Distribution
system
A farmer in Srinagar has an apple orchard. Once the
apples are ripened he negotiates with an agent of Delhi.
The agent negotiates and sells them to a wholesaler at
New Delhi sabzimandi. The wholesaler then distributes
them to various retail fruit vendors throughout Delhi by
selling smaller quantities.
Finally, we purchase apples from those vendors as per our
requirement. Thus, we find that while coming from the
producer at Srinagar, the product reaches the consumers
by passing through several hands like an agent, a
wholesaler and a retailer. All these three are called
middlemen.
These middlemen are connecting links between
producers of goods, on one side and consumers,
on the other.
They perform several functions such as buying,
selling, storage, etc. These middlemen constitute
the channels of distribution of goods.
Thus, a channel of distribution is the route or
path along which goods move from producers to
ultimate consumers.
Distribution Channels
DISTRIBUTION CHANNELS
People and firms involved
in the transfer of title to a product
as the product moves from producer to
ultimate consumer or business user
Producers
Middlemen
Final
Consumer
Or
Business
User
• A path through which goods and services
flow in one direction (from vendor to the
consumer), and the payments generated by
them that flow in the opposite direction (from
consumer to the vendor).
• Each intermediary receives the item at one
pricing point and moves it to the next higher
pricing point until it reaches the final buyer.
This is called channel of distribution.
Middlemen
Middlemen
A business firm that
renders services directly
related to the sale/purchase
of a product as it flows through
from producer to consumer
You can eliminate middlemen, but not the
essential distribution activities they
perform
Middleman Activities
Provides
Market
information
Negotiates
Interprets Promotes
consumers’ Producer’s with
products
customers
wants
A. Sales Specialist for Producers
Owns
Shares risks products
Provides
financing
Stores
products
Subdivides
large quantities Provides
financing
of a product
Makes Products
Readily available
B. Purchasing Agent for Buyers
Anticipates
Wants
Stores
products
Transports
products
Guarantees
products
Types of Channel
• Direct Channel -In this channel, producers sell
their goods and services directly to the
consumers. There is no middleman present
between the producers and consumers. The
producers may sell directly to
consumers through door-to-door salesmen
and through their own retail stores. For
example, Bata India Ltd, HPCL, Liberty Shoes
Limited has their own retail shops .
Also called Zero level channel
Channel structure and levels
(Consumer Goods)
Producers of consumer goods
Agent
wholesaler
Merchant
wholesalers
Retailers
Retailers
Ultimate consumers
Merchant
wholesalers
Retailers
Indirect Channel
• If the producer is producing goods on a large
scale, it may not be possible for him to sell
goods directly to consumers. As such, he sells
goods through middlemen. These middlemen
may be wholesalers or retailers.
• One level- super markets
• Two level – FMCG
• Three level- FARMERS
Major Channels of Distribution
(Services)
Producers of services
Agents
Ultimate consumers or Business users
Wholesaling
WHOLESALING
All activities related to the sale in
large quantities
of goods and services
to retailers, and
other organizations even to other
wholesalers.
If working on commission they are
called agents.
WHOLESALER
• Person or firm that buys large quantity of goods from
various producers or vendors, warehouses them, and
resells to retailers.
• Wholesaling refers to all activities performed in
selling goods and services to those who buy for resale .
• They also perform such functions as warehousing,
transportation, financing and risk bearing.
Wholesalers also provide market information and
management services and advice to the producers.
• Wholesalers who carry only non-competing goods or
lines are called distributors
Characteristics of
Wholesalers
• Wholesalers buy goods directly from producers or
manufacturers.
• Wholesalers buy goods in large quantities and sells in
relatively smaller quantities.
• They may employ a number of agents or workers for
distribution of products.
•
They generally provides credit facility to
retailers.
• He also provides financial assistance to the
producers or manufacturers.
• In a city or town they are normally seen to be
located in one particular area of the market.
For example, you can find cloth merchants in
one area, book publishers and sellers in one
area; furniture dealers in one area etc.
Functions of Wholesalers
• Collection of goods: A wholesaler collects goods from
manufacturers or producers in large quantities.
• Storage of goods: A wholesaler collects the goods and
stores them safely in warehouses, till they are sold
out. Perishable goods like fruits, vegetables, etc. are
stored in cold storage.
•
Distribution: A wholesaler sells goods to different
retailers. In this way, he also performs the function of
distribution.
• Financing: The wholesaler provides financial
support to producers and manufacturers by
sending money in advance to them. He sells goods
to the retailer on credit. Thus, at both ends the
wholesaler acts as a financier.
