2) Wholesalers remain in close touch with the retailers. They get regular
information from the retailers about changes in the consumer's demand
for particular products as also about competing products. On the basis of
such information, wholesalers place orders with manufacturers. Thus,
wholesaler's purchase orders reflect thechanging market conditions.
Hence, the volume of production can be regulated by the manufacturers
in accordance with the changing market conditions as reflected by the
wholesaler's purchase orders.

3) Often the wholesalers place orders in advance on the basis of their

expectations regarding future demand of products even though the
current demand is low. This helps manufacturers to continue their
production on an even pace.

4) Wholesalers may also participate in the advertising of products jointly

with the producers, which is of great advantage to both the parties.

Services to Retailers: Wholesalers render the following services to retailers:

1) A variety of goods can be procured by retailers in small quantities from

the wholesalers. Most retailers serve a large number of customers. Thus,
different types of products have to be stored by a retailer to meet the
needs of individual consumers. It is difficult for him to buy the products
from different manufacturers in small quantities. He can easily do so by
contacting a few wholesalers.

2) Small retailers can get repeated supplies of products from wholesalers.

Thus they can able to run their business with a relatively small amount of
capital. Large stocks are not to be held by them, so there is saving of
storage space as well.

3) Wholesalers have expert knowledge of the lines of products they deal

with. They procure the items from the best sources, that is from
producers who supply the best quality at competitive prices. Retailers
also get advantage of the wholesalers specialised knowledge of the
products.

4) Retailers are protected from the risk of loss which would arise if they
were to hold large stocks of any product. It is the wholesalers who bear
the maximum business risks arising out of falling demand for products.

5) Most wholesalers supply goods on credit to the retailers. This enables

small retailers to pay for the goods after sale or customer payment on
account. The working capital required for retail trading is thus relatively
small.

226
6) Generally retailers come to know about new products only through the Channels of
Distribution-II
wholesalers who deal with manufacturers. Whenever any new product is
introduced, wholesalers bring it to the notice of retailers either through
salesmen or display in showrooms.

Check Your Progress B

1) Who is a wholesaler?

2) Visit a wholesaler in your area and find out the following:

i) Whether he deals in general merchandise or general line or single

line.

ii) The services rendered by him to the retailers.

4) Whether the following statements are True or False.

i) Wholesalers do not sell products to ultimate consumers.

ii) Wholesalers sell goods to industrial users.
iii) Wholesaler is a mercantile agent.
iv) General line wholesalers deal in a very narrow range of products.
v) A local wholesaler normally have dealings with retailers located in a
region/state.

12.5 RETAILERS
In simple words retailing refers to all transactions which involve sale of
goods to the ultimate consumers for personal consumption. If the buyer uses
the goods for reselling purposes it will not be treated as a retailing
transaction. Any individual or business unit or shop primarily engaged in
retail selling is known as a retailer or retail store. In a general sense, even a
manufacturer or wholesaler may sometimes engage in sale of goods to the
ultimate consumers. But they are not called retailers as retailing is not the
major activity of such a manufacturer or wholesaler. Thus, a retailer or
retail store is one whose business consists primarily of sale of goods to
consumers for their own use, but not for resale in business. Retail
business may include other types of transactions also. It will be treated as a
retailing business if more than half of its total sales revenue is from retail
trading.

A retailer is a middleman because retailing involves procuring goods from

suppliers (generally wholesalers) and selling them to consumers for the
personal use. Retailers perform the very important task of making goods
available to consumers, which after all is the objective that underlies the
production of goods. Retailers thus form a vital link in the channel of
distribution of products.

227
Distribution Since the retailers deal with a large number of consumers of many different
categories, the role of retailers in the physical distribution of goods is clearly
of vital importance. The retailers act as a link between the producers or
wholesalers on the one hand and the consumers on the other. Without
retailers, neither the products would sell in distant places, nor would it be
possible for consumers to buy goods of their choice in shops located nearby.
Due to large-scale manufacture of a wide variety of consumer goods and the
necessity of making them available to individuals living in distant villages,
cities and towns, retailers are now regarded as the most important middlemen
in the chain of distribution of goods.

12.5.1 Functions
Like the wholesalers, retailers also perform a variety of functions connected
with the buying and selling of goods. They, in brief perform the following
functions:

1) Estimating the demand: All retailers - big or small have to make an

estimate of the demand for different products and have to determine the
nature of products that consumers need to be supplied.

2) Procurement of goods: Most retailers deal in a variety of products. So

they may have to procure goods from different wholesalers. Besides,
they must decide to buy from those wholesalers who supply goods suited
to the requirements of consumers considering the quality and price.

3) Transportation: Usually the retailers are to arrange the transportation of

goods procured from the wholesalers' place. Sometimes delivery is also
arranged by the wholesalers on the basis of orders placed with their
salesmen.

4) Storing goods: Small-scale retailers have limited space for the goods to
be kept in stock. Large retail stores often have godowns to store different
varieties of goods in adequate quantities. But in all cases, goods have to
be held in stock so as to meet the customer’s needs. For this purpose
storage of goods must be so arranged that customers may be served
without delay. They must be given an opportunity to select goods of their
choice. This is often done by display of goods on shelves and in show
cases.

5) Grading and packaging: Large-scale retailers often have to sort out

goods according to the quality and price to be charged. They also make
convenient packages of goods for the benefit of consumers. For instance,
fruit vendors purchase apples in containers (boxes), sort out on the basis
of size and charge different rates for different sizes. Spices which are
procured in bags, may be divided into small packets of 100 or 200 grams
each.

228
6) Risk-bearing: Since goods are held in stock, the retailers are to bear the Channels of
Distribution-II
risk of loss on account of deterioration of quality, fire, theft, etc. Large
retail stores are insured to cover the risks of theft or fire. But losses due
to damage or deterioration of quality caused by improper storage cannot
be insured.

7) Selling: The main function of retailers is selling the goods to ultimate

consumers. They have to satisfy the needs and preferences of different
types of customers and deal with them tactfully and politely so as to
make them regular buyers.

12.5.2 Services
As middlemen engaged in the distribution of goods, retailers deal with
wholesalers and consumers. Manufacturers as well as wholesalers depend a
great deal on retailers for reaching the ultimate consumers to supply various
products. Retailers provide the necessary outlet for goods and thus render
very useful service to the wholesalers and in several ways also to the
producers indirectly. The services of retailers to the consumers are significant
in several ways:

1) By holding ready stocks of various commodities required by the

consumers, retailers relieve the customers of the need for stocking a wide
variety of goods which could be extremely inconvenient and
cumbersome.

2) By keeping a good assortment of the various varieties of a particular

product, say soap, toothpastes, etc., retailers provide a wide variety of
choice to their customers.

3) By proper display of new products, the retailers keep the consumers

informed about the changing trends in production of different varieties of
goods, besides helping manufacturers to promote the products.

4) Retailers very often guide their customers about the relative merits of the
various brands of a particular product and thus help them in the selection
of goods.

5) Retailers may provide special facilities to their customers, for example,

free delivery, extension of credit, after-sales service, etc.

