4.6. Place (Distribution)
Importance of Place in the marketing mix
Place deals with how the product is distributed and how it reaches the customers:
a. Channel: zero level distribution is where the organization sells directly to the
customer; in one level distribution, the organization sells to a retailer, who
sells to the customer; two level distribution involves the organization selling to
a wholesaler who in turn sells to the retailer.
b. Logistics: the speed of delivery is an important issue in place.
Marketing Channels (Core)
A channel of distribution or trade channel is defined as the path or route along which
goods move from producers or manufacturers to ultimate consumers or industrial
users. In other words, it is a distribution network through which producer puts his
products in the market and passes it to the actual users. This channel consists of: producers, consumers or users and the various middlemen like wholesalers, selling
agents and retailers (dealers) who intervene between the producers and consumers.
Therefore, the channel serves to bridge the gap between the point of production and
the point of consumption thereby creating time, place and possession utilities.
A channel of distribution consists of three types of flows:


Downward flow of goods from producers to consumers
Upward flow of cash payments for goods from consumers to producers
Flow of marketing information in both downward and upward direction i.e.
Flow of information on new products, new uses of existing products, etc from
producers to consumers. And flow of information in the form of feedback on
the wants, suggestions, complaints, etc from consumers/users to producers.
An entrepreneur has a number of alternative channels available to him for distributing
his products. These channels vary in the number and types of middlemen involved.
Some channels are short and directly link producers with customers. Whereas other
channels are long and indirectly link the two through one or more middlemen.
These channels of distribution are broadly divided into four types:

Producer-Customer:- This is the simplest and shortest channel in which no
middlemen is involved and producers directly sell their products to the
consumers. It is fast and economical channel of distribution. Under it, the
producer or entrepreneur performs all the marketing activities himself and has
full control over distribution. A producer may sell directly to consumers
through door-to-door salesmen, direct mail or through his own retail stores.
Big firms adopt this channel to cut distribution costs and to sell industrial
products of high value. Small producers and producers of perishable
commodities also sell directly to local consumers.
Producer-Retailer-Customer:- This channel of distribution involves only
one middlemen called 'retailer'. Under it, the producer sells his product to big
retailers (or retailers who buy goods in large quantities) who in turn sell to the


ultimate consumers. This channel relieves the manufacturer from burden of
selling the goods himself and at the same time gives him control over the
process of distribution. This is often suited for distribution of consumer
durables and products of high value.
Producer-Wholesaler-Retailer-Customer:- This is the most common and
traditional channel of distribution. Under it, two middlemen i.e. wholesalers
and retailers are involved. Here, the producer sells his product to wholesalers,
who in turn sell it to retailers. And retailers finally sell the product to the
ultimate consumers. This channel is suitable for the producers having limited
finance, narrow product line and who needed expert services and promotional
support of wholesalers. This is mostly used for the products with widely
scattered market.
Producer-Agent-Wholesaler-Retailer-Customer:- This is the longest
channel of distribution in which three middlemen are involved. This is used
when the producer wants to be fully relieved of the problem of distribution
and thus hands over his entire output to the selling agents. The agents
distribute the product among a few wholesalers. Each wholesaler distribute the
product among a number of retailers who finally sell it to the ultimate
consumers. This channel is suitable for wider distribution of various industrial
products.
An entrepreneur has to choose a suitable channel of distribution for his product such
that the channel chosen is flexible, effective and consistent with the declared
marketing policies and programmes of the firm. While selecting a distribution
channel, the entrepreneur should compare the costs,sales volume and profits expected
from alternative channels of distribution and take into account the following factors:
Product Consideration:- The type and the nature of products manufactured is
one of the important elements in choosing the distribution channel. The major
product related factors are:




Products of low unit value and of common use are generally sold
through middlemen. Whereas, expensive consumer goods and
industrial products are sold directly by the producer himself.
Perishable products; products subjected to frequent changes in fashion
or style as well as heavy and bulky products follow relatively shorter
routes and are generally distributed directly to minimise costs.
Industrial products requiring demonstration, installation and after sale
service are often sold directly to the consumers. While the consumer
products of technical nature are generally sold through retailers.
An entrepreneur producing a wide range of products may find it
economical to set up his own retail outlets and sell directly to the
consumers. On the other hand, firms producing a narrow range of
products may their products distribute through wholesalers and
retailers.
A new product needs greater promotional efforts in the initial stages
and hence few middlemen may be required.

