Channel of Distribution

Meaning and Concept Means used to transfer merchandise from the manufacturer to the end user. An intermediary in the channel is called a middleman. Channels normally range from two-level channels without intermediaries to five-level channels with three intermediaries. For example, a caterer who prepares food and sells it directly to the customer is in a two-level channel. A food manufacturer who sells to a restaurant supplier, who sells to individual restaurants, who then serve the customer, is in a four-level channel. Intermediaries in the channel of distribution are used to facilitate the delivery of the merchandise as well as to transfer title, payments, and information about the merchandise. For example, a manufacturer may rely upon the workforce employed by a distributor to sell the product, make deliveries, and collect payments. The channels used by a marketer are an integral part of the marketing plan and play a role in all strategic marketing decisions. See also channel competition; channel management; distribution. The Greek philosopher Heraclitus wrote, "Nothing endures but change." Marketing channels are enduring but flexible systems. They have been compared to ecological systems. Thinking about distribution channels in this manner points out the unique, ecological-like connections that exist among the participants within any marketing channel. All marketing channels are connected systems of individuals and organizations that are sufficiently agile to adapt to changing marketplaces. This concept of a connected system suggests that channel exchange relationships are developed to build lasting bridges between buyers and sellers. Each party then can create value for itself through the exchange process it shares with its fellow channel member. So, a channel of distribution involves an arrangement of exchange relationships that create value for buyers and sellers through the acquisition (procurement), consumption (usage), or elimination (disposal) of goods and services. Channel of Distribution Means used to transfer merchandise from the manufacturer to the end user. Intermediaries in the channel are called middlemen. Those who actually take title to the merchandise and resell the goods are merchant middlemen. Those who act as Broker but do not take title are agent middlemen. Merchant middlemen include wholesalers and retailers. Agent middlemen include Manufacturer's Representatives, brokers, and sales agents. The word channel might bring to mind a waterway such as the English Channel, where ships move people and cargo. Or it might bring to mind a passageway such as the Channel, the railroad tunnel under the English Channel. Either image implies the presence of paths or tracks through which goods, services, or ideas flow. This imagery offers a good starting point for understanding channels of distribution. The term marketing channel was first used to describe trade channels that connected producers of goods with users of goods. Any movement of products or services requires an exchange. Whenever something tangible (such as a computer) or intangible (such as data) is transferred between individuals or organizations, an exchange has occurred. Therefore, marketing channels make exchanges possible. How do they facilitate exchanges? Perhaps the key part of any distribution channel is the intermediary. Channel intermediaries are individuals or organizations who create value or utility in exchange relationships. Intermediaries generate form, place, time, and/or ownership values between producers and users of goods or services. Marketing channels were traditionally viewed as a bridge between producers and users. However, this traditional view fails to fully explain the intricate network of relationships that underlie marketing flows—the exchanges of goods, services, and information. To illustrate, consider a prescription drug purchase. To get authorization to purchase the drug, one must visit a physician to obtain a prescription. Then, one might acquire the drug from one of several retail sources, including grocery store chains (such as Kroger's), mass discounters (such as Wal-Mart), neighborhood pharmacies, and even virtual pharmacies (such as Drugstore.com). Each of these prescription drug outlets is a marketing channel. Pharmaceutical manufacturers, distributors, and their suppliers are all equally important links in these channels of distribution for pharmaceuticals. Sophisticated computer systems track each pill, capsule, and tablet from its point-of-production at a pharmaceutical manufacturer all the way to its point-of-sale in retail outlets worldwide. To appreciate the complexity of marketing channels, exchange should be recognized as a dynamic process. Exchange relationships themselves continually evolve as new markets and technologies redefine the global marketplace. Consider, for example, that the World Wide Web's arrival created a new distribution channel now accounting for over $1.3 trillion in electronic exchanges. It may come as a surprise that the fastest-growing segment of electronic commerce involves not business-to-consumer, (called B2C in today's Web language) but business-to-business (B2B) channels. Whether these exchange processes occur between manufacturers and their suppliers, retailers and consumers, or in some other buyer-seller relationship, marketing channels offer an important way to build competitive advantages in today's global marketplace. This is so for two major reasons: • Distribution strategy lies at the core of all successful market entry and expansion strategies. The globalization of manufacturing and marketing requires the development of exchange relationships to govern the movement of goods and services. As you sip your preferred coffee blend at your neighborhood Starbucks, consider that consumers in China, Lebanon, and Singapore may be sipping that same blend. Then consider how the finest coffee beans from Costa Rica or Colombia get to thousands of neighborhood coffee shops, airports, and grocery stores around the world. • New technologies are creating real-time (parallel) information exchange and reducing cycle times and inventories. Take as an example Dell Computer, which produces on-command, customized computers to satisfy individual customer preferences. At the same time, Dell is able to align its need for material inputs (such as chips) with customer demand for its computers. Dell uses just-in-time production capabilities. Internet-based organizations now compete vigorously with traditional suppliers, manufacturers, wholesalers, and retailers. Bricks-and-mortars (organizations having a physical location) and clicks-and-mortars (organizations having a virtual