12.5.3 Classification
Broadly speaking, we may divide the retailers into two categories as: 1)
itinerant retailers, and 2) fixed shop retailers. Fixed shop retailers can be
further classified as: 1) Small scale retailers, and 2)large scale retailers.All
these categories can be further classified as shown in Figure 12.5

229
Distribution
Retailers

Itinerant Retailers Fixed Shop Retailers

Hawkers or Pavement Pavement Market Small Scale Large Scale

Pedlars Traders Traders Traders Traders Retailers

Stall-holders General Speciality Second Hand

Merchandise Shops Goods Shops
Shops

Departmental Super Multiple Mail Consumer Super Hire Purchase Discount

Stores Markets Shops Order Cooperative Bazar Trader Houses
House Stores

Franchise
Store Automatic
Vending

Figure 12.5 :Classification of Retailers

Itinerant Retailers

Retail traders who carry on business moving about from place to place to sell
their goods are known as itinerant retailer. They do not have any fixed place
of business. They either move from house to house with their goods, or
change their place of business frequently according to convenience and sales
prospects. Thus, these itinerant retailersmove about and try to reach as nearer
to the buyer as possible. There are three types of itinerant retailers. Let us
learn them.

1) Hawkers or pedlars: These retailers move from door to door in

residential localities and sell their goods which may consist of
vegetables, fruits, utensils, toys, ice cream, snacks, etc. They carry their
articles in bags or trays hanging from shoulders, on bicycles or push
carts, small motor vans or horse-drawn carriages.

2) Pavement traders: Pavement traders are found in busy market areas,

street crossings, in front of railway stations and bus terminals. The goods
traded by them include items like hand bags, cut-pieces of cloth,
readymade garments, footwear, household utensils, toys, books and
journals, pens and pencils, fruits, vegetables, etc. These traders
sometimes put up temporary sheds or make-shift platforms for display of
goods. More often they spread their wares on pavements at different
places depending on the prospects of sale.

230
3) Market traders: This type of itinerant retailers generally sell their goods Channels of
Distribution-II
in weekly markets held in small towns or villages. They move from one
market to another in the neighbouring places on specific days fixed for
the market.

Services of Itinerant Retailers : These retailers serve consumers at the

nearest and the most convenient places. They serve either at the consumers'
door-step or on busy places which consumers normally visit. Thus,
housewives and working people find it very convenient to buy goods from
itinerant traders like hawkers and pavement traders. Market traders in small
towns and villages are also very useful to the consumers as they do not have
fixed shops within easy reach. All itinerant retailers save time and effort of
customers in buying articles of ordinary use. Housewives have the
satisfaction of shopping leisurely at their doorstep.

Small-scale Retail Shops

Small-scale retail shops include those small shops dealing with miscellaneous
products of regular use, and shops selling particular products of different
varieties. They hold small stocks and do their business in fixed shops located
in residential areas or market places. According to the nature of goods sold,
the small retail shops may be divided into three categories as follows:

1) Stalls on streets: Small shops on the road side are very common in cities
and towns. These are set up as stalls in front of large stores or in
residential area selling alimited variety of products of regular use like
stationery, grocery, toilet products, biscuits, etc. The shops are located
within easy reach of consumers’ residence or nearby roads or street-
crossings, or bus stops. These retailers meet the needs of customers at
convenient locations. They supply goods of regular use for which
customers are not prepared to go to central markets.

2) General merchandise shops: These are small retail stores which deal in
all types of general consumer goods of regular use including provisions,
bread, butter, stationery and toiletry, paper and pencils, cigarettes,
matches, etc. The shops are located in thickly inhabited residential areas
and busy markets. Consumers find it convenient to buy all their
requirements in one shop. Regular buyers are also offered home delivery
services and credit facility.

3) Speciality shops: Small retail shops which deal in only one or two
special types of goods are known as speciality shops. The goods dealt
with may be only electrical fittings of different kinds, or medicines, or
motor parts, or books and stationery, or bread and confectionary items,
or ready-made garments, or toys, etc. People of tenfind it convenient to
buy their requirements from these shops due to the availability of
different grades and sizes in the small product line.

231
Distribution Large-scale Retail Shops

Large-scale retail shops are so called because they deal in a large variety of
goods, and have large volume of business. The types of fixed shops in this
category include the following:

1) Departmental Stores
2) Super Market
3) Multiple Shops or Chain Stores
4) Franchise Stores
5) Mail Order House
6) Consumer Co-operative Stores
7) Hire Purchase Traders
8) Discount Houses
9) Super Bazars
10) Automatic Vending Machines

We shall now discuss briefly the characteristics of each of these types of

retail shops.

Departmental Stores

A departmental store is a large-scale institution comprising a number of

departments, each department specialising in a separate line of products. All
these departments are under one roof and one unified control. Department
stores offer the widest possible choice of products. The consumer can find all
what he needs in one store rather than moving around from shop to shop.
These stores are located in central places in big cities so that they are easily
accessible to customers. Bigger department stores offer a great number of
amenities like restaurants, post and telegraph offices, recreation rooms and
car parking. A department store indulges in decentralised buying and
centralised selling. In fact, department store is a medium of mass
merchandising.

Departmental stores grew up in developed countries mainly to cater to the

requirement of well-to-do people who required articles of high quality and
looked forward for comfortable shopping. But they have also become popular
in urban centres in many developing countries. In India too, we find a number
of department stores such as Big Bazar, Spencer’s etc.

Advantages: Departmental stores have the following advantages:

1) Departmental stores make shopping convenient to consumers by

providing them a whole range of goods in one building.

2) The central location attracts a large number of customers leading to a

large turnover. Thus, they can afford to make large profits even with
232 smaller margins.
3) Bulk-buying by Departmental stores enables them to obtain heavy Channels of
Distribution-II
discounts from manufacturers, and thus buy at a cheaper rate. There are
savings in freight charges as well.

4) Departmental stores can afford to have effective advertising through

press, radio and television and thus they are able to attract more and
more customers.

5) Being large business units, departmental stores can afford to employee

skilled and expert staff for all their operations and thus they are able to
achieve a high degree of efficiency in their working.

Disadvantages: Departmental stores suffer from the following limitations:

1) Experience has shown that operating costs of departmental stores tend to

become very high because of the necessity to run some departments at a
loss to attract customers and heavy emphasis in service. As a result, more
often, their goods may be marked at higher prices.

2) Central location also involves higher rents and thus higher overheads.
Central location may not be convenient to persons living in far off places
which means that they will make their purchases of articles of everyday
use from nearby shops. However, in recent years, departmental stores
have branched themselves out to suburban areas as well to reach the
customers nearer their location.

3) It may not be possible for customers in general to receive personal

attention which is possible when they deal with small retailers.

Super Markets

Supermarkets are large, low cost, low margin, high volume, and self service
operations designed to serve the customer’s need for food, laundry and
household maintenance products. Supermarkets lays emphasis on self-
service, here the products are displayed in such a way that buyers can easily
select the products on their own and get them billed at the counter.

Though India is among the world’s largest food and grocery market, the
traditional small Kirana stores continue to dominate the FMCG retail.
However many developments are taking place in this form of retail outlets in
India. Supermarket operators like Reliance Fresh, Easyday, DMart and many
others are expanding their outlets across the country and attracting customers
by maintaining a large variety of all the goods of daily necessity under one
roof.

Co-operative Stores

Consumers sometimes join together to form co-operative societies to sell

goods on retail basis. The basic purpose is to eliminate middlemen and obtain
their requirements at a lower price. The capital is subscribed by the members
through the purchase of shares of small denominations. Co-operative stores 233
Distribution purchase their requirements in bulk, from manufacturers or wholesalers. This
enables the co-operative stores to sell their products at somewhat lower prices
than the ordinary retailers. These stores usually sell on cash basis and thus
avoid the loss due to bad debts. Some example of department storesrun on
co-operative basis are: Central Government Employees consumer Co-
operative Stores popularly known as Kendriya Bhandar in Delhi, and TUCS
Kamadhenu, and Amudhan in Chennai.

