Chapter Seven

Distribution /place/placement/marketing channel

Decisions

by: Ayalneh Dagnaw

Temariam Teshager
Yeshambel Ewunetu
• Discuss how do channel firms organize to do the work of the
channel
• Explain the major problems companies face in designing and
managing their channels?
• Analyze the roles physical distribution plays in attracting and
satisfying customers?

1. The concept of distribution/channels

• This chapter deals with the ‘place’ element of marketing
strategy (i.e. ‘placement’ of goods and services from their
respective providers into the hands of customers).
• Distribution channel has been defined in different ways by
different experts in the area. Following are just of them:
• Distribution channel refers to the sequence or series
of marketing firms or organizations that direct a
product (s) from the producer (s) to the ultimate user
(s). Every marketing channel begins with the
producer and ends with either consumers or the
industrial user.
 The channel of distribution is therefore all those
organizations through which a product must pass
between its point of production and consumption.
 The term channel is derived from the Latin word
canalis, which means canal. A marketing channel can
be viewed as a large canal or pipeline through which
products, their ownership, communication, financing
and payment, and accompanying risk flow to the
consumer.
Distribution channel members:
• Many different types of organizations participate in
marketing channels. Channel members (wholesalers,
distributors, and retailers, also sometimes referred to as
intermediaries, resellers, and middlemen) negotiate with one
another, buy and sell products, and facilitate the change of
ownership between buyer and seller in the course of moving
the product from the manufacturer into the hands of the final
consumer.

• As products move through channels, channel members

facilitate the distribution process by providing specialization
and division of labor, overcoming discrepancies, and
providing contact efficiency
Types of Distribution Channel / trade channel
• Distribution channels can be described by the number of
channel levels involved. Each layer of marketing
intermediaries that performs some work in bringing the
product and its ownership closer to the final buyer is a
channel level. Because the producer and the final consumer
both perform some work, they are part of every channel.

