International Operations
Management
MGMT 6367
Lecture 09
Instructor: Yan Qin
Fall 2012
Outline
 What is a distribution channel?
 Importance of distribution channels
 Pros and Cons of using channel members
 Two key decisions in designing distribution channels:
 Length;
 Breath
 How to select a channel member?
 New trends in designing distribution channels
 Case study: 7-11 Japan Co.
Distribution
 Distribution is the process of getting products from the
manufacturer to the ultimate customer.
 Distribution is important because:
 It affects sales.
 It affects profits and competitiveness.
 Delivery is part of customer satisfaction.
Distribution decisions
 Distribution decisions include:
 Assessing the best distribution channels for getting products
to customers
 Determining whether a reseller network is needed to assist in
the distribution process
 Arranging a reliable ordering system that allows customers to
place orders
 Creating a delivery system for transporting the product to
the customer
What is a distribution channel?
 A distribution channel consists of a set of
interdependent organizations—such as
wholesalers, retailers, and sales agents—involved
in making a product available for use or
consumption.
Distribution channels
Three general situations:
 Companies, such as Dell, sell
directly to customers.
 Companies sell through
retailers only.
 Companies sell through
distributors and retailers.
Importance of distribution channels
 The design of distribution channels is one of most
important marketing decisions as
 It affects every other element of a manufacturer’s marketing
strategy.
 Channel choices commit to a company for a relatively long
time.
Questions to think about
 As noted in the definition, a manufacturer often requires
the assistance of others in order to reach its target market.
 Now think about the following questions:
 Why exactly does a company need others to help with the
distribution of their products?
 Wouldn’t a company that handles its own distribution
functions always be in a better position to exercise control
over product sales and potentially earn higher profits?
Benefits of using a channel member
 Cost savings in specialization
 Members of the distribution channel are specialists in what
they do and can often perform tasks better and at lower cost
than companies who do not have distribution experience.
 Reduced delivery time
 Channel members are often able to perform their job more
rapidly resulting in faster product delivery.
 Customers want to conveniently shop for variety
Benefits of using a channel member
 Wholesalers and retailers sell smaller quantities
 They allow customers to buy quantities that work for them.
 Manufacturers, however, prefer to ship products in large
quantities to be more cost effective in distribution.
 Create sales
 Channel members dealing customers directly may help create
demand for a particular product through their own
advertising efforts.
 Easier market penetration by selling through a local retailer.
Costs of using a channel member
 Loss of revenue
 Wholesalers and retailers are not likely to offer services to a
manufacturer unless they see financial gains in doing so.

Loss of communication control

Loss of product importance
 If a competitor is using promotional incentives in an effort to
push their product through the same channel members, the
manufacturer’s product may not get the attention the
manufacturer feels it should receive.
Three key considerations