Advantages: Co-operative stores have the following advantages:

1) Consumers can be sure of the quality of goods in the sense that there is
no possibility of an adulteration practiced by some retailers in the private
sector.

2) These stores are able to offer various products at more reasonable prices
than most other retailers.

3) Consumers are assured of availability of certain products even when

there is an overall shortage in the market and that too at reasonable
prices. Retailers usually take advantage of such situations by either
increasing prices or earmarking supplies to their favoured customers.

Disadvantages: Co-operative stores suffer from the following limitations:

1) Consumers do not patronise these stores regularly, coming to these stores

only in times of shortages.

2) In practice, they have not been able to reap the benefit of bulk purchases
from manufacturers.

3) Large Co-operative stores tend to suffer from all the drawbacks of

bureaucratic management.

Multiple Shops or Chain Stores

The multiple shop system denotes an organisation which controls a number

of stores under one common ownership and management. The various stores
are located invarious cities and in various localities of bigger cities. Multiple
shops refer to a group of retail stores dealing in similar types of goods. The
basic idea behind the establishment of the multiple shops is to approach the
customer in his vicinity unlike department stores which seek to attract
customers to a central location. These shops could be operated by
manufacturers or by wholesalers with the basic objective of eliminating
retailers. Bata Shoes is an example of product for which multiple shops have
been opened by manufacturers in India. Some textile mills also have some
shops of their own in bigger cities. If wholesalers decide to operate multiple
shops, they indulge in centralised buying with decentralised selling. Some of
the important features of these shops are:

1) Each shop deals in the same type of goods and products.

234
2) The goods dealt are generally those meant for everyday use. Channels of
Distribution-II
3) There is a high degree of standardisation and uniformity in the interior
layout of stores, window displays and outward appearance.
4) A uniform policy of sales is adopted.

Advantages: Multiple shops have the following merits:

1) Multiple shops are able to offer lower prices due to the economies of
bulk buying.

2) As sales are on cash basis, losses on bad debts are eliminated and
accounting is also made simpler.

3) Rapid turnover and common advertising for all shops make the operation
of multiple shops economical.

4) Any shortage of goods faced by one branch can be easily made up by

transfer from some other branch in the same city.

5) Since advertising material and interior layout of each shop is similar,

each shop serves to advertise the other shops. This leads to further
economy in advertising and a quicker turnover.

Disadvantages: Multiple shops suffer from the following limitations:

1) Multiple shops cannot offer the variety of choice which department

stores or even ordinary retail stores offer.

2) These shops do not normally offer home delivery service or credit sales
and thus lose a good number of customers.

3) Each unit is controlled by the head office and thus branch managers
cannot adjust their sales policy to local conditions and emerging
opportunities.

4) Limitations of bureaucratic organisation usually creep in so that the shop

personnel tend to loose initiative.

Franchise Store

A franchise store refers to an organisation which is formed as a result of a

contractual agreement, where an independent retailer called franchisee enters
into an agreement with a producer/manufacturer called franchisor. This is
formed to use a fanchisor’s brand name and to sell their products in return for
a fee or commission on sales. The Franchisee must adhere to the guidelines
of the agreement regarding the mode of operation of the stores. Mostly the
franchisee makes investments in terms of premises, interiors and equipments
while the stocks and management is done by the franchisor. Companies like
Adidas, Raymonds, Mcdonalds, Subway are examples of franchise store.

Advantages: The advantages of Franchise Store are as follows:

235
Distribution 1) It helps the franchisors (producers) to expand their business and reach
more customer without incurring additional cost for store set up.

2) A franchisee gets the benefits and recognition of a pre-established brand

name.

3) A franchise gets benefits in the form of training and assistance for

management of the store.

Disadvantages: The disadvantages of Franchise Store are as follows:

1) The Franchisees (retailers) do not have independent control over the

business.

2) The Franchisor’s brand goodwill may suffer if the franchisee does not
maintain the standards.

Mail-order House

Retail trading which consists of receiving orders by mail and delivery of

goods by parcel post is known as mail-order business. The mail-order house
is thus a retail trading organisation which uses the post office or couriers as
its channel of distribution. Standard consumer goods with trade marks or
brand names are generally dealt with by mail-order houses. This is because
customers are to place orders without physically checking the items. Under
Traditional methods orders from customers may be secured by advertising in
newspapers or journals. Sometimes circular letters are issued by mail to
certain categories of customers. Customers are invited to send their orders by
post to the address of the mail-order house. Delivery is made by V.P.P.
(Value Payable Post).Goods are thus available to the customers on payment
of the price which is remitted by the post office to the sender of goods. Now a
days, advantage of internet is taken. Knowledge advantage of internet is
taken. Retailers provide online catalogues through e-mail, website and social
media to sell their products ones and payment from clients are also accepted
online.

Mail-order business helps customers to get their requirements at their own

place which save the time and expenses of shopping. Goods can be procured
according to the order received. Thus, the business can be started with a small
amount of capital. A wide market can be covered by means of postal
communication.

Hire Purchase Trading

Hire- purchase trading consists of supplying durable goods for use by

customers who agree to pay the price by instalment at regular intervals. The
buyer acquires ownership of the goods only after the total price has been
paid. In other words, in hire-purchase the buyer takes possession of the
goods, but does not get the ownership until the last instalmenthas been paid.
The instalments are regarded as hire charges. If there is default in paying an
236
instalment, the seller has the right to recover the goods or sue the buyer for Channels of
Distribution-II
the balance amount due.

Durable goods like refrigerators, television sets, radio, sewing machines,

electric fans, automobiles, industrial machinery, air-conditioners, etc., can be
sold by hire-purchase trading houses. The instalments payable by the buyer
includes interest on unpaid balance. Hence, the total price paid is relatively
higher than in the case of outright cash purchase. But the customers get the
advantage of deferred payment, as in the case of purchase on credit, and is
also able to use the goods meanwhile. Hence, hire-purchase becomes
attractive as a means of saving large initial payment required for outright
purchase of goods.

Discount Houses

Large scale retail establishments which offer discounts on the prices are
known as discount Houses. Durable goods like household appliances
(cooking ovens, electrical gadgets, etc.) camera, binoculars, etc., are
generally available through discount houses at a relatively lower price as
compared with the price charged by other retail stores. This is possible as the
discount houses directly purchase from manufacturers and operate the
business on a low margin of profits. They expect to cover expenses and make
substantial profits through large volume of sales. Brand factory is a popular
example of this type of retail store in India.

Super Bazars

These are large retail stores organised by Co-operative Societies which sell a
variety of products under a single roof. The goods traded by Super Bazars
include consumer goods which are procured at wholesale rates from
manufacturers or wholesalers. The stores are operated either on the principle
of self-service or with separate counters served by salesmen. The difference
between a Super Bazar and Super Market is that the former is organised by
co-operative society whereas the latter is generally established as a private
sector organisation. Similarly, the difference between a Consumer Co-
operative Store and Super Bazar is that a Consumer Co-operative Store is
usually run on small scale, while the Super Bazar may be a large-scale
establishment.

