DISTRIBUTION OF MEDICAL
PRODUCTS
Theoretical questions
1. The essence of distribution. Planning and
organization of distribution.
2. Kinds of channels-structure and their functions.
Creation of channels. The organization of the
control and the estimation of their efficiency.
3. Kinds of trading intermediaries and the principles of
their selection.
4. The basic methods and systems of selling, their
elements and functions.
5. The concept of logistic.
6. Wholesale realization and retail trade of medical
products
• Marketing is defined as an exchange process. In
relation to distribution, exchange poses two
problems.
• Firstly, goods must be moved to a central location from the warehouses of producers that
make heterogeneous goods and that are
geographically widespread.
• Secondly, the goods that are accumulated from
diversified sources should represent a desired
assortment from the customers' viewpoint.
• These two problems can be solved by the
process of sorting, which combines
concentration (i.e., bringing the goods from
different sources to a central location) and
dispersion (i.e., picking an assortment of goods
from different points of concentration).
• There are two basic strategic questions that
need to be answered here. Who should perform
the concentration and dispersion tasks — the
manufacturer or intermediaries? Which
intermediary should the manufacturer select to
take the goods close to the customer?
Functions during distribution divide the
corresponding management into 2 kinds:
• Commercial, channel distribution of the
goods. Its functions are to provide the
purchase and sale of goods, to transfer of
the belonging.
• Physical distribution. Its functions are
storage, warehousing or transportation of
goods.
Components of the distribution
planning:
• To define a strategy of a distribution and organization of the
channels - structure;
• To define methods or types of the distribution channel, their
combination on groups of the goods and segments of the
markets;
• To define a number of levels of the channel;
• To choose the system of management of trade channels, forms
of legal and organizational relations;
• To define a supervising role of the firm - manufacturer or
trading firm;
• To create a network of wholesale or retail shops, warehouses,
etc.;
• To define routes of distribution;
• To analyze the possible efficiency of selling.
Kinds of channels-structure and their functions. Creation of
channels. The organization of the control and the estimation
of their efficiency
• The channel-structure strategy refers to the number of
intermediaries, who may be employed in moving
goods from manufacturers to customers.
• A company may distribute its goods to customers or
retailers without involving any intermediary.
• This comprises the shortest channel and may be
called a direct distribution strategy.
• Alternatively, goods may pass through one or more
middlemen, such as wholesalers and/ or agents. This
is an indirect distribution strategy.
Channels of distribution may be evaluated on such primary
criteria as :
• cost of distribution,
• coverage of market (penetration), customer service,
• communication with the market, and
• control of distribution networks.
Occasionally such secondary factors as support of
channels in the successful introduction of a new product
and cooperation with the company's promotional effort
also become evaluative criteria. Arriving at a distribution
channel, which will satisfy all these criteria, requires
simultaneous optimization of every facet of distribution,
something which is usually not operationally possible.
There are four types of the distribution
channels structure:
• Producer — consumer. The shortest, simplest channel
of distribution for consumer products is from the
producer to the consumer, with no middlemen involved.
• Producer —► retailer —► consumer. Many large
retailers buy directly from manufacturers.
• Producer —► wholesaler—► retailer —► consumer.
This is "traditional" channel for consumer goods. Small
retailers and small manufacturers by the thousands find
this channel the only economically feasible choice.
• Producer — agent — wholesaler — retailer —►
consumer. To reach small retailers, the producers often
use agent middlemen, who, in turn, call on wholesalers
that sell to stores.
For a choice of the channel of distribution
it is necessary to consider:
• A degree of intensity of selling (intensive,
exclusive, selective);
• Planned sales volumes;
• Features of goods;
• Opportunities of the manufacturer
(resources, the staff, competitiveness,
etc.);
• Results of the estimation of the channel
distribution by a set of criteria.
Intermediaries execute specific functions:
1. Buying: Act as purchasing agents for customers.
Anticipate customers' needs, have good knowledge
of market and sources of supply. Enable customers
to deal with only a few sales people rather than with
representatives of many producers.
2. Selling: Provide a sales force for producers to small
retailers and industrial users, at a lower cost than
producers would incur to reach these markets.
Customers often know and trust their local
wholesalers more than distant supplier.
– Dividing, bulk breaking: Wholesalers buy in
carload and truckload lots and then resell in
case lots or less, thus providing a saving
and a service to customers and producers.
– Transportation: It provides quick, frequent
delivery to customers, thus reducing their
risks and investment in inventory. Reduce
producers' and customers' freight costs by
buying in large quantities.
–
–
–
Risk bearing: In addition, simply by taking title to
products, wholesalers deduce a producer's risk,
tosses due to spoilage or fashion obsolescence are
then borne by wholesalers.
Market information: Wholesalers supply
information for their customers, regarding new
products, competitors' activities, special sales by
producers, etc.