When choosing a particular distribution strategy, a
manufacturer must balance three primary considerations:
 Efficiency: Getting products and services to retailers and/or
end customers at the lowest cost;
 Effectiveness: Market coverage and quality of services
provided;
 Control: Ability to determine timing and focus of
distribution efforts.
Two key decisions in channel design
 Determining the length of a distribution channel.
 That is, how many types of channel members should be
involved in moving the product from the manufacturer to the
ultimate customer.
 Determining the breath of a distribution channel.
 That is, how many of each type of channel members should
be included in the channel.
Length Vs. Breath
 Other organizations involved in the moving of a product
from a manufacturer to the ultimate customer are called
third-parties or intermediaries.
 Each layer of intermediaries is a "channel level".
 Length refers to the number of layers in a channel,
while breath refers to the number of intermediaries
at a layer.
Length of a distribution channel
 Some examples of channel levels in distribution:
 Channel 1:
Channel 1 is called a “Direct-marketing” channel since it has no
intermediaries involved. The manufacturer sells products directly to
consumers.
Length of a distribution channel
 Channel 2
Channel 2 consists of one layer of intermediaries, which are usually
retailers. It is an in-direct marketing channel.
Length of a distribution channel
 Channel 3
Channel 3 consists of two layers, Wholesaler(s) and Retailer(s).
This is also an indirect-marketing channel.
Length of a distribution channel
 Channel 4
There can be some other layers in a distribution channel.
Foreign manufacturers may employ long distribution channels
which may include exporters/importers.
Characteristics of short and long distribution channels
Short channels
Long channels
Market
factors
Business users;
Geographically concentrated;
Extensive technical knowledge and
regular service required;
Large orders.
Consumers;
Geographically dispersed;
Little technical knowledge and
regular service not required;
Small orders.
Product
factors
Perishable; Complex; Expensive
Durable; Standard; Inexpensive
Manufacturer
factors
Manufacturer has adequate resources
to perform channel functions;
Broad product lines;
When channel control is important.
Manufacturer lacks adequate
resources to perform channel
functions;
Limited product line;
When channel control in
relatively unimportant
Indirect distribution channels
 If a manufacturer decides not to sell directly to its
customers, it has two options:
 Take part in a Conventional system in which the
manufacturers uses independent intermediaries to move
products to customers.
 Construct a Vertical Marketing System (VMS) in which
manufacturers, wholesalers, and retailers act as a unified
system. One channel member owns the others, has contracts
with them, or has so much power that they all cooperate.
Conventional systems
 A conventional system tends to be fragmented. None of them
has too much control over the others.
 Reasons for participating a Conventional system:
 The manufacturer believes that those intermediaries can perform
more efficiently than themselves.
 The manufacturer cannot afford the cost of establishing its own
distributorship.
 The manufacturer want to avoid the risk by having other members
in the channel take title to the product.
Vertical Marketing System
 A VMS can be dominated by the manufacturer, wholesaler, or
retailer.
 There are three major types of vertical marketing systems:
 Corporate VMS: A VMS that combines successive stages of
production and distribution under single ownership—channel
leadership is established through common ownership.
 Contractual VMS: a VMS in which independent intermediaries join
together through contracts.
 Administered VMS: a VMS that coordinates the system, not
through common ownership or contractual ties, but through the
size and power of one of the channel members.
Corporate VMS
 In a Corporate system, a company can exert tight control
over marketing activities due to ownership.
 For example, it allows Hart, Schaffner and Marx to set and
maintain its list price on men's clothing.
 Oil companies to control the quality of the gasoline pumped
at their service stations.
 Goodyear to achieve better coordination in executing its
promotional campaign.
Corporate VMS – Cons.
 Big financial investment
 For example, the US Pioneer, which sells hi-fi audio
components, figures it will need fixed investments of
$100,000 to establish a wholly owned distributorship, and
another $100,000 to open a small hi-fi specialty store of its
own.
 Less flexibility
Contractual VMS
 Franchising prevails in contractual systems.
 Two types of franchising arrangements:
 Product trade-name franchising, in which the franchisee
acquires the right to market the franchisor's product within a
designated market area.
 Business format franchising, in which the franchisee acquires
the right to utilize the business know-how accumulated by
the franchisor.
Administered VMS
 In an Administered VMS, the channel member that wields
the most economic power within the channel can force
greater cooperation and support from other members.
 Manufacturers of a top brand, such as P&G, can obtain
strong trade cooperation and support from resellers.
 Large retailers such as Wal-Mart can exert strong influence
on the manufacturers that supply the products they sell.
Breath of distribution channels
 A company has three options when determining the
relative intensity of market coverage:
 Seek intensive distribution in as many available outlets as
possible in a given market area;
 Seek selective distribution in a limited number of outlets
carrying the manufacturer's product in a given market area;
 seek exclusive distribution by designating only one outlet per
market.
Products suitable for Intensive/Selective
 An intensive distribution strategy suits items with wide appeal
across broad groups of consumers, such as convenience goods.
 Selective distribution strategies are suitable for shopping
products such as clothing, furniture, household appliances,
computers, and electronic equipment for which consumers are
willing to spend time visiting different retail outlets to compare
product alternatives.
 Exclusive distribution is typically used with products that are
high priced, that have considerable service requirements, and
when there are a limited number of buyers in any single
geographic area.
How to select channel members
 Criteria may include:
 Market Coverage: Does the profile of existing customers
match your target market profile? Is the number of
customers big enough to meet the required distribution
penetration?
 Sales Forecast: How many can they sell? What are their
forecasts based upon? Do they give a 'best, worst and average’
forecast?
 Cost: What will it cost in terms of discounts, commissions,
stock investment and marketing support?
How to select channel members
 Criteria may include: (Cont.)
 Profitability: How much profit will the distributor generate
for the supplier?
 Other Resources: Does the target market require anything
special such as technical advice, installation, quick deliveries,
instant availability? If so can the distributor provide it?
 Competition: Do they distribute any competitor's products?
How to select channel members
 Criteria may include: (Cont.)
 Control: Do they have a reporting system in place? How do
they deal with problems? How often are review meetings
scheduled? Can you influence the way they present your
products?
 Motivation: Does the agent or distributor convey a sense of
excitement and enthusiasm about the product? What about its
sales force - what's their reaction?
Multi-channel distribution systems
 A multi-channel distribution system is a distribution
system in which a single firm sets up two or more
marketing channels to reach one or more customer
segments.
 With each new channel, the company expands its sales and
market coverage and gains opportunities to tailor its
products to the specific needs of diverse customers.
 What can be the disadvantages?
Designing a distribution channel