Automatic Vending Machines

Retail sale of articles with the help of coin-operated automatic machines is

known as automatic vending. Retailing on a large scale is possible in this way
by placing machines at convenient locations like bus terminals, railway
stations, airports, shopping centres, etc. This method of retail selling is very
popular in western countries. Cigarettes, razor blades, postage stamps, milk,
ice-cream, soft drinks, soup, paper-back books, newspapers, etc., are sold in
cities through vending machines. Customers are required to insert necessary
coins in a slot and press a button whereby the article is released
237
Distribution automatically. The coins are collected from the machine periodically, and
articles are put in as needed. Automatic vending facilitates buying of small
items round the clock. There is no necessity of salesmen's services. However,
the stocking capacity of machine is limited and there are risks of mechanical
failures irritating the customers. Moreover, paper currency may not be used
and coins of exact value are required to operate the machine.In India,
automatic vending has been used for selling postage stamps, flight insurance,
milk, etc. In Airport, You will find the automatic vending machine for packed
eatable, water etc.

12.6 TRENDS IN WHOLESALING AND

RETAILING
Marketing is adynamic area of Management. As such, with a constantly
changing environment of business, various important developments have
taken place in almost all the areas of marketing. Some of the important
developments have taken place in thefield of distribution channels also.
These developments not only reflect the trends in respect of major channel
participants i.e., wholesalers and retailers but also indicate the future of these
intermediaries in the country.

The first major development is the emergence of Integrated Marketing

Systems. Instead of the conventional distribution system, in which an
individual channel member operates independently on the basis of self-
interest and without taking interest in whatoccurs later in the chain. Now the
channel participants at different levels have started working in an integrated
and coordinated manner. This integration may be either vertical or horizontal.
Vertical integration refers to coordination between channel participants at
different levels. For example, coordination between manufacturers and
wholesalers, between wholesalers and retailers. Such coordination may be
organised on a corporate, contractual or administered basis. The objective of
such integration is to achieve operating economies and increased market
impact. Horizontal integration on the other hand, refers to alignment of two
or more firms at the same level of channel participation to jointly exploit a
marketing opportunity. This integration may be at the level of manufacturers
or wholesalers or even retailers. For example, in India, cement manufacturing
companies have formed an 'Associated Cement Company’ so as to channelise
their produce to the market. Similarly, tyre manufacturers has built up a guild
through which the prices, etc., of the tyres were being fixed jointly. This
tendency of integrated marketing is likely to grow in the coming years.

Secondly, more number of firms are adopting direct marketing techniques for
selling their products. This is particularly so in the case of distribution of
consumer durable products. This is being done to ensure great control over
the market and to bring economy in the cost of distribution.

238
Thirdly, in the field of retailing, two important developments are the opening Channels of
Distribution-II
of self service outlets, and the increased use of automatic vending machines.
The super bazaars and departmental stores, particularly those selling grocery
items have almost become common in big cities and towns. Similarly, the
automatic vending machines which of late were used for the distribution of
milk have now been used by banks for the purpose of withdrawal of cash. As
a result, the role of personal selling has slightly decreased while the role of
branding and packaging has tremendously increased.

Check Your Progress C

1) How is a retailer different from a wholesaler?

2) Differentiate between Departmental Store and Multiple Shop.

3) Differentiate between a Consumer Co-operative Store and Super Bazar.

4) State whether the following statements are True or False.

i) Retailers always buy goods from manufacturers.

ii) Retailers also sell goods to other retailers.
iii) Super Markets normally deal with consumer durables.
iv) Retail traders who move from place to place are called itinerant
retailers.
v) Super Bazar is a retail shop organised by a Co-operative Society.
vi) Consumer Co-operatives are run on no-profit no-loss basis.

12.7 LET US SUM UP

Intermediaries play a significant role in the distribution of goods and
services. They create a number of utilities, bring in economy of effort, make
shopping convenient for the buyers and help in regulating demand for the
products. There are two broad categories of intermediaries — primary and
ancillary. The primary participants are those who undertake the negotiatory
functions of selling and transferring of title of goods.The ancillary
participants such as financial institutions, public warehouses, etc., on other
hand, assist the channel members (primary participants) in performing the
distribution task. The primary participants may again be divided into two
categories:1) merchant middlemen (retailers and wholesalers) and 2)
merchant agents (brokers, commission agents, del credere agents,
auctioneers, etc.).

Wholesalers defined as merchant middlemen who are engaged in buying and

reselling of goods to retailers, other merchants, industrial and commercial
users, but not consumers. Wholesalers may be classified on the basis of
merchandise dealt with, methods of operation, and geographical coverage of
their dealings. The functions performed by wholesalers include: assembling,
239
Distribution storage, grading and packaging, transportation, financing retail traders, price-
fixation, risk-bearing and making advances to manufacturers. Wholesalers
render valuable services to manufacturers aswell as retail traders.

A retailer is one whose business consists of primarily selling goods to

customers for their own use, not for use in their business. If manufacturers
sell goods to consumers, they are not treated as retailers as retailing is not the
major activity of a manufacturer. The retailers perform several functions such
as estimating demand, procuring goods, arranging transport, holding stocks,
grading and packaging, and selling. They render valuable service to
consumers, wholesalers and indirectly also to the producers of goods.

Retailers may be divided into two broad categories: itinerant retailers and
fixed-shop retailers. Itinerant retailers (hawkers, pedlars, pavement traders,
and market traders) either move from house to house or change their place of
business according to convenience. Fixed-shop retailers locate their stores at
fixed places where customers can easily come and make their purchases.
Fixed shop retail trading may consist of two types: 1) Small-scale retailing
(stall-holders, general merchandise shops, speciality shops, and second-hand
goods sellers) who deal in a limited range of products or 2) Large-scale retail
stores (departmental stores, super markets, multiple shops, mail-order houses,
consumer co-operative stores, super-bazars, hire-purchase trading, discount-
houses, and automatic vending) which deal in and stock a wide range of
products.

12.8 KEY WORDS

Ancillary Participants: Group of individuals and organisations which do not
perform the negotiatory functions of selling and transferring title of products
but assist the primary participants in performing the distribution tasks.

Auctioneer: A middlemen appointed as an agent to sell goods by auction.

Automatic Vending: Sale of small articles of regular use by installing coin-

operated automatic machines at different places.

Broker : A middlemen who brings together the buyer and seller, and
negotiates the terms and conditions of sale on behalf of either buyer or seller.

Commission Agent: A middlemen who sells goods on commission basis on

behalf of the owner.

Consumer Co-operative Stores: Retail stores run by co-operative societies

organised in the interest of consumer groups.

Del Credere Agent: An agent middleman authorised to sell goods on credit

and who assumes the risk of bad debts,

Departmental Stores: Large retail stores consisting of separate departments

selling different types of products.
240
Discount Houses: Retail stores engaged in selling durable consumer goods at Channels of
Distribution-II
a discount.

Factor: A mercantile agent who keeps the goods of other for sale. He can in
his own name, pledge and do all acts necessary for sale.

Hire Purchase Trading: Supply of durable goods on hire against the

payment of periodical instalments with ownership transferred to the buyer,
after all instalments have been paid.

Itinerant Retailers: Retail traders who sell goods moving from house to
house or change their place of business frequently.

Mail-Order House: Receiving orders by mail and delivering goods through

Post office or courier.

Mercantile Agent: A functional Middleman who undertakes specific

functions of sale or purchase of goods as agent of the owner without having
ownership right.

Merchant Middleman: A middleman such as wholesaler or retailer who

buys and sells goods in his own name and performs necessary functions in
that connection.