• Distribution channel levels refer to the number of

intermediaries involved in the distribution process of a given
channel. For example, a zero level distribution channel
means a channel with no intermediary or middleman (e.g.,
channel 1 in figure A and B below), two levels (commonly
called the traditional channel) involves two intermediaries
and so on.
Why Intermediaries are needed?
• Providing Specialization and Division of Labor
• According to the concept of specialization and division of
labor, breaking down a complex task into smaller, simpler
ones and allocating them to specialists will create greater
efficiency and lower average production costs.
• Manufacturers achieve economies of scale through the use of
efficient equipment capable of producing large quantities of
a single product.
• Marketing channels can also attain economies of scale
through specialization and division of labor by aiding
producers who lack the motivation, financing, or expertise to
market directly to end users or consumers.
• In some cases, as with most consumer convenience goods,
such as soft drinks, the cost of marketing directly to millions
of consumers—taking and shipping individual orders—is
prohibitive. For this reason, producers hire channel
members, such as wholesalers and retailers, to do what the
producers are not equipped to do or what channel members
are better prepared to do.
• Channel members can do some things more efficiently than
producers because they have built good relationships with
their customers. Therefore, their specialized expertise
enhances the overall performance of the channel.
 • Providing Contact Efficiency
• Marketing channels provide contact efficiencies by reducing
the number of stores customers must shop in to complete
their purchases. Think about how much time you would
spend shopping if supermarkets, department stores, and
shopping malls did not exist.
• For example, suppose you had to buy your milk at a dairy
and your meat at a stockyard. Imagine buying your eggs and
chicken at a hatchery and your fruits and vegetables at
various farms. You would spend a great deal of time, money,
and energy just shopping for a few groceries.
Channels simplify distribution by cutting the number of
transactions required to get products from manufacturers to
consumers and making an assortment of goods available in
one location.
Consider the example illustrated in figure 2. Four consumers
each want to buy a television set. Without a retail
intermediary like Circuit City, television manufacturers JVC,
Zenith, Sony, Toshiba, and RCA would each have to make
four contacts to reach the four buyers who are in the target
market, for a total of 20 transactions. However, when Circuit
City acts as an intermediary between the producer and
consumers, each producer has to make only one contact,
reducing the number of transactions to 9.
 • Overcoming Discrepancies
• Marketing channels also aid in overcoming discrepancies
of quantity, assortment, time, and space created by
economies of scale in production.
• The quantity produced to achieve low unit costs has
created a discrepancy of quantity, which is the difference
between the amount of product produced and the amount
an end user wants to buy. By storing the product and
distributing it in the appropriate amounts, marketing
channels overcome quantity discrepancies by making
products available in the quantities that consumers desire.
• discrepancy of assortment
• temporal discrepancy
• spatial discrepancy
Function of distribution channels
Buying acting as purchasing agents for the customers
Selling providing sales force for producers to reach
target customers
Allocation: Breaking down large shipments into smaller
amounts
Assorting Combining collections of products that will
appeal to groups of buyers
Sorting out Separating out heterogeneous deliveries into
homogeneous ones
Aggregating small production batches into
Accumulati amounts big enough to be worth shipping.
on
• Channel Levels: distribution channels can be described by
the number of channel levels involved. Each layer of
marketing intermediaries that performs some work in
bringing the product and its ownership closer to the final
buyer is a channel level.
• Because the producer and the final consumer perform some
work, they are part of every channel. We use the number of
intermediary levels to indicate the length of a channel. The
channel width refers to the number of intermediaries at each
level. For example: a two level channel is composed of two
types of intermediaries—such as wholesaler and retailer.
 Factors determining channel of
destribution
•1. Product Related Factors:
•Following are the important product related considerations in deciding on channels of
distribution:
•(a) Nature of Product:
•In case of industrial goods like CT scan machine, short channels like zero level channel or first
level channel should be preferred because they are usually technical, expensive, made to
order and purchased by few buyers. Consumer goods Ike LCD, refrigerator can be distributed
through long channels as they are less expensive, not technical and frequently purchased.
•(b) Perishable and Non- Perishable Products:
•Perishable products like fruits or vegetables are distributed through short channels while non
perishable products like soaps, oils, sugar, salt etc. require longer channels.
•(c) Value of Product:
•In case of products having low unit value such as groceries, long channels are preferred while
those with high unit value such as diamond jewellery short channels are used.
•(d) Product Complexity:
•Short channels are preferred for technically complex goods like industrial or engineering
products like machinery, generators like torches while non complex or simple ones can be
distributed through long channels.
• 2.company related factor

• (a) Financial Strength:

• The companies having huge funds at their disposal go for direct distribution.
Those without such funds go for indirect channels.
• (b) Control:
• Short channels are used if management wants greater control on the channel
members otherwise a company can go in for longer channels.
• 3. Competitive Factors:
• Policies and channels selected by the competitors also affect the choice of
channels. A company has to decide whether to adopt the same channel as that
of its competitor or choose another one. For example, if Nokia has selected a
particular channel say Big Bazaars for sale of their hand sets, other firms like
Samsung and LG have also selected similar channels.
 Physical Distributions
What is physical distribution?

 It is actual movement of products from producer to

consumers or business users.
 Philip Kotler has defined physical distribution as,
“Physical distribution involves planning, implementing
and controlling the physical flow of materials and final
goods from the point of origin of use to meet consumer
needs at a profit.”
Definition of physical distribution continue…

• According to William J. Stanton, “Physical distribution involves

the man­agement of physical flow of products and
establishment and operation of flow systems.”

• Thus Physical distribution is a process of managing the

movement of the goods.
Objectives of Physical Distribution:
Physical distribution has two broad objectives:-
1. Consumer satisfaction: -
• A firm can provide sat­isfaction to consumers by making available right
quantity of right goods at right place and time, at lowest costs. Prompt and
dependable distribution enhances consumer satisfaction.