presence) are in a virtual face-off. Evolution of Channels Marketing channels always emerge from the demands of a marketplace. However, markets and their needs are always changing. It's true, then, that marketing channels operate in a state of continuous evolution and transformation. Channels of distribution must constantly adapt in response to changes in the global marketplace. Remember: Nothing endures but change. At the beginning of the nineteenth century, most goods were still produced on farms. The point-of-production had to be close to the point of-consumption. But soon afterward, the Industrial Revolution prompted a major shift in the American populace from rural communities to emerging cities. These urban centers produced markets that needed larger and more diverse bundles of goods and services. At the same time, burgeoning industrialization required a larger assortment of production resources, ranging from raw materials to machinery parts. The transportation, assembly, and reshipment of these goods emerged as a critical part of production. During the 1940s, the U.S. gross national product (GNP) grew at an extraordinary rate. After World War II ended, inventories of goods began to stockpile as market demand leveled off. The costs of dormant inventories—goods not immediately convertible into cash—rose exponentially. Advancements in production and distribution methods now focused on cost-containment, inventory control and asset management. Marketers soon shifted from a production to a sales orientation. Attitudes like "a good product will sell itself" or "we can sell whatever we make" receded. Marketers confronted the need to expand sales and advertising expenditures to convince individual customers to buy their specific brands. The classic four Ps classification of marketing mix variables—product, price, promotion and place—emerged as a marketing principle. Distribution issues were relegated to the place domain. This new selling orientation inspired the development of new intermediaries as manufacturers sought new ways to expand market coverage to an increasingly mobile population. The selling orientation required that more intimate access be established to a now more diversified marketplace. In response, wholesale and retail intermediaries evolved to reach consumers living in rural areas, newly emerging suburbs and densely populated urban centers. Pioneering retailers such as John Wanamaker in Philadelphia and Marshall Field in Chicago quickly sprouted as goliaths in this brave new retail world. Small retailers came of age, as well, offering specialized operations tailored to meet the needs of a changing marketplace. Retailers and their channels evolved in lockstep with the movements and needs of the consumer marketplace. As always, marketing channels were evolving in response to changing marketplace needs. The impact of two remarkable innovations taken for granted today—the car and the interstate highway system—cannot be ignored. These transforming innovations simultaneously stimulated and satisfied Americans' desire for mobility. Manufacturers suddenly began selling their wares in previously inaccessible locations. Millions of Americans fled from the cities to the suburbs in the 1950s and 1960s. Retailers quickly followed. Yet another channel phenomenon emerged, this one involving groups of stores situated together at one site. The suburban shopping center was born. Its child, the mall, soon followed. In 1951, the earth moved. That was the year marketers first embraced the marketing concept. The marketing concept decrees that customers should be the focal point of all decisions about marketing mix variables. It was accepted that organizations should only make what they could market instead of trying to market whatever they could make. This new perspective had a phenomenal impact on channels of distribution. Suppliers, manufacturers, wholesalers, and retailers were all forced to adopt a business orientation initiated by the needs and expectations of each channel member's customer. The marketing concept quickly reinforced the importance of obtaining and then applying customer information when planning production, distribution, and selling strategies. A sensitivity to customer needs became firmly embedded as a guiding principle by which emerging market requirements would be satisfied. The marketing concept remained the cornerstone of marketing channel strategy for some thirty years. It even engendered the popular 1990s business philosophy known as total quality management. Small wonder, then, that in today's Japan the English word customer has become synonymous with the Japanese phrase honored guest. The customer focus espoused within the marketing concept has a broad, intuitive appeal. Yet the marketing concept implicitly suggests that information should flow unidirectionally from customers to intermediaries, and from intermediaries to manufacturers. This unnecessarily restrictive and reactive approach to satisfying customers' needs has been supplanted by the relationship marketing concept. As modern communication and information management technologies emerged, channel members found they could now establish and maintain interactive dialogues with customers. Ideas and information now were exchanged—bidirectionally—in real time between buyers and sellers. Channel members learned that success comes from anticipating one's customer's needs before they do. The earth had moved, again, as the relationship marketing philosophy was widely adopted. How important is a customer dialogue? Sophisticated database and interactive technologies enable channel members to quickly identify changes in customers' preferences. This, in turn, allows manufacturers to modify product designs nimbly. Relationship marketing allows manufacturers to mass-customize offerings and to reduce fixed costs associated with production and distribution. Retailers and wholesalers make better informed merchandising decisions. This is yet another lesson in the costs of carrying unwanted products. Relationship marketing yields greater customer satisfaction with the products and services they acquire and consume. And why not? The customer's voice was heard when the offering was being produced and distributed. Relationship marketing is driven by two principles having particular relevance to marketing channel strategy: • Long-term, ongoing relationships between channel members are cost-effective. (Attracting new customers costs more than ten times more than retaining existing customers.) • The interactive dialogue between providers and users of goods and services is based on mutual trust. (The absence of trust imperils all relationships. Its presence preserves them.)