Management services and advice: By offering
managerial services and advice, especially to
retailer customers, wholesalers have significantly
strengthened their own position in the market. The
existence of full-service wholesalers is dependent,
upon the economic health and well-being of small
retailers. Therefore, by helping the retailers, the
wholesalers really help themselves.
• So, these are granting of trading services:
maintenance with the information on the
market; support in promotion of the goods
and stimulation of selling; selection,
standardization and packaging of the
goods; storage of the goods in
warehouses.
• The intermediary wholesale enterprises in
the system of market relations are divided
into two groups: independent
intermediaries and dependent.
• Independent ones are the independent
intermediary organizations getting goods
in the property with their subsequent
realization to consumers.
• Distributors, dealers concern to this group
of intermediaries, jobber, trading brokers
(the distributors, who are not having
warehouse).
• The distributor is the independent intermediary
having the property right to the goods. It sells die
goods on its own behalf and at own expense.
Frequently distributors are constant
representatives of foreign firms.
• Dealers is the independent intermediary, who as
against others carries out after selling service
(the market of the equipment, home appliances).
• Jobber is the fine intermediary and resells the
goods.
Dependent intermediaries have no property right to the goods and
work for commission compensation. Brokers, commission agents
concern to dependent marketing intermediaries, agents (industrial
and marketing).
• Brokers are agent middleman whose prime
responsibility is to bring buyers and sellers together.
They furnish considerable market information regarding
prices, products, and general market conditions. Brokers
do not physically handle the goods, they do not work on
a continuing basis with their principals.
• Manufacturers' agents (frequently called manufacturers
representatives agents commissioned to sell part or all of
a producer's products in particular territories. The agents
are independent and are in no way employees of the
manufacturers. They have little or no control over the
prices and terms or sale; these are established by the
manufacturer.
• The commission merchants arrange, for any
necessary storage, grading, and other services
prior to the sale. They find buyers at the best
possible prices, make the sales. They deduct
their commissions, freight charges, and other
marketing expenses, and then remit the balance
as soon as possible to the local shippers.
• Selling agent is an independent middleman, who
essentially takes the place of manufacturer's
entire marketing department. These agents
typically perform more marketing services than
any other type of the agent middleman does.
Methods and systems of selling
• After selecting their distribution channels,
manufacturers should next decide upon the
number of middlemen (the intensity of
distribution) to be employed at the wholesale
and retail levels.
• There are three strategies to choose from here.
Instead, they form a continuum or points on a
scale, running from intensive distribution through
selective distribution to exclusive distribution.
Intensive Distribution
• Ordinarily the strategy of intensive
distribution is used by manufacturers of
consumer convenience goods. Consumers
demand immediate satisfaction with this
class of product and will not defer
purchases to find a particular brand.
Retailers often control the extent, to which
the strategy of intensive distribution can be
implemented.
Selective Distribution
• Selective distribution covers a wide range of the distribution
intensity.
• Selective distribution is a retail strategy that involves making a
product or group of products available only in certain markets. This
is the opposite of open distribution, where a product line is
distributed to as many markets as possible. There are several
reasons for employing this approach, including the potential for
limiting competition and minimizing distribution costs so that net
profits are higher.
• The process of selective distribution focuses on identifying specific
markets where a company’s products are highly likely to be favored
by consumers in the area, while avoiding distribution to areas where
there is less of a chance of gaining a significant market share. Often,
this situation comes about because a number of similar products are
already available through certain markets, and the level of
competition is higher. By choosing to distribute goods through
handpicked retailers within certain geographic regions, it is possible
to avoid some of this competition, while still tapping into the demand
for products of that type
Exclusive Distribution
• Under an exclusive distribution strategy, the supplier agrees to sell
only to a particular wholesaling middleman or retailer in a given
market.
• This type of distribution agreement is usually seen with high end and
luxury products. In an example of an exclusive distribution
agreement, a car manufacturer might only agree to allow three
dealers to sell its cars in a specific country. Dealers other than these
three who attempted to sell new vehicles from that manufacturer
would be doing so without authorization; one consequence of this
might be that the manufacturer would refuse to honor warranties or
provide support for cars sold at unauthorized dealers.
• The structure of an exclusive distribution agreement favors both the
manufacturer and the distributor or retailer. From the point of view of
people moving the product to consumers, having an exclusive
contract means that consumers must come to them if they want the
product. For example, if a cell phone provider has an exclusive deal
with a manufacturer of cell phones, people who want to use cell
phones made by that manufacturer must go through that cell phone
provider.
Systems of selling are divided:
• Simple (manufacturer - consumer);
• Complex (with participation of intermediaries);
• Vertical marketing systems (Corporate;
Contractual (intermediate); Administrative).