Market Consideration:- Another important factor influencing the choice of
distribution channel is the nature of the target market. Some of the important
features in this respect are:



If the market for the product is meant for industrial users, the channel
of distribution will not need any middlemen because they buy the
product in large quantities. While in the case of the goods meant for
domestic consumers, middlemen may have to be involved.
If the number of prospective customers is small or the market for the
product is geographically located in a limited area, direct selling is
more suitable. While in case of a large number of potential customers,
use of middlemen becomes necessary.
If the customers place order for the product in big lots, direct selling is
preferred. But, if the product is sold in small quantities, middlemen are
used to distribute such products.
Other Considerations:- There are several other factors that an entrepreneur
must take into account while choosing a distribution channel. Some of these
are as follows:




A new business firm may need to involve one or more middlemen in
order to promote its product, while a well established firm with a good
market standing may sell its product directly to the consumers.
A small firm which cannot invest in setting up its own distribution
network has to depend on middlemen for selling its product. On the
other hand, a large firm can establish its own retail outlets.
The distribution costs of each channel are also an important factor
because it affects the price of the final product. Generally, a less
expensive channel is preferred. But sometimes, a channel which is
more convenient to the customers is preferred even if it is more
expensive.
If the demand for the product is high, more number of channels may be
used to profitably distribute the product to maximum number of
customers. But, if the demand is low only a few channels would be
sufficient.
The nature and the type of the middlemen required by the firm and its
availability also affect the choice of the distribution channel. A
company prefers a middleman who can maximise the volume of sales
of their product and also offers other services like storage, promotion
as well as after sale services. When the desired type of middlemen is
not available, the manufacturer will have to establish his own
distribution network.
All these factors or considerations affecting the choice of a distribution channel are
inter-related and interdependent. Hence, an entrepreneur must choose the most
efficient and cost effective channel of distribution by taking into account all these
factors as a whole in the light of the prevailing economic conditions. Such a decision
is very important for a business to sustain long term profitability.
Effectiveness of distribution channels (HL Extension)
The effectiveness of different types of distribution channel
Direct marketing is where the goods are sold directly from the product direct to the
customer. A producer does not have to share its profit with intermediaries and so it is
a low cost channel. The producer controls the whole marketing process and as a result
can protect and maintain its brand image. Customers are increasingly using direct
sales though the internet and can purchase from the comfort of their own home
However, it can be expensive to set up these channels and all the cost of distribution
such as storage and damage rest on the producer. In addition, a recent trend is for
customers to search online for products and then purchase them physically from
outlets after making comparisons on price.
Wholesaler
A wholesaler is normally an intermediary between the producer and the retailer;
although some wholesalers have their own outlets. Wholesalers are prepared to buy in
considerable bulk from a producer. They break bulk by distributing smaller
quantities to individual retailers. Goods are normally stored in regional warehouses
where they are distributed using the wholesaler's vehicles to retailers.
Wholesalers, like major retailers, may have international networks and distribute
worldwide. Examples of multinational wholesalers are Makro and Costco.
The advantage for a producer of using a wholesaler is that the wholesaler will:






store the producer's output so freeing up space for new products
improve the producer's cash flow by purchasing in bulk
market the products to retailers
bear the cost of storage
bear the risk of storage such as theft, fire and damage
ensure that the distribution process is cost effective.
However, in return for the costs and risks they bear, wholesalers will expect a
significant discount from the producer to allow a mark-up when they sell the products
on to retailers. Producers cannot be sure that the wholesalers will maintain the brand
image.
Agents/Brokers
Agents and brokers are intermediaries between the producer and the wholesaler
and/or retailer. They are experts in certain markets and bring buyers and seller
together in return for a commission on the value of the sales. They very rarely take
possession of any physical items; they just a facilitate negotiations and the selling
process.
Agents and brokers are particularly useful when a firm is selling into a market or
geographic region, of which they have little knowledge and experience. Brokers and
agents will know the local market and, if it is in an overseas location, will help with
the language and the legal requirements. They may also negotiate joint ventures with
local firms.
Agents and brokers are probably best known in the buying and selling of land and
travel services, but virtually all markets require employ such intermediaries.
Retailers
A retailer is an intermediary, which buys products either from manufacturers or from
wholesalers and resells them to consumers. They come in all shapes and sizes from
the corner shop to the hypermarket. The advantage of manufacturers using retailers is
that they:



are prepared to buy in bulk
accept responsibility for storing stock and for any unsold items
may have strong customers loyalty which may is an attractive proposition for
the brands that they stock.
Clearly the disadvantage for the producer is that the retailer will demand a share of
the profits and they will also decide how, and where, to display the product. With
considerable competition for shelf space in multiple retailers, this placement of a
product is a key element of the purchasing decision.
Retailers themselves may choose to use the services of distribution specialists. Marks
and Spencer, for example, do not distribute their own products to individual stores.
This is done for them by a subsidiary of British Oxygen. M&S prefer to concentrate
on presentation at the point of sale.
Channels of distribution
There is considerable debate about how long distribution channels should be. Some
years ago the basic rule of thumb was that industrial goods had shorter routes than
consumer products, but this is now changing. Many of the traditional routes have seen
casualties as wholesalers and specialists have gone out of business.
Modern technology allows goods to be tracked along their distribution route and the
next buyer in the chain can remain fully informed of just where the products are.
Most producers will use a range of channels to distribute their products; this approach
is known as a multichannel distribution.
Supply Chain Management (HL Extension)
Purchasing and Supply Chain Management
Supply Chain Management is concerned with the flow of goods and services through
the organisation with the aim of making the firm more competitive.
A degree of control is sought over the supply process and businesses actively manage
the number of suppliers they use, implement outsourcing arrangements as necessary
and consider developing strategic partnerships where appropriate.
What caused the need for closer supply chain links?
Christopher (2005) identified a number of factors:




Shorter product life cycles requiring more efficient supply pipelines
Increasingly global supply chains requiring greater coordination
A move towards more flexible organisations that partner with others
(organisational integration)
More demanding customer service standards
Effective Supply Chain Management
Porter recognized that management of the supply chain and supply network could be a
source of competitive advantage. Supply chains today must be responsive and
reliable. Integration between the organisation and other chain members, both
upstream and downstream, should be facilitated by integrated information systems.
Reck and Long
Reck and Long (1988) devised a model that aimed to provide an insight into the
evolution of the purchasing function. Their strategic positioning tool identified a
four-phase development of purchasing within organisations.
Passive


Purchasing reacts to requests from other departments
The focus is on efficient transaction processing
Indepen
dent

A more professional approach to purchasing

During this phase, the importance of negotiation with suppliers to
securing the best process for individual products/services
purchased is recognized
Often include IT improvements and the creation of a purchasing
manager position to manage supplier negotiations

The potential for purchasing to support wider organisational goals
is recognized
This phase is often characterised by a centralised purchasing
department with organisation-wide buying policies and systems
The emphasis is co-ordination and compliance with centrally
negotiated contracts
The importance of careful supplier selection is recognized
Policies and procedures for supplier management are developed
Supportive
Integrative