Middleman: An intermediary between the producer and the consumer to

help distribution of goods.

Multiple Shops/Chain Stores: Retail stores under the ownership and

management of a single firm dealing in similar products at uniform prices
and located at different places.

Primary Participants: Group of individuals and organisations undertaking

to perform the negotiatory functions of selling and transferring title of the
products.

Retailer: One who is engaged in retail trading.

Retailing: Purchasing goods from wholesalers or manufacturers and selling

them the consumers for their personal non-business use.

Speciality Shops: Small retail shops dealing in one or two special types of
goods.

Super Markets: Retail stores selling consumer goods of regular use and
operating on self-service basis.

Wholesaler: One who is engaged in wholesale trading.

Wholesaling: Purchasing and reselling of goods to retailers and merchants.

241
Distribution
12.9 ANSWERS TO CHECK YOUR PROGRESS
A 4 i) False ii) False iii) True iv)True v) Falsev
i)True

B 3 i)True ii) True iii) False iv)True v) False

C 4 i) False ii) False iii) False iv) Truev) True vi)True

12.10 TERMINAL QUESTIONS

1) What role do intermediaries play in the distribution of products? Can
intermediaries be eliminated?

2) What do you understand by retailing? What important functions do the

retailers perform in the distribution of products.

3) What do you understand by wholesaling? How does it differ from

retailing ?

4) Compare the advantages and disadvantages of departmental stores and

chain stores.

5) Write notes on the following:

a) Itinerant Retailers
b) Ancillary Participants
c) Consumer Co-operative Store
d) Merchant Agents
e) Franchise Stores

6) Describe the services rendered by wholesalers and retailers to different

sections of society.

7) Explain briefly about various types of middlemen.

Note: These questions will help you to understand the unit better. Try to
write answers for them. But do not submit your answers to the University for
assessment. These are for your practice only.

242
UNIT 13 PHYSICAL DISTRIBUTION Physical
Distribution

Structure

13.0 Objectives
13.1 Introduction
13.2 Meaning and Importance
13.3 Total System Approach
13.4 Total Cost Approach
13.5 Objectives of Physical Distribution
13.6 Physical Distribution Tasks
13.6.1 Order Processing

13.6.2 Warehousing

13.6.3 Inventory Control

13.6.4 Transportation

13.6.5 Information Monitoring

13.7 Let Us Sum Up

13.8 Key Words
13.9 Answers to Check Your Progress
13.10 Terminal Questions

13.0 OBJECTIVES
After studying this unit, you should be able to:

• explain the concept and role of physical distribution;

• describe the total systems approach and total cost approach to physical
distribution;
• discuss the major objectives of physical distribution; and
• describe the major elements of physical distribution system.

13.1 INTRODUCTION
In the preceding two units, various aspects relating to development of
channels of distribution (or a network of merchants and agent business
institutions) for the flow of goods and services, from the point of production
to the point of use, have been discussed. The entire process of setting up and
operating contractual organisation responsible for meeting the firm's
distribution objectives have been explained. However, nothing actually
happens in marketing unless the goods are physically moved from the point
of their origin to the point of their consumption. The present unit focuses on 243
Distribution various aspects relating to the physical distribution of a product. It describes
the role, objectives and the tasks involved in the process of physical
distribution of products and services.

13.2 MEANING AND IMPORTANCE

No matter how good the product of a firm may be, if it does not reach the
users or consumers at the right time and place and in the best physical state, a
great deal of effort would go waste. For that, it is important to ensure
mobility of goods.

From the point of view of management, physical distribution has been

described by Philip Kotler as “planning, implementing and controlling the
process of physical flow of materials and final products, from point of origin
to point of use, to meet customer’s ofneeds at a profit".

In the opinion of W.Y. Stewart “physical distribution is the science of

business logistics whereby the proper amount of the right kind of product is
made available at the place where demand exists, viewed in this light,
physical distribution is the key link between manufacturing and utility
creation.” As stated by Cundiff and Still, “physical distribution involves the
actual movement and storage of goods after they are produced and before
they are consumed”.

Note that while Stewart's definition emphasises the important contributions

of physical distribution, the definition by Cuondiff and Still rather limits the
scope of physical distribution to finished goods only. The physical
distribution of raw material or semi-finished products is almost ignored in the
description.

Thus, in the context of marketing, physical distribution may be defined

as the activities involved in the flow of products as they move physically
from producer to consumer or industrial user.

The process of physical distribution involves handling and movement of

products from the point of production to the point of consumption or use.
The important activities involved in this process include: order handling,
information processing, inventory control, storage and transportation.
Thus, the major elements of physical distribution may be listed as follows:

• Transportation
• Inventory Maintenance
• Order Processing
• Acquisition
• Protective Packaging
• Warehousing

244 • Materials Handling

• Information Maintenance Physical
Distribution
Look at Figure 13.1 carefully for physical distribution logistics system.

Figure 13.1 : Physical Distribution Logistics System

(Source: Phos van Ansel M.J. Physical Distribution Cost Control, International Journal of
Physical Distribution and Materials Management)

An effective physical distribution system contributes immensely to the

achievement of marketing objectives of a firm. It creates time and place
utilities in the products and thereby helps in maximising the value
satisfaction to consumers. By ensuring quick deliveries in minimum time
and cost, it relieves the customers of holding excess inventories. It also
brings down the cost of carrying inventory, material handling,
transportation and other related activities of distribution. In a nutshell,
an efficient system of physical distribution has a great potential for
improving customer service and reducing costs.

The area of physical distribution has received considerable attention in the

recent years. It is because of the traditional short supply nature of market in
our country, which often witnessed gaps between the demand and the
availability of the products. Prices of essential commodities of daily
consumption are particularly amenable to any dislocation in the physical
distribution. This is evident from the concerns and anxieties with news of
strike in rail and road transport. Theportstrikein1989 is further indicative of
the importance that physical distribution has gained over the years.

13.3 TOTAL SYSTEM APPROACH

As stated earlier, physical distribution involves the physical flow of goods.
From this we can imply that the physical distribution management is the
development and operation of efficient flow of systems for products.

The most commonly stated objectives of the physical distribution

management in a firm are to minimise the cost of distribution and maximise
the services provided to the customers. But actually it is not possible to
245
Distribution simultaneously maximise customer service and minimise the distribution
cost. Maximum customer service implies large inventories, faster
transportation and best possible warehousing services. All of this would add
to the cost of distribution. On the other hand, minimising the cost of
distribution would mean using cheaper and slower transport, fewer
warehouse and keeping lower level of inventories. This would of course
bring down the cost of distribution but at the same time bring down the level
of customer service also. Thus, the firms have to strike a balance between
these two aspects, To do that, they first set the level upto which they would
extend service to the customers. This in turn determines the cost of physical
distribution. Let us also have a look at the components of distribution task.

The task of distribution in any marketing organisation consists of the

following major elements:

1) Transportation
2) Warehousing
3) Inventory carrying and handling
4) Interest on capital employed

The traditional approach of management treats all these components as

independent of each other. In other words, the decision regarding say,
transportation can be taken independently of the decision regarding inventory
or storage. Thus, according to this approach, the cost of distribution can be
minimised by keeping the cost of each of these elements at a minimum level.