Channel design can consist of the following four steps:
1. Segmentation
 Begin with the question: “How does the customer want
to be met in the market place?”.
 Understand the needs of different market segments.
2.
Positioning
 Identify the channel that optimally serves each of the key
segments. Decisions to make at this step include the
specific activities to offer in a channel, the channel
members to include, and the distribution intensity.
Designing a distribution channel
3.
Targeting
 Decide on the segments to serve and make adjustments to
the initial channel design based on realistic considerations.
4.
Implementation
 Address issues of power, conflict, and channel
coordination.
 Three types of channel conflicts:
1.
2.
3.
Vertical: conflicts between supplier and reseller within a
given channel;
Horizontal: conflicts among members at the same layer;
Multi-channel: conflicts among different channels.
Recent trends
 Customer self-service
 More customers will rely on technology to perform
tasks that previously had been done by their distributors.
Internet has proven to be an invaluable tool to check
order status, learn about new products, and etc.
 Companies need to find new ways to create value for
customers.
Recent trends
 Logistics and fulfillment
 Wholesale distribution may lose its longstanding share of
channel sales as logistics carriers start to provide wholesale
distribution functionalities.
 Technology spending
 To better align with their customers, wholesale distributors
will increase their IT spending to gain insights into customerperformance metrics and to develop new ways to meet
customer requirements.
Case study: 7-11 Japan Co.
 This case illustrates how a firm can be successful by
structuring its supply chain to support its corporate
strategy. Once 7-11 Japan decided to provide
responsiveness by rapid replenishment, it structured its
facilities, inventory, information, and distribution to
support this decision.
 This case also brings up the question of whether the same
approach can work in the United States.
Case study: 7-11

Please read the case “7-11 Japan Co.” purchased from
Harvard Business Publishing and think about the following
questions. Sample answers are provided in the PDF
document titled “7-11 sample answers” under the same
learning module:
 What can the advantages of a market-dominance strategy?
 A convenience store chain attempts to be responsive and
provide customers with the products they need at the right
time and location. So what can be some alternative
approaches for a convenience store chain to achieve the
desired responsiveness?
Case study: 7-11

Case-related questions: (Cont.)
 What did 7-11 do in areas such as facility location, inventory
management, distribution, and information infrastructure to
support its supply chain strategy?
 What factors attributed to the success of 7Dream in Japan?
 7-11 was planning to duplicate its successful Japanese supply
chain structure in the United States with the introduction of
CDCS. What are the pros and cons of this approach?
Next Week

Facility Network
◦ Logistics Network Configuration
◦ Orientation of Facility Networks
◦ Location Methods