• Risk taking: The wholesaler buys finished goods
from the producer and keeps them in the
• warehouses till they are sold. Therefore, he
assumes the risks arising out of changes in
• demand, rise in price, spoilage or destruction of
goods.
Additional Functions
• Provide ready access to a supply of
goods to retailers.
• Assemble and arrange goods of a
compatible nature from a number of
producers for resale.
• Minimize buyer transportation costs by
buying goods in larger quantities and
distributing them in smaller amounts
for resale.
Economies of transaction in Distribution
A
B
C
D
Producers
A
B
C
D
Wholesaling middleman
1
2
3
4
A
5
Retailers
Four producers each sell directly
to 6 retailers, resulting into 24
transactions
6
1
2
3
4
5
Retailers
Four producers use the same
wholesaling middleman, reducing
the number of transactions to 10
6
WHOLESALERS
MERCHANT WHOLESALRS
FULL SERVICE
GNERAL
MERCHANDISE
WHOLESALER
LIMITED
SERVICE
CASH AND CARRY
DROP SHIPPERS
LIMITED LINE
WHOLESALER
MAIL ORDERS
SPECIALITY LINE
WHOLESLER
TRUCK
WHOLESALERS
AGENTS
MANUFACTURERS
AGENT
SELLING AGENTS
TYPES OF WHOLESALERS
Merchant Wholesalers
• Merchant wholesalers are independent
business enterprise.
• They take title to the products they
deal in.
• Broadly, merchant wholesalers are of
two types-full-service wholesalers and
limited-service wholesalers.
Merchant Wholesalers
Full Service Wholesalers, Full range of services – Stocking,
Advertising, personal selling, trade
and Distributors
Related advise, delivery of product
Credit to retailer etc.
Limited Service
wholesalers
Only a few functions.
Full service
• General merchandize
wholesaler
• Limited line wholesaler
• Specialty wholesaler
Limited service
• Cash and carry stores
• Drop shippers
• Truck wholesalers
• Mail order wholesaler
•
Full-service wholesalers provide numerous services
to customers. Delivery, warehousing, credit,
promotional assistance, and general information
about operations may be available to interested
customers. Some merchant wholesalers are also
involved in, packaging, and coordinating the
marketing strategy of products they carry.
(a) General merchandise wholesalers are full-service
merchant wholesalers who carry a very wide
product mix including such products as drugs,
hardware, electrical supplies, plumbing supplies,
nonperishable foods, cosmetics, soaps, detergents,
and tobacco. General merchandise wholesalers
typically serve neighborhood grocery stores, small
department stores, and nonbusiness organizations.
• (b) Limited-line wholesalers are full-service merchant wholesalers who carry only a few
product lines, as opposed to the wide variety carried by general merchandise
wholesalers. Limited-line wholesalers do, however, offer services similar to those of
general merchandise wholesalers.
(c) Specialty-line wholesalers carry a very limited variety of products. Generally, these
merchant wholesalers carry one product line or a few items within a product line
designed to meet their customers' specialized requirements.
Limited Line Wholesaler
• (a)Drop shippers take title to products and negotiate sales. The
distinguishing characteristic of drop shippers is that they do
not physically handle products. The physical inventory may
actually remain with the producer or in a public warehouse.
Drop shippers often deal with products that are inefficient to
ship or products that could not be sold at competitive prices if
the wholesaler had to cover the cost of physically handling
them. Drop shippers are concerned mainly with facilitating
exchange through selling activities. They assume title to the
product. If the products are not sold, then drop shippers
assume the loss.
• Cash-and-carry wholesalers are limited-service
wholesalers that sell to customers who will pay cash
and furnish transportation or pay extra to have
products delivered. These middlemen usually handle a
limited line of products such as groceries, construction
materials, electrical supplies, or office supplies.
• Mail-order wholesalers sell through direct mail by
sending catalogs to retail, industrial, and institutional
customers; this is another example of limited-function
wholesaling. Wholesale mail-order includest usually
jewelry, cosmetics, specialty products, or automobile
parts usually serve dispersed geographical areas,
where retailers find mail-order purchasing convenient
and efficient.
• Inmac uses a catalog to sell a complete line of 3,000
different computer accessories and supplies. Inmac’s
catalogs are printed in six languages and distributed to
business customers in the United States, Canada, the
United Kingdom, Germany, Sweden, the Netherlands,
and France. Many of these customers – especially
those in smaller towns – don’t have a local wholesaler.
• Truck wholesalers- provide transportation and deliver
products directly to customers for inspection and
selection. Usually a truck wholesaler has a regular
route and calls on retail stores and institutions to
determine their needs. These middlemen are often
small operators who own and drive their own trucks.
