Distribution Problems
Distribution is the movement of products from one
place to another.
DISTRIBUTION CHANNELS
A distribution channel is the route taken by a product as it goes from manufacturer to the end
user, the customer. Some common channels of distribution are as follows:
Direct Marketing
Some businesses sell directly to its customers, without any other parties being involved.
Examples of direct distribution channels are buying fudge at a Sunday market where you give
your payment direct to the fudge maker, or buying directly from a website. Some
manufacturers have factory shops from which they sell directly to customers. Services are
also usually distributed straight to the customer, e.g. hairdressers and accountants.
Distribution through intermediaries
An intermediary is a link between the producer and the customer. Another name for an
intermediary is “middle man”.
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Retailers buy large quantities from suppliers and sell in smaller quantities to customers.
This is of service to the manufacturers who don’t want to sell in small quantities to many
consumers, and to consumers who do not want to buy in bulk. Retailers sometimes
provide other services that add value to what they sell, for example, home delivery, giftwrapping or repair services. The use of retailers is a one-level distribution channel
because the retailer is the one intermediary involved.
A wholesaler buys goods from manufacturers and sells them to retailers. The use of
wholesalers is an example of a two-level distribution channel.
A manufacturer may use an intermediary called an agent or broker. These intermediaries
bring buyers and sellers together. Agents are often used when selling into a foreign
country. They usually have better knowledge of the laws, needs of consumers and trading
conditions in that country.
WHAT IS THE BEST DISTRIBUTION CHANNEL FOR A BUSINESS?
Various factors must be considered.
 Nature of the product
Is the product complex or technical? Complex products are more likely to be sold by
specialist distributors or agents.
Is the product customised/made to order? A direct distribution approach is usually best for
a product that is made to the customer’s specifications.
Desired image for the product ~ if intermediaries are to be used they must be suitable and
relevant for the product.
 The business
Its size and scope ~ can it afford an in-house sales force?
Its marketing objectives.
Does it already have a distribution network, or will this need to be established?
How much control does the firm want over distribution? The longer the channel the less
control the firm has.
 The market
How geographically spread is the market?
Is the market domestic only, or international?
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Extent and nature of the competition ~ which distribution channels and intermediaries do
competitors use?
Legal issues
Are there any limitations on sale? For example, drugs that need a doctor’s prescription can
only be sold through pharmacies.
What are the risks if an intermediary sells the product to an inappropriate customer?
DISADVANTAGES OF USING INTERMEDIARIES IN THE DISTRIBUTION
CHANNEL
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Loss of revenue
Intermediaries make a profit for their part in the distribution process. They are either made
a direct payment by the manufacturer, e.g. shipping costs plus a mark-up, or they sell the
products to retailers at a higher price than they bought the goods from the manufacturer
(again, by adding a mark-up).
The manufacturer therefore sells the product to the intermediaries at costs lower than the
price at which the intermediaries sell to the final customers. A greater profit would be
made if the manufacturer been able to manage the distribution.
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Loss of communication control
The manufacturer loses control over what message is being conveyed to the final
customers. The reseller may engage in personal selling in order to increase product sales
and may possibly exaggerate the benefits of the product. There is potential for
miscommunication with end users.
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Loss of product importance
The importance given to a manufacturer’s product by the members of the distribution
channel is not under the manufacturer’s control. A competitor’s product may gain greater
importance to the intermediary if that business is offering a higher promotional incentive.
INVENTORY ISSUES
Stock Levels
Careful control of stock levels can improve business
performance. Having too much stock may mean that money is
tied up unproductively, but inadequate stock can lead to delays
in production and late deliveries. Efficient inventory control
involves finding the right balance between keeping stock levels
as low as possible so that costs are minimised, while not
allowing stock to run out to the disappointment of customers.
Factors that influence stock levels:
 Demand ~ sufficient stocks need to be kept to satisfy normal demand as well as ‘buffer’
stock held for unforeseen increases in demand or breaks in supply.
 Stockpiling ~ some firms stockpile stock. For example, confectionary businesses build up
stocks of Easter eggs in the few months leading up to Easter.
 Costs of stock holding ~ stocks of raw materials, components and finished goods occupy
space in buildings. The business will also need to pay heating, lighting, insurance and
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other associated costs. Some products may need special storage conditions such as
refrigerated facilities for certain food items.
Type of stock ~ only small stocks of perishable items can be held. The stock levels of
baked goods should be low; ideally the entire stock will be sold in a day. The ‘life’ of
stock does not only depend on its perishability. For example, holding high levels of highfashion garments would be unwise as fashions may change and the garments may need to
be sold below cost.
Available working capital ~ a business that is short of working capital will not be able to
purchase more stock, even if it is needed.
Lead time ~ this is the amount of time it takes for stock to be ordered, received, inspected
and made ready for use. The longer the lead time, the higher the minimum stock level is
needed.
Just-in-case and Just-in-time
These terms refer to two approaches to stock levels.
 Just-in-case (JIC) manufacturing is the traditional model of production, in which products
are created in advance and in excess of demand. The firm is always able to respond to
orders. There is not a panic situation when stocks run out, but the disadvantage is the
storage space necessary and funds being tied up in stock that is sitting idle on warehouse
shelves.
 In contrast a Just-in-time (JIT) strategy meets the principles of lean production. The firm
does not allocate space to the storage of components or finished goods, but instead orders
them or manufactures them when required. There is no over-production and the
streamlining reduces storage space and therefore costs.
OVERCOMING CULTURAL BARRIERS
Given the scale and growth rate of the global economy, it is essential that businesses wishing
to trade in or with overseas countries understand the cultural etiquette of the countries.
The distinct cultures can make navigation through the market more
difficult. For example, Chinese business tends to be completed through
contacts rather than contracts. Establishing relationships based on
mutual respect is a fundamental aspect of both the Chinese culture and
business place. Professional relationships tend to be built through faceto-face social interaction, such as over lunch or dinner. The simple act
of shaking hands can be extremely significant. If a Western business
doesn’t have an on-the-ground presence in China and communicates
solely by telephone, it will be very difficult to build business relationships.
Establishing local relationships with overseas suppliers is, therefore, essential. Having a
presence on the ground, either directly or via an intermediary, can help businesses better
manage transactions and help develop their reputation with local suppliers. Building local
relationships can also help overcome any language barriers. In order to secure business and to
negotiate payment terms with China, for example, it is vital to be present with a native
language speaker, be it a translator or a business associate. This is not just to assist with
translation, but also to help provide guidance on customary practices.
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