2. Profit maximization: -
• This done by lowering the physical distribution costs, we can offer products at
a lower price with better quality, and its can maintain current customers and
also attract additional consumers, and profit position can be improved.
Objectives of Physical Distribution
continue…
 Apart from these, it has other objectives.

i. To deliver the right goods in right quantity at right time and right place
at least cost.
ii. To achieve minimum inventory level and speedier transportation.
iii. To establish price of products by effective management of physical
distribution activities.
iv. To gain competitive advantage over rivals by
performing customer service more effectively.
Importance of Physical Distribution: -
1. Creating Time and Place Utility:
• Physical distribution activities help in creating time and place
utility. This is done through transportation and warehousing.
Transportation system creates place utility as it makes available
the goods at the right place where they are required. Warehousing
creates time utility by storing the goods and releasing them when
they are required.
Importance continue…
2. Helps in Reducing Distribution Cost:
• Physical distribution cost account for a major part of the price of
the product. If these costs are handled systematically, decrease in
costs of product can be there. Proper and systematic planning of
transportation schedules and routes, warehousing location and
operation, material handling, order processing, etc. can easily
bring in cost economies.
Importance continue…
3. Helps in Stabilization of Price:
• Physical distribution helps in maintaining stable prices. Even customers expect
price stability over a period of time. Proper use of transportation and
warehousing facilities can help in matching demand with supply and thus ensure
stabilization of price.
4. Improved Consumer Services:
• Consumer service in physical distribution means making products in right
quantity available at right time and right place i.e. place where customer needs.
Functions of Physical Distribution:
Functions continue…
1. Order Processing:
• Order processing is the starting point of any distribution activity. Order
processing includes activities like receiving the order, processed the
order quickly and accurately /prepare invoice/, shipped items are
accompanied by shipping and billing documents with copies to various
departments, etc. Each customer expects that the order placed by him
is implemented without delay, and as per the specifications of the
order.
Functions continue…
2. Warehousing:
• Warehouse is places where the goods are stored while they wait to be
sold. There are many products which are seasonally produced but are
used throughout the year, they can be stored and later released.
•   Similarly, there are products which are produced throughout the year but are
seasonally used like umbrella, fans, heaters, etc.

• The company must decide the number of ware houses needed. And
also decide what types of warehouse need and where will be located.
 Functions continue…
3. Inventory Control:
• Inventory control refers to efficient control of goods stored in warehouses.
Maintaining adequate level of inventory is very essential for smooth flow of
business. Inventory acts as a bridge between the orders of customers and
production. They are the reservoir of the goods held in anticipation of sales.
Therefore, it needs to be properly managed and controlled. Neither to small
nor too large inventory should be maintained. It involves knowing both
when to order and how much to order.
Functions continue…
4. Material Handling:
• Material handling includes all those activities which are associated in moving
products when it leaves the manufacturing plant but before it is loaded on the
transport. This activity has been in existence since very long period of time,
and now it has developed as a system.

• It involves moving the goods from plant to warehouses and from warehouses
to place of loading in transport modes. Proper management of material
handling helps in avoiding unnecessary movement of goods, avoiding damage
to the goods, facilitate order processing and efficient movement of goods.
Functions continue…

5. Transportation:
• Transportation as a function of physical distribution is concerned with
the movement of goods from the warehouse to customer destination.
It includes loading and unloading of goods and their movement from
one place to another. In doing so it provides time and place utility.
Transport accounts for a major portion of the distribution cost and of
the total price of the product.
• Being a major cost element, marketers must take keen interest in
transportation decision as it will help in reducing cost and increasing
customer satisfaction. Correct form of transportation mode is very
essential as it directly affect the price of the product.
 Proper choice facilitates smooth movement of goods on time and in
good condition. The transportation mode therefore needs to be
adequate, regular and dependable.
• Different modes of transportation are there like Road transport,
railways, Airways, Water transport and pipeline from which a choice
has to be made. Each has its own share of merits and demerits.
Normally a combination of different mode is chosen and integrated in
a sequential order to move the product economically and faster.
• Choice of a particular mode of transportation depends upon various
factors like cost of the transport, availability of the mode of transport,
speed, reliability, frequency, safety and suitability of the mode to
move the product.
Warehousing
• A warehouse may be defined as a place used for the storage or
accumulation of goods. The function of storage can be carried out
successful with the help of warehouses used for storing the goods.
• Warehousing can also be defined as assumption of responsibility for
the storage of goods. By storing the goods throughout the year and
releasing them as and when they are needed, warehousing creates
time utility.
Type of Warehouses:
• There are three types of warehouses: -
1. Private Warehouses:
• The private warehouses are owned and operated by big
manufacturers and merchants to fulfill their own storage needs.
• The goods manufactured or purchased by the owner of the
warehouses have a limited value or utility as businessmen in general
cannot make use of them because of the heavy investment required
in the construction of a warehouse, some big business firms which
need large storage capacity on a regular basis and who can afford
money, construct and maintain their private warehouses.
Continue….
2. Public Warehouses:
• A public warehouse is a specialized business establishment that
provides storage facilities to the general public for a certain charge. It
may be owned and operated by an individual or a cooperative
society. It has to work under a license from the government in
accordance with the prescribed rules and regulations.
• Public warehouses are very important in the marketing of agricultural
products and therefore the government is encouraging the
establishment of public warehouses in the cooperative sector. A
public warehouse is also known as duty-paid warehouse.
Continue….
3. Bonded Warehouses:
• Bonded warehouses are licensed by the government to accept imported goods for storage
until the payment of custom duty. They are located near the ports. These warehouses are
either operated by the government or work under the control of custom authorities.
• The warehouse is required to give an undertaking or ‘Bond’ that it will not allow the
goods to be removed without the consent of the custom authorities. The goods are held
in bond and cannot be withdrawn without paying the custom duty. The goods stored in
bonded warehouses cannot be interfered by the owner without the permission of
customs authorities. Hence the name bonded warehouse.
• Bonded warehouses are very helpful to importers and exporters. If an importer is unable
or unwilling to pay customs duty immediately after the arrival of goods he can store the
goods in a bonded warehouse. He can withdraw the goods in installments by paying the
customs duty proportionately.
Benefits from Warehouses:

1. Time utility:
• A warehouse creates time utility by bringing the time gap between
the production and consumption of goods. It helps in making
available the goods whenever required or demanded by the
customers.
• Some goods are produced throughout the year but demanded only
during particular seasons, e.g., wool, raincoat, umbrella, heater, etc.
Continue….
2. Store of surplus goods:
• Basically, a warehouse acts as a store of surplus goods which are not needed
immediately. Goods are often produced in anticipation of demand and need
to be preserved properly until they are demanded by the customers. Goods
which are not required immediately can be stored in a warehouse to meet
the demand in future.
3. Price stabilization:
• Warehouses reduce violent fluctuations in prices by storing goods when their
supply exceeds demand and by releasing them when the demand is more
than immediate productions. Warehouses ensure a regular supply of goods
in the market. This matching of supply with demand helps to stabilize prices.
Continue….
4. Minimization of risk:
• Warehouses provide for the safe care of goods. Perishable products can be
preserved in cold storage. By keeping their goods in warehouses,
businessmen can minimize the loss from damage, fire, theft etc. The goods
kept in the warehouse are generally insured. In case of loss or damage to
the goods, the owner of goods can get full compensation from the insurance
company.
5. Packing and grading:
• A modern warehouse provides facilities for processing, packing, blending,
grading etc., of the goods for the purpose of sale. Goods can be packed in
convenient sizes as per the instructions of the owner.
Continue….
6. Financing:
• Loans can be raised from the warehouse keeper against the goods
stored by the owner. Goods act as security for the warehouse keeper.
Similarly, banks and other financial institutions also advance loans
against warehouse receipts. In this manner, warehousing acts as a
source of finance for the businessmen for meeting business
operations.
 definition of Wholesaling
Wholesaling: all activities involved in selling goods and services to those
buying for resale or business use.

• Buy mostly from producers and resell to retailers, industrial consumers and
other wholesalers.
 Characteristic of Wholesaler
The main characteristics of wholesaler are:
• buys and sells goods in large quantities.
• deals only in a few types of products.
• acts as a middleman between the producers and retailers.
• usually makes cash purchases and sells goods on credit
to the retailers.
• mostly does not sell good to the consumers.
• operates in particular area determined by producers
Functions of wholesaler

Wholesaler Performs some of the following

functions:
 assembling

 storage
 grading and packing
Transportation
Financing
Risk bearing
Market information
 Continue..

• Assembling The wholesaler buys good from different manufacturer

producing the same streak of goods. He assembles them in his
warehouse for the purpose of sale to the retailers.

• Storage A wholesaler stores the goods in his warehouse.