Purchasing is now fully integrated in the major business
activities of the organisation
Proactive purchasing strategies are developed and followed
Purchasing is part of the firm’s strategic planning process and
purchasing strategy is aligned with corporate goals and strategy
The alignment of purchasing strategy with overall organisational
goals and strategy often leads to new requirements in suppliers’
performance and capabilities
Suppliers are viewed as partners and supplier management is
viewed as relationship management
Today, closely linked or joint communication and information
systems would facilitate this relationship
Cousins
His research revealed that all of the aspects identified and shown in the Strategic
Supply Wheel are inter-connected. Organisations need to balance these resources and
issues as a focus on any one particular area (relationship management) would be
detrimental to another area (performance management).
The research also examined the relationship type using the classification of
‘opportunistic’ (low level of co-operation with the supplier) versus ‘collaborative’
(high level of co-operation). The results showed that the more collaborative the
relationship the greater the degree of strategic alignment required
Supply Chain Networks
A supply chain network is an interconnecting group of organisations which relate to
each other through linkages between the different processes and activities involved in
producing products/services to the ultimate customer.
Historically, businesses in supply chains have operated relatively independently of
one another to create value for the ultimate customer. Independence was maintained
through holding buffer stocks and managing lead times.
Market and competitive demands are now, however, compressing lead times and
businesses are reducing inventories and excess capacity. Linkages between businesses
in the supply chain must therefore become much tighter. This condition is shown in
the integrated supply chain
The aim is to co-ordinate the whole chain, from raw material suppliers to end
customers. The chain should be considered as a network rather than a pipeline (a
network of vendors support a network of customers, with third parties such as
transport businesses helping to link the companies).
The potential for using the internet to allow customers and suppliers to acquire up-todate information about forecasting needs and delivery schedules is a recent
development, but one which is being used by an increasing number of companies.
Some supply chain relationships are strengthened and communication facilitated
through the use of extranets (intranets accessible to authorised outsiders)
Implications for supply chain management
Supply chain management involves optimising the activities of companies working
together to produce goods and services.
 Reduction in customers served – companies might concentrate resources on
customers of high potential value
 Price and inventory co-ordination – businesses co-ordinate their price and
inventory policies to avoid problems and bottlenecks caused by short-term
surges in demand.
 Linked Computer systems – closer links may be facilitated through the use of
Electronic Data Interchange (EDI) and through the use of a computer extranet
 Early supplier involvement in product development and component design
 Logistics design – certain product components can be added at the distribution
warehouse rather than at the central factory (manuals in certain language)
 Joint problem solving
 Supplier representative on-site.
The business case for supply chain management is the benefit to all the participants in
terms of the performance objectives of speed, dependability and cost.
Demand Networks
Products produced by demand networks are pulled into existence in response to
demand signals. Organisations within a demand network share information and
collaborate to produce a product or service the market is demanding.
A demand network is the result of companies evolving internally (within their
departments) and externally (with their partners). This evolution is a four-stage
process.
1. Reacting: departments optimise their operations to meet demand. Reacting
organisations cannot sense demand or tie it into corporate strategy – they
simply react to market conditions.
2. Anticipating: anticipating companies have developed internally to respond to
long and short-term demand. They often use lean production or Six Sigma to
bring order to their operations. They can anticipate upstream demand (demand
coming to them) but not downstream demand.
3. Collaborating: collaborating organisations have established external
relationships with business partners that allow intelligence to be gathered on
downstream demand. This allows better forecasting and adjustment of plans
4. Orchestrating: supply and demand have evolved into a flow of information
throughout the network. Companies plan new products and product life cycles,
and can begin to influence demand patterns.
To create competitive advantage, organisations within a demand network have to
manage three factors.
Alignment of shared incentives
Agility to respond to demand quickly
Adaptability to adjust the structure of the supply chain to meet demand
Supply Portfolios and sourcing strategies
Organisations may use a number of suppliers for their raw materials, and there are a
range of possible strategies open to an organisation when deciding who they will
purchase their supplies from such as quality, price, geographical dispersion, size and
expertise available.
The mix of suppliers should be optimised so that the organisation maximises the
benefits they offer and minimises any risks involved in supply – the result is a supply
portfolio.
The following strategies may be followed when deciding on a supply strategy.
1: Single: the buyer chooses one source of supply
Advantages
Stronger relationship with supplier
Possible source of superior quality due to increased opportunity for a supplier
quality assurance programme
Facilitates better communication
Economies of scale
Facilitates confidentiality
Possible source of competitive advantage
Disadvantages
Vulnerable to any disruption in supply
The buyer is dependent on the supplier
Supplier power may increase if no alternative supplier
The supplier is vulnerable to shifts in order levels
2: Multiple: the buyer chooses several sources of supply
Advantages
Access to a wide range of knowledge and expertise
Competition among suppliers may drive price down
Supply failure by one supplier will cause minimal disruption – it is easy to switch
between suppliers
Disadvantages
Not easy to develop an effective quality assurance programme
Suppliers may display less commitment
Economies of scale are neglected
3: Delegated: a supplier is given responsibility for the delivery of a complete subassembly (i.e. PC manufacturer and keyboards)
Advantages
 Allows the utilisation of specialist external expertise
 Frees up internal staff for other tasks
 The purchasing entity may be able to negotiate economies of scale
Disadvantages
 Quality control is difficult to maintain
 Loss of confidentiality if products use trade secrets
 Competitors may utilise the same external organisation so it is unlikely to be
source of competitive advantage
4: Parallel: involving mixing/combining the other three approaches to maximise the
benefits of each
Advantages
 If used correctly should provide an efficient/effective strategy
 Supplier failure will not halt production
 Price competition is created between suppliers
Disadvantages
 Can be complicated to manage
 Quality control is difficult to maintain
Information flows across supply chains and networks
One way of analysing and representing information flows is with the use of process
maps.
Process Mapping
Process mapping aims to identify and represent the steps and decisions involved in a
process, in diagrammatic form.
Process maps
 Describe the flow of materials, information and documents
 Display the tasks contained within the process
 Show that the tasks transform inputs into outputs
 Indicate the decisions that need to be made
 Demonstrate the relationships and dependencies between the process steps
There are many types of process maps. Two common types are:


A basic flowchart – provides a bird’s eye view
A deployment chart – provides an overview and also indicates where or by
whom actions are performed.
Process maps are important for several reasons
a. Changing systems and working methods without understanding the underlying
processes can lead to costly mistakes. It can also create conditions that make it
difficult for staff to work effectively
b. If organisations don’t understand a process they will not be able to manage it
effectively – and thus cannot improve it
c. Process mapping enables businesses to clearly define current processes,
identifying problem areas such as bottlenecks, delays or waste. This
knowledge provides a sold basis from which to develop solutions and plan
new improved processes
d. Process mapping enables an organisation to:
I. Establish what is currently happening and why
II. Measure how efficiently the process is working
III. Gather information to understand where waste and inefficiencies exist
and their impact on employees, customers and/or partners
IV. Develop new improved processes to reduce or eliminate inefficiency.