However, a closer examination of the situation reveals that the costs of each
of these elements described above cannot be minimised without affecting the
other elements as these activities often have conflicting and even
diametrically opposite goals. For example, use of rail transport over air
transport would reduce the total cost of transportation of the goods. But, as
rail transport is relatively slow, the cost incurredon other elements such as
inventory carrying cost, interest on capital employed, etc., would increase.
This, in turn affects the level of customer service. Thus, it may be stated
that different physical distribution activities are interrelated. A decision
in respect of one activity cannot be taken in isolation of the other
activities. So decisions with regard to physical distribution activities
should be based on a total systems approach.

The systems approach is a scientific way of management. It looks at the

physical distribution in its total form as a system consisting of several
interconnected tasks or parts operating together to achieve the given
objectives. Thus, the systems approach of physical distribution, envisages
integration of all the components of physical distribution as parts of a whole
whose market impact is maximum when they operate in synergy. In other
words, it is looking at managing the distribution activities as an integrated

246
exercise in which decisions in respect of different components are taken not Physical
Distribution
in isolation of one another but as a whole.

Check Your Progress A

1) What is the systems approach to physical distribution?

2) What is physical distribution in the context of marketing ?

3) List out the major subsystems of the total system of physical distribution
of a firm.

13.4 TOTAL COST APPROACH

The growing costs of physical distribution have forced marketers to study the
structure of physical distribution costs within the company and control them
to increase the cost effectiveness. Added to the growing costs is the service
function to be performed by distribution logistics. As you know, physical
distribution seeks to minimise total costs of distribution at a given level of
customer service. In a competitive market where substitutes are available to
customers, a major advantage can be gained if distribution costs are reduced
while maintaining the required service levels.

The total cost of distribution consists of the costs of various elements such as
costs of storage, inventory maintenance, transportation, etc. The total cost
approach is a corollary of the systems approach. Total cost approach
envisages the use of total cost (and not the cost of each individual
component) while choosing the alternative course of action in respect of
physical distribution of the products. In case total cost is not analysed, there
is every likelihood of taking a wrong decision. This is explained with the help
of an illustration presented in Table 13.1.

Table 13.1: Physical Distribution Costs under Alternative Approaches

Physical Distribution Alternative A Alternative B

Costs

Interest on working 100 150 (15 days)

capital employed in
inventory
Transportation cost 230 200
Warehousing cost 100 130
Total Cost 430 480

As shown in Table 13.1, if the decision regarding choice of the mode of

transportation is taken independent of the other components of cost, rail
transport (Alternative B) would be selected, as the cost in this case is Rs. 200,
247
Distribution as compared to the road transport (Alternative A) where it is Rs. 230. But if
we prefer rail transport, the cost of other components (interest cost and
warehousing cost) increases. We can see from the table that the total cost in
case of Alternative A is lower than that of Alternative B.Thus, ifthe total cost
is taken into consideration, Alternative A will be selected as it is less
expensive

From this illustration it is clear that a reduction in the cost of one component
may be possible at the expense of the other element. If the transportation cost
is reduced, the cost of warehousing and inventory goes up. Therefore, in any
attempt to improve the physical distribution efficiency and reduce cost, the
total cost of performing the physical distribution function should be taken
into account. Management should think in terms of trade off in reducing
alternative costs so as to maximise profits. By doing this, thefirm can
maximise potential profit.

13.5 OBJECTIVES OF PHYSICAL DISTRIBUTION

Determining the objectives is the first step in managing an activity in a
planned and systematic way. It is so because the objectives serve as a
guiding force for chalking out the strategy for the successful completion
of the task. In the area of physical distribution too, the strategy will
depend upon the objectives sought to be achieved in this regard. Thus, it
is important for the firm to specify the major objectives of the physical
distribution system.

The objective of any physical distribution system is to move the goods to

the right place at the right time, and at the lowest cost. Thus, customer
service and cost reduction are the two basic objectives of an effective
distribution system in an organisation. However, there may be some more
specific objectives in a given marketing situation. Some such objectives
are described in detail below:

Improving Customer Service : As you know, the marketing concept

assumes that the sure way to maximise profits in the long run is through
maximising the customer satisfaction. Thus, an important objective of all
marketing efforts, including the physical distribution activities, is to
improve the customer service. This in turn, produces better sales and
profits.

An efficient management of physical distribution helps to improve the

level of customer service by developing an effective system of
warehousing, quick and economic transportation and optimum level of
inventory. But as discussed earlier, the level of service directly affects the
cost of physical distribution. Therefore, while deciding the level of
service, a careful analysis of the customers’ wants and the policies of the
competitors is necessary. The customers may be interested in several
248 things like timely de1ivery, careful handling of merchandise, reliability of
inventory, economy in operations and so on. But the relative importance Physical
Distribution
of these factors in the minds of customers may vary. Thus, an effort
should be made to know whether they value timely delivery or economy
in transportation, and so on. Once the relative weights are known, an
analysis of what the competitors are offering in this regard should be
made. This together with an estimate about the cost of providing a
particular level of customer service would help in deciding the level of
customer service.

Reduce Distribution Costs : Another most commonly stated objective is

to reduce the cost of physical distribution of the products. It has already
been explained that the cost of physical distribution consists of various
elements such as transportation, warehousing and inventory maintenance,
and a reduction in the cost of one of the elements may result in an
increase in the cost of the other elements. Thus, the objective of the firm,
should be to reduce the total cost of distribution and not just the cost
incurred on any one element. For this purpose, the total cost of alternative
distribution systems should be analysed and the one which has the
minimum total distribution cost should be selected.

The cost of distribution is also related to the level of customer service

offered by a firm. The higher the level of service offered, the greater
would be the cost of distribution. Thus, the objective of the firm may be
to minimise the total distribution cost to achieve a target level of
customer service. In other words, cost minimisation is related to the level
of customer service set by the company.

Generating Additional Sale :Another important objective of the physical

distribution system in a firm is to generate additional sales. A firm can
attract additional customers by offering better services at lower prices
through improvements in the physical distribution of the products. For
example, by decentralising its warehousing operations or by using
economic and efficient modes of transportation, a firm can achieve larger
market share. Also by arresting the out-of-stock situation, the loss of loyal
customers can be arrested.

Creating Time and Place Utilities: The physical distribution system also
aims at creating time and place utilities in the products. Unless the
products are physically moved from the place of their origin to the place
where they are required for consumption, they do not serve any purpose
to the users. Similarly, the products have to be made available at the time
they are needed for consumption. Both these purposes can be achieved
through the physical distribution system. For example, in order to create
maximum time and place values, the products should be kept in
warehouse during the period they are available inexcess till they are in
short supply. For this the warehouse should be located at places from
where they can be delivered and sufficient stocks levels should be
249
Distribution maintained so as to meet the emergency demands of the customers
quickly.

A quicker mode of transport should be selected to move the products

from one place to the other in a short time. Thus, time and place utilities
can be created in the products through an efficient system of physical
distribution.

Price Stabilisation: Physical distribution may also aim at achieving

stabilisation in the prices of the products. It can be achieved by regulating
the flow of the products to the market through a judicious use of available
transport facilities and compatible warehouse operations. For example, in
the case of Industries such as cotton textile industry using agricultural
products as raw material, there will be fluctuations in the supply of raw
materials. In such cases if the market forces are allowed to operate freely,
the raw material would be very cheap during harvesting season and very
dear during off season. This fluctuation may be stabilised by keeping
such raw material in warehouses during the period of excess supply
(harvest season) available during the periods of short supply. Thus, prices
can be stabilised with the help of physical distribution activities.

Check Your Progress B

1) What is total cost approach in physical distribution system?

2) What are the main objectives of physical distribution in a firm?