Vertical marketing systems
• Formally or informally coordinated
distribution channel where its independent
members work together to achieve greater
efficiency and economies of scale, and to
eliminate channel-conflict arising out of
disparate individual objectives.
Vertical marketing systems
• In corporate vertical marketing systems, the
production and marketing facilities are owned by
the same company.
• In administered vertical marketing systems, the
coordination of production and marketing
activities is achieved essentially through the
domination of one powerful channel member.
The manufacturer's brand and market position
are strong enough to get the voluntary
cooperation of retailers in matters of advertising,
pricing, and store display.
• In contractual vertical marketing systems,
independent institutions — producers,
wholesalers, and retailers — are banded
together by contract to achieve the necessary
economic size and coordination of effort.
• Three types of contractual systems can be
identified: wholesaler-sponsored voluntary
chains, retailer-owned cooperatives, and
franchise systems.
franchise systems
• The term franchise comes from a French word
which means "freedom."
• Politically, a franchise is the freedom to
participate in government, generally through the
right to vote.
• In business, franchise systems are business
models in which a company with a successful
product or business system allows other
businesses the right, or freedom, to operate
under their trade name for a fee.
• The original business which sells the right is
called the franchisor: the person or company
which purchases the right is called the
franchisee.
• In most franchise systems, the franchisor
maintains a great deal of control over the
product and services offered by the franchisee
in order to maintain brand consistency and the
reputation of his trademark or product.
• For example, the franchisor generally has very
strict terms governing marketing, product
quality, building design and operating
practices.
• An entrepreneur should carefully examine the
restrictions of prospective franchise systems to
make certain he is able to work comfortably
within those constraints.
• An investor needs to be aware that buying a franchise
from a successful company does not necessarily
guarantee his own success. The purchaser must make
certain he has the managerial ability required to run a
business, as well as the aptitude needed for the
particular franchise he chooses. If he has no
mechanical aptitude, for example, he may want to
stay away from franchise systems that specialize in
auto repair or maintenance. He should also make
certain that the success of the parent company is not a
result of regional issues, that the company has the
resources to offer adequate support, and that his local
area has not reached a saturation point for that type of
business.
• When investigating particular franchise systems, a
prospective purchaser should consider a number of
factors. He should know exactly what is included in
the franchise fee; for example, training, operations
manuals, guidance in site selection, and territorial
rights. The franchisor should be able to provide
projections of how much capital the investor needs,
how long it should take for the new franchise to open,
and when the investor can reasonable expect to
recover his initial investment. It is also important to
know how many other franchise offices will be sold
in the same area, and if there are any on-going
franchise fees.
Channels of distribution may be evaluated on
such primary criteria as
• cost of distribution,
• coverage of market (penetration),
• customer service,
• communication with the market, and
• control of distribution networks.
Occasionally such secondary factors as support of
channels in the successful introduction of a new product
and cooperation with the company's promotional effort
also become evaluative criteria.
To arrive at a distribution channel, which will satisfy all
these criteria, requires simultaneous optimization of
every facet of distribution, something, which is usually
not operationally possible.
For estimating the efficiency of distribution
channels the concept 3C and 6C is used:
The concept "3C":
• costs - сosts of distribution
• control - the control over the channel of
distribution
• coverage - scope of the market
The concept "6C":
•
•
•
•
costs Costs of distribution
control The control over the channel of distribution
coverage Scope of the market
capital The investments necessary for formation of
the channel distribution
• character Character of the channel, its conformity to
the goods, requirements of the manufacturer and the
consumer
• continuity Stability of the channel, orientation to
long-term cooperation.
• Physical distribution involves the flow of
products from supply sources to the firm, and
from the company to its customers.
• Executives, who manage physical distribution,
are responsible for developing and operating
efficient flow systems. Their goal is to move the
right amount of the right products to the right
time. Physical distribution costs are a substantial
part of the total operating costs in many firms.
Moreover, physical distribution is probably the
only remaining source of major cost reductions
in many companies.
• Physical distribution should be treated as a total system
of business action. In the past (and unfortunately even
now in too many firms), physical distribution activities
have been fragmented operationally and
organizationally.
• Applying the systems concept also means applying the
total-cost approach— that is, reducing the cost of the
entire system, rather than the costs of individual
elements in the system.
• However management should not strive only for the
lowest total cost of physical distribution. Instead, the
goals should be to effect the best balance between the
level of costumer service and the total cost.
• Sometimes a company can improve its market position
by providing a higher level of customer service, even
though this means an increase in physical distribution
costs.
The actual operation of a physical distribution system
requires management's attention and decision making in
five areas:
• (1) inventory location and warehousing,
• (2) materials handling,
• (3) inventory control,
• (4) order processing,
• (5) transportation.
Again, these areas should not be approached as
individual activities, but as subsystems of the
whole—the physical distribution system.