They play an important part in supplying small grocery
stores with such perishable products as fruit and
vegetables. Also, meat, potato chips, supplies for
service stations, and tobacco products are sometimes
supplied by truck wholesalers. Cash purchases and
limited services are typical.
Agent wholesaling
• Independently owned
• Do not take title to products being
distributed
• Actively negotiate sales or
purchase of products.
• MANUFACTURERS AGENT AND SELLING
AGENT
Manufacturers' agents
•
Represent several sellers.
• They enter into agreement with manufacturers regarding
territories, selling price, order handling, and terms of sale
relating to delivery, service, and warranties.
• Most manufacturers' agents are small establishments with only
a few employees.
• They are restricted to a particular territory and perform
functions for manufacturers similar to those of a sales office.
• Professional salespersons who contact potential buyers are
highly skilled in selling.
• By concentrating on a limited number of products, these
middlemen are able to provide an intensified and coordinated
sales effort that would be impossible with other distribution
methods.
• In addition, manufacturers' agents are able to spread operating
expenses among noncompeting products and to offer each
manufacturer lower prices for services rendered.
• The products handled by manufacturers' agents must be
noncompeting and complementary.
• Some agents assist retailers in advertising and in maintaining a
service organization. The more services offered, the higher the
agent's commission.
• Selling agents market either all of a specified product line or a
manufacturer's entire output. Selling agents essentially have
control over manufacturers' marketing efforts and may be
used in place of a marketing department. These agents have
full authority with regard to prices, promotion, and
distribution. They assume the functions of a sales department
for sellers.
Selling agents are used most often by small firms or by
manufacturers whose seasonal production or other
characteristics make it difficult to maintain a marketing
department.
Factors suggesting which type of Middlemen
should be used in a Channel
Factors
Nature of product
Favoring Agent
Wholesaling Middlemen
Nonstandard, perhaps
made to order
Favoring Merchant
Wholesalers
Standard
Product’s gross margin Small
Relatively large
Number of customers
Few
Many
Concentration of
customers
Concentrated
geographically and in a
few industries
Dispersed
geographically and in
many industries
Frequency of ordering
Relatively infrequently
Frequently
Time between order
and receipt of
shipment
Customer satisfied with
relatively long lead time
Customer requires or
desires shorter lead
time
STRATEGIC ISSUES IN
WHOLESALEING
•
•
•
•
•
TARGET MARKET DECISION
MARKETING MIX
FINANCIAL MANAGEMENT
SALES MANAGEMENT
INVENTORY MANAGEMENT
retailer
• Meaning
• Characteristics
• Function
Intensity of Distribution
Distribution
through
every
distribution
outlet in
the market
Distribution
through
multiple but ,
Not all
outlet in
the market
Intensive
Selective
Distribution
through a single
wholesaling
middleman
and/or retailer
in the market
Exclusive
Designing a Distribution Channel
Specify
the
role
of
distribution
Select
the Most
Suitable
Type Of
channel
Determine
Intensity
Of
distribution
Choose
Specific
Channel
members
Well
Designed
Distribution
Channel
Choice of Channels: Market
Type
of
Market
Number of
potential
customers
Geographic
concentration
Choice of Channels: Product
Perishability
Unit
Value
Technical
Nature
Choice of Channels: Middleman
Availability of desired
middlemen
Services provided by
middlemen
Producer’s and
middlemen’s policies
Choice of Channels: Company
Desire
for channel control
Ability
of management
Financial resources
Vertical Marketing
Systems (VMS)
• a tightly coordinated distribution channel designed
to improve operating efficiency and marketing
effectiveness.
• Corporate VMS: One firm owns other firms in
channel or the entire channel.(Easy Day, Bata)
• Contractual VMS: Independents work together for
much greater effectiveness.(franchise)
• Administered VMS: Relies on economic power of
one channel member. (HUL , P& G)
15 - 45
Horizontal Integration
•
Joining of two or more corporations on the same level for the purposes of
pursuing a new marketing opportunity.
•
Usually a horizontal marketing system is established so that the individual
members can combine resources to make the most out of the marketing
situation.
•
Products from each member can be marketed and/or distributed together,
such as a bottle manufacturer combining with a producer of some beverage.
The two products are marketed together, allowing the two companies to
combine their marketing resources and accomplish much more than either
one might accomplish alone.
MULTICHANNEL MARKETING
SYSTEM
• system in which a producer uses more that one channel of
distribution, commonly, producers who use multichannel
marketing systems operate their own retail stores as well as
sell through other wholesalers and retailers.
• The objective of the companies doing the marketing is to
make it easy for a consumer to buy from them in whatever
way is most appropriate.