• Grading and Packing A wholesaler sorts out the goods according to

their quality, size, shape, content etc, and then packs them carefully to
sell them to the retailers.

• Transportation Wholesaler buys goods in bulk from the producers

and transports them in his own go down.

 Continue..

• Financing A wholesaler provides credit facility to retailers who are in

need of financial assistance.

• Risk bearing The wholesaler bears all the trade and financial risks of
the business. Since he buys goods in bulk for making them available to
retailer in small quantities, he takes all the risk involved in marketing
of goods.

• Market Information One of the most important functions of

wholesaler is that it provides important market information to retailer
and manufacturer, which help the retailers about the demand of
consumer and manufacturer.
 Types of Wholesalers
a. Merchant wholesalers: The merchant wholesalers are
independently owned concerns that take title to the goods they
distribute. The merchant wholesalers are classified in terms of the
number and the types of service they provide to the customer.
 Full-service wholesalers It provides customers with a
complete array of services in addition to the merchandise
they offer. The service may include delivery, credit
facility, advice and even assistance as accountant aid.
 Continue…

• General Merchandise Wholesalers are those who sell

large number of different product types or lines. It would
be a one stop shop for the retailers to procure things from
them at a much bargain able prices.

• Specialist Wholesaler reduce the line further, they may

hold only select products in a particular product line.
 Continue..
Limited service wholesalers: It is one who offers less than full
service and charges lower prices. These types of wholesalers are
also known as limited function wholesalers.
• Cash-and-carry wholesalers

• Truck jobbers

• Drop shippers
 Continue..

• cash-and-carry wholesalers normally stocks a limited

line of fast-moving products that are sold to small retails.

• Truck Joppers performs primarily a selling and delivery

functions only.

• Drop shippers operates in industries associated with

commodities handled in bulk, such as building materials,
coal, lumber and paper-based products.
 continue

b. Brokers and agents:

 Do not take title to goods.
 Perform only a few functions.
 Specialize by product line or customer type.
Brokers bring buyers and sellers together.
Agents represent buyers on a more permanent basis.
Manufacturers’ agents are the most common type of
agent wholesaler.
 Contineu..

c. Manufacturers’ sales branches and offices

 Involves wholesaling by sellers or buyers themselves

rather than through independent wholesalers.
Definition of Retail
 All the activities involved in selling goods or services directly

to final consumers for their personal, nonbusiness use.

 Retailing can take place in stores and non-store

environments
 Retailers can be classified based on:
• Amount of service offered
• Depth of products lines
• Relative prices charged
• How they are organized
Types of Retailers

Amount of service offered:

• Self-service retailers
• Limited-service retailers
• Full-service retailers

Relative prices charged:

• Discount stores
• Off-price retailers:
Types of retail(continue)

Products lines:
• Specialty stores
• Department stores
• Supermarkets
• Convenience stores
• Discount stores
• Off-price retailers
• Superstores
Types of Retailers (continue)

Retail organizations:
• Corporate chains
• Voluntary chains
• Retailer cooperatives
The Comparison chart between wholesale and retail

BASIS FOR WHOLESALE RETAIL

COMPARIS
ON
Meaning Wholesale is a business When the goods are sold
in which goods are sold to the final consumer in
in large quantities to the small lots, then this type
retailers, industries and of business is termed as
other businesses. retail.

Creates link Manufacturer and Wholesaler and

between Retailer Customer
Price Lower Comparatively higher
Competition Less Very high
Volume of Large Small
transaction
Capital Requirement Huge Little

Deals in Limited products Different products

Area of operation Extended to various Limited to a specific

cities area

Art of selling Not Required Required

Conclusion
 The word wholesale simply means selling in bulk
quantities and retail stands for selling merchandise
in small quantities. Wholesale and retail are two
distribution arrangement that constitutes a major
part of the supply chain. When the goods are
manufactured, they are sold in large quantities
(wholesale) to the wholesalers who further sells
them to the retailers who finally sells them to the
ultimate customers.
 Whenever a product is produced, it does not come to us
directly. There are so many hands, through which a product
passes, and finally, we get it from the retail shopkeeper. In
wholesale, mild competition can be seen, but in retail, there is
a cut-throat competition, so it is very tough to retain and
regain customers.
The end