3) State whether the following statements are True or False.

i) In total cost approach of physical distribution system, the cost of

each element is considered in isolation.

ii) Total cost approach envisages the use of total cost while choosing
the alternative courses of action in respect of physical distribution.

i) Efficient customer service is the only objective of physical

distribution system.

iv) Effective physical distribution system can bring stability in price

v) Physical distribution system creates time and place utilities in

products.

13.6 PHYSICAL DISTRIBUTION TASKS

The important decisions in respect of physical distribution are: i) how should
be order handled? ii) where should the stock be located? iii) how much
should stock be kept on hand? and iv) how should goods be transported? In
fact, as shown in Figure 13.2, these aspects constitute the major components
of the physical distribution system.
250
Let us discuss about the components in detail. Physical
Distribution

Transportation

Customer Order Processing Inventory

Storage
Information
System

Figure 13.2 Major Tasks of Physical Distribution System

(Source: Mandell M. I and Rosenberg L.J. Marketing, 2nd Ed., Pg. 424)

13.6.1 Order Processing

The starting point of the physical distribution activities is the processing of
customers orders. In order to provide quicker customer service, the orders
received from customers should be processed within the least possible time.
Order processing includes: receiving the order, recording the order, filling the
order, and assembling all such orders for transportation. The company and
the customers benefit when these steps are carried out quickly and accurately.
The error committed at this stage at times can prove to be very costly. For
example, if a wrong product or the same product with different specifications
is supplied to the customer, it may lead to cancellation of the original order
(apart from loss in the credibility of the firm). Similarly, if the order is not
executed within a reasonable time, it may lead to serious consequences. High
speed orders, data processing techniques are now available which allow for
rapid processing of the orders.

13.6.2 Warehousing
Warehousing refers to the act of storing and assorting products in order
to create time utility in them. The basic purpose of the warehousing activity
is to arrange placement of goods, provide storage facility to store them,
consolidate them with other similar products, divide them into smaller
quantities and build up assortment of products. Some of the important
decision areas in respect of warehousing are:

• how many warehouses should the firm have?

• where should these warehouses be located?
• what should be the pattern of ownership of the warehouse (owned or
rented) ?

Generally larger the number of warehouses a firm has, the lesser would be
the time taken in serving customers at different locations, but greater would
251
Distribution be the cost of warehousing. Thus, the firm has to strike a balance between the
cost of warehousing and the customer service.

Forproductsrequiringlong-termstorage(suchasagriculturalproductsorproducts
in limited demand), the warehouses are located near production sites. This
helps in minimising the charges on transportation of the goods. On the other
hand, the products which gain weight during production and are bulky, hard
for shipment (machinery, automobiles), and perishable in nature (bakery,
meat, vegetables, etc.) are kept at different locations near the markets.
However, the factors which influence the location of warehouses may be
listed as below:

• Product type
• Transportation cost
• Proximity to markets
• Rent
• Labour Supply
• Taxes
• Geography
• Competition,

Look at Figure 13.3 carefully for a schematic representation of the

problem of the location of warehouses.

Figure 13.3 : Representation of the Warehouse Location Problem

As regards to ownership of the warehouses, the important factors determining

the choice are the amount of money the firm wants to spend on storage and
the extent of control it wishes to retain over its goods. The Warehouses may be
Public warehouses and Private warehouses. The Private warehouses may be
owned or Leased. Public warehouse is generally cheaper but the user has little
say about warehouse operations. Own warehousing is better for those firms
252
which have financial resources and use full capacity throughout the year. Physical
Distribution
To avoid capital investment on construction, the firm can lease in some
warehouse depending on its requirement. Some of the other criteria used
for deciding between public and private warehouses is given in Table 13.2.

Table 13.2. Decision Variables in Choosing among Types of Warehouse

Type of Warehousing Arrangements

Private Public

Decision Variables Owned Leased

1) Fixed Investment Very High Moderate, No fixed

depends on the investment is
lease's terms involved

2) Unit cost High, if High, if Low, since

volume is volume is low rates are on the
low basis of space
used and fixed
costs are
widely
distributed
among users.

3) Control High High Low

managerial
control

4) Adequacy to product Highly Moderately May not be

line adequate Adequate convenient

5) Flexibility Low Low High;

termination of
usage can be
easily arranged

Depending upon the nature of the products stored and the services rendered,
warehouses may be classified as follows:

• General merchandise warehouse: It handles a wide variety of goods.

• Speciality warehouse: It handles a limited line of goods (e.g., hardware)
or it specialises in commodities difficult to store (e.g., grain, cotton).
• Refrigerated warehouse: It handles perishable products like milk,
fruits, vegetableetc., which require cold storage.

253
Distribution • Bonded warehouse: It is insured against loss as well as regulated by
certain laws in the case of liquor.
• Bulk storage warehouse: It handles liquids such as gasoline, petroleum,
oil extracts etc., among other products.

13.6.3 Inventory Control

Linked to warehousing decisions are the inventory decisions which hold key
to success of physical distribution especially where the inventory costs may
go as high as 30-40 per cent (e.g. Steel and Automobiles). No wonder,
therefore, that the new concept of Just-in-Time-Inventory decision is
increasingly becoming popular with a number of companies.

The decision regarding level of inventory involves estimation of demand for

the product. A correct estimate of the demand helps to hold proper inventory
level and control the inventory costs. This not only helps the firm in terms of
the cost of inventory and supply to customers in time but also to maintain
production at a consistent level. The major factors determining the inventory
levels are:

• The firm's policy regarding the customer service level.

• Degree of accuracy of the sales forecasts.
• Responsiveness of the distribution system i.e., ability of the system to
transmit inventory needs back in the factory and get the products in the
market.
• The cost of inventory which consists of holding cost (such as cost of
warehousing, tied up capital and obsolescence) and replenishment cost
(including the manufacturing cost).

13.6.4 Transportation
Transportation facilitates to move goods from points of production and sale
to consumption in the quantities required at times needed and at a reasonable
cost. The transportation system adds time and place utilities to the goods
handled and thus, increases their economic value. To achieve these goals,
transportation facilities must be adequate, regular, dependable and equitable
in the costs and benefits of the facilities and service provided.

Often called carriers, transportation agents are classified by method of

movement. These are: roads, railroads, airways, shipways and pipelines.

Road Transportation

Road transport is characterised by the ability to move small shipments

economically, to move shipments of varying sizes, short distances, and to
deliver shipments to any point in the country that is served by roads and
highways.

254 Road carriers of goods for the market are commonly classified into three
types: Physical
Distribution
• Common Carriers
• Contract Carriers
• Private Carriers.

Common Carriers: They serve the public at large, moving goods of all types
to any part of the country. In practice, however, certain carriers restrict their
operations to the handling of one line of goods or closely related lines.

Contract Carriers: These operators enter into rather formal arrangement

to transport goods for selected customers which is usually for definite
period of time.

Private Carriers: These are operated by business firms and individuals

for transportation of their own goods. Often, they are also let out to have
a better return.

Truck is the main vehicle used for road transportation of nearly all kinds of
goods, particularly manufactured products such as textiles, machinery and
rubber and plastic products. Trucks dominate in the movement of household
goods and small packages. However, now a variety of LCVs, auto carriers
and articulated trucks too are used.

Rail Transportation

The main advantage of railways is their ability to handle heavy bulk products
and to intercharge cars with other roads without generating additional
paperwork for shippers.