• To be effective multichannel marketing needs to be supported
by good supply chain management systems, so that the
details and prices of goods on offer are consistent across the
different channels.
Channel management
• Recruiting channel members- is a continuous
process.
• Even retailers choose manufactures
• Screening the applicant
Criterion for selection
•
•
•
•
Financial ability
Sales factors
Product factor
Experience factor
Channel Management Cont……
• Motivating channel members
• training channel members
• Evaluating Channel members
Channel conflict
• Channel conflict arises when one channel
member believes another channel member is
engaged in behavior that prevents it from
achieving its goals.
• Disintermediation is channel conflict that
arises when a channel member bypasses
another member and sells or buys products
direct.
Conflict in Channels
Vertical
Producer
vs.
Wholesaler
Producer
vs.
Retailers
Conflict in Channels
Horizontal
Middlemen
of the same type
Retailer
Retailer
Different types
of middlemen
on the same level
Retailer
Retailer
Types of conflict
A. CLASHES OVER DOMAIN- domain consists of
1. Product Range- keeping products of many
manufacturers
2. Population and territory coverage- competing
for the same customer.
3. functions
B. Goal incompatibility
Transportation
• Transportation costs limit the market
spread.
• Transport cost add little to the cost of
products that are already valuable relative
to their size and weight.
• It is a large part of total cost for heavy
products of low value.
TRUCKING—FLEXIBLE AND
GROWING
• The method is most favoured by business
• trucks offer fast, frequent, and economic
delivery to more destinations in the country
than any other mode.
AIR FREIGHT—FAST BUT
EXPENSIVE
• high cost
• businesses typically use air only for the
movement of valuable or highly-perishable
products.
WATER CARRIERS—SLOW BUT
INEXPENSIVE
• There are two basic types of water carriers:
inland or barge lines, and oceangoing deepwater ships.
• Barge lines are efficient transporters of bulky,
low-unit-value commodities such as grain,
gravel, lumber, sand, and steel. Barge lines
typically do not serve small businesses.
• Oceangoing ships, on the other hand, operate
in the Great Lakes, transporting goods in
international commerce.
• Sea shipments are an important part of
foreign trade, and thus are of vital importance
to businesses seeking an international market
share.
RAILROADS—LONG DISTANCE
SHIPPING
• Railroads continue to present an efficient
mode for the movement of bulky commodities
over long distances.
• These commodities include coal, chemicals,
grain, non-metallic minerals, and wood
products
PIPELINES—SPECIALIZED
TRANSPORTERS
• Pipelines are utilized to efficiently transport
natural gas and oil products from mining sites
to refineries and other destinations.
INTERMODAL SERVICES
• business owners often take advantage of
multi-mode transportation.
• Under these arrangements, business owners
can utilize a given transportation mode in the
section of the trip in which it is most cost
efficient, and use other modes for other
segments of the transport.
• Overall costs are often significantly lower
under this arrangement than with singlemode transport.
Comparison of Transportation Methods
Transportation Method
Selection Criteria
Rail
Water
Highway
Pipeline
Air
Speed (door-to-door
time)
Medium
Slowest
Fast
Slow
Fastest
Cost of transportation
Medium
Lowest
High
Low
Highest
Reliability in meeting
delivery schedules
Medium
Poor
Good
Excellent
Good
Variety of products
carried
Widest
Widest
Medium
Very limited
Somewhat
limited
No. of geographic
locations served
Very many
Limited
Unlimited
Very limited
Many
Most suitable products
Long hauls of carload
quantities of bulky
products, when freight
costs are high in relation
to product’s value
Bulky, lowvalue
nonperishable's
high
value/margin
goods
Oil, natural
gas,
High-value
perishables,
where speed of
delivery is allimportant
Dead Stock
• Merchandise that cannot be sold. This type of
product has never been worn, used or sold
and has been in inventory for an extended
period of time. It often has original packaging
and tags.
• Also Known As: NOS (Never Off Shelf or New
Old Stock)
METHODS OF LIQUIDATEING
THE DEAD STOCK
• The most popular method of liquidating dead stock is to
return the product to the vendor in which it was
purchased from — granted not too much time has passed
since it's original purchase date, and it doesn't violate
the vendor's return policy.
• dollar for dollar exchange- if a distributor returns Rs
5,000 worth of product, they have to buy Rs5,000 worth.
• Returning the vendor at a lower cost
• enticing sales employees with monetary incentives to
clear out the unwanted product.
• Selling it at a discount
• dead stock by pairing it with a good selling
product and sell it as a bundle
• Swapping dead items with other distributors
across the country also proves worth while.
One Man's trash is another man's treasure.
• some distributors as a last resort will donate
the product to charitable organizations and
take a tax write-off.