Some of the special services provided by railways are:

• Unitised Train
• Piggy-back Service
• Containerisation

Unitised Train: It consists of 100 or more cars carrying commodities like

coal on a shuttle basis between mines and a utility company. The use of
modern loading and unloading facilities, full time operation of the train and
avoidance of switching at yards allow excellent service at substantial cost
savings. In recent years, unitised trains have been used for transporting
grains, iron ore, and other commodities too and their use continues to grow.
Computerised loading and unloading too exists between major power plants
and collieries (Korba for instance).

Piggy-back Service: It is also known as ‘Trailer-on-floatcar’ service. Piggy-

back refers to the hauling of loaded truck trailers over railroad lines on
specially designed flat cars. Shippers fighting higher transportation costs
have shown an increasing interest in this mode of transport because it affords
substantial savings in freight handling. Since, it costs less per mile to 255
Distribution transport a trailer on a flat rail car than over the road, lower rates can be
charged. Further advantages include less damages while enroute and
reduction in delivery time. Piggy-back service is also available on waterways
where loaded vans/trailers are moved by steamers/ships between designated
points.

Containerisation: It refers to the design and use of filled van or, trailer-size
container, which may be moved interchangeably between various types of
carriers without breaking bulk. For example, a container may be moved from
truck to rail, or from truck to ship, thus reducing the handling charges,
damages, losses, and pilferage as well as speeding up the movement of
shipments.

Air Transportation

In recent years, significant growth has taken place in the transportation of

freight by air, although total air-freight volume is still small as compared to
movement by railroads and roadways. The primary advantage of air shipment
of course, is the speed with which the traffic moves between air terminals.
But, the main disadvantage of air-freight has been its higher costs.

Pipe-line Transportation

Most pipe-lines are used to transport liquid petroleum products. Natural gas,
chemicals, coal, minerals, pulp, wood chips and for other non-liquid products
also pipelines are extremely economical mode of transport.

The relative importance of transportation types can be measured in 'tons

originated’ or ‘ton miles’.

Tons originated means 'total amount loaded' and includes both inter and
intracity movements.

Ton miles means ‘one ton moved one km’.

There are several factors that influence the choice of transportation. The
following of them merit our attention:

• Services: transit privilege, reconsignment, containerisation.

• Availability.
• Flexibility: Cost, routing, speed, handling.

13.6.5 Information Monitoring

The physical distribution managers continuously need up-to-date information
about inventory, transportation and warehousing. For example, in respect of
inventory information about present stock position at each location, future
commitment and replenishment capabilities are constantly required.
Similarly, before choosing a carrier, information about the availability of
various modes of transport, their costs, services and suitability for a particular
256
product, etc., is required. About warehousing, information with respect to Physical
Distribution
space utilisation, work schedules, unit load performance etc., is required.

In order to receive all the information stated above, an efficient management

information system would be of immense use in controlling costs, improving
services and determining the overall effectiveness of distribution. Of course,
it is difficult to correctly assess the cost of physical distribution operations.
But if correct information is available it can be analysed systematically and a
great deal of saving can be ensured.

Check Your Progress C

1) List the major tasks of physical distribution.

2) Distinguish between warehousing and inventory control in physical

distribution.

3) What is information monitoring in physical distribution?

13.7 LET US SUM UP

Physical distribution refers to the activities involved in handling and moving
goods from the point of production to the point of use. An effective system of
physical distribution greatly helps a firm in achieving its marketing
objectives. Apart from creating time and place utilities in the product, it
relieves the customers of holding excess inventories and helps in bringing
down the cost of carrying inventory, transportation and other related costs.

The cost of physical distribution consists of four important elements, viz.,

transportation, warehousing, inventory carrying and interest on capital
employed. The systems approach to physical distribution envisages
integration of all the physical distribution components as parts of a whole
system whose market impact is maximum when operated in synergy. The
cost approach to physical distribution is a corollary to the systems approach.
The cost approach envisages the use of total cost and not the individual cost
of each of the components while choosing the alternative course of action in
respect of physical distribution of the products.

The broader objective of any physical distribution system is to move the right
goods to right place at right time at the lowest cost possible. Some of the
specific objectives in a given marketing situation, however, include
improving customer service, reducing the distribution costs, generating
additional sales, creating time and place utility and stabilising the prices of
the products.

The five important components of an effective physical distribution system

are: 1)order processing, 2) inventories, 3) warehousing, 4) transportation, and
5) information system. Order processing includes receiving, recording, filling
and assembling order for transportation to the customer. The customer and
the firm benefits when steps are taken quickly and accurately. Warehousing 257
Distribution is the act of storing and sorting products in order to create time utility in
them. The important decision areas in respect of warehousing are determining
the i) number of warehouses a firm should have, ii) the location of the
warehouses, and iii) whether the firm should own warehouses or use the
public warehouses. A decision regarding inventory is based on primarily the
prediction about the demand for the product. A correct prediction in this
regard helps in minimising the cost of inventory.

As regards transportation, the firm has to constantly evaluate the different

alternatives available. Basically the decision has to be between the different
modes of transportation like rail, road, water and air. A systematic
management information system is necessary to ensure a continuous flow of
data on all the components of physical distribution system.

13.8 KEY WORDS

Physical Distribution: Activities involved in handling and moving goods
from the point of production to the point of consumption.

Total Cost Approach: Optimization of the overall cost-customer service

relationship of the entire physical distribution system.

Total Systems Approach: Looking at and managing physical distribution

activity as an integrated exercise where decisions in respect of different
components are taken not in isolation of one another but as a whole.

Warehousing: The act of storing and assorting products in order to create

time utility in them.

Order Processing: It includes receiving the order, filling the order, and
assembling all such orders for transportation.

13.9 ANSWERS TO CHECK YOUR PROGRESS

B 3 i) False ii) True iii) False iv) True v) True

13.10 TERMINAL OUESTIONS

1) What is the significance of physical distribution in Marketing
Management? Explain its role for a Mumbai based toilet soap
manufacturer producing several national brands.

2) Customer service and cost reduction are the two bench marks of an
effective system of physical distribution. Discuss with examples.

3) What would be the most likely mode of transportation for the following
products and why?

i) Soft drinks
258 ii) Coal
 iii) Refrigerator Physical
Distribution
iv) Industrial Plant and Machinery
v) Industrial Chemicals
vi) Potato chips

4) Explain the total systems approach to physical distribution. How is this

different from the Total Cost Approach?

5) Explain the strategy options available to a firm in warehousing location?

What are their relative strengths and Weaknesses?

6) What are alternative transport media available to a firm? What are their
relative strengths and weaknesses?

Note: These questions will help you to understand the unit better. Try to
write answers for them. But do not submit your answers to the university for
assessment. These are for your practice only.

SOME USEFUL BOOKS

Indira Gandhi National Open University, School of Management Studies,
1989, Marketing for Managers MS-6, Indira Gandhi National Open
University: New Delhi (Unit 18).

Kotler, Philip., and Gary Armstrong. 1987. Marketing - An Introduction,

Prentice Hall: Englewood Cliffs. (Chapters 13 and 14).

Neelamegham, S. 1988. Marketing in India - Cases and Readings, Vikas

Publishing House: New Delhi, (Chapters 46-50).

Sherlekar, S.A. 1984. Marketing Management, Himalaya Publishing: New

Delhi.(Chapters 19-21).

Stanton, William J., and Charles Futrell. 1987. Fundamentals of Marketing,

McGraw-Hill: New York. (Chapters 14-17).

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