NOTES ON THE INTERACTIVE EXERCISE
Overview of Interactive Exercise on Channel Efficiency
The objective of this exercise is to show a graphical example that indicates how adding a
wholesale level can, in fact, reduce total transaction costs in a channel of distribution.
The exercise contains a hypothetical example, assuming that there are 50 manufacturers
and 800 retailers in a channel system. The total transaction cost in a channel system with
no wholesale level is computed and compared to the total transaction costs in channels
that contain one and two wholesalers, respectively.
Concept Review
Middlemen exist in order to rectify market discrepancies and to perform certain key
functions.
A discrepancy of quantity is the difference between the quantity of products it is
economical for a producer to make and the quantity final users or consumers normally
want.
A discrepancy of assortment is the difference between the lines a typical producer makes
and the assortment final consumers or users want.
Among the important channel functions are regrouping activities-- adjusting the
quantities and/or assortments of products handled at each level in a channel of
distribution. These activities include:
 accumulating: collecting products from many small producers.
 bulk-breaking: dividing larger quantities into smaller quantities as products get
closer to the final market.
 sorting: separating products into grades and qualities desired by different target
markets.
 assorting: putting together a variety of products to give a target market what it
wants.
Using the Exercise
Initial Screen
1. The exercise begins with a graphic example of the relationships that would result if
each manufacturer distributed directly to every retailer.
A. The instructor can use this screen to emphasize how complex a channel system
can be, even if it involves only two levels.
B. When ready, the instructor can click on the “Next” button to proceed to the next
screen.
Next Screen
2. This screen specifies that there are 12 deliveries per year from each manufacturer to
each of the retailers in the channel at a cost of $40 per transaction over and above the
cost of the merchandise distributed.
A. So, with no wholesalers present, the number of transactions is computed as:
[number of manufacturers (50) X number of retailers (800) X 12].
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B. The total cost of transactions in the channel is simply the number of transactions
X $40.
C. The instructor can ask students to supply the appropriate numbers to place in the
boxes on the left hand side (from top to bottom: 50, 800, 12 and $40,
respectively).
D. When they are filled in, the bar chart on the right hand side of the screen is
produced automatically, and the total cost appears: $19.2 million.
E. When ready, the instructor can click on the “Next” button to proceed to the next
screen.
Next Screen
3. This screen shows what happens when a wholesale level is added to the channel. All
manufacturers deal with the wholesaler, and the wholesaler sells to all the retailers.
A. The instructor should emphasize that even though there is now an additional level
to the channel, the channel is actually more efficient and the number of
transactions is reduced.
B. When ready, the instructor can click on the “Next” button to proceed to the next
screen.
Next Screen
4. This screen presents the computation of the total cost of transactions for the channel
system, now that the wholesaler has been added.
A. The total number of transactions is computed as: [(number of manufacturers X
12) + (number of retailers X 12)]. So, the total number of transactions goes down
significantly in the system as a whole.
B. As before, the total cost of transactions in the channel is simply the number of
transactions X $40.
C. The instructor can ask students to supply the appropriate numbers to place in the
boxes on the left hand side (from top to bottom: 50, 1, 800, 12 and $40,
respectively).
D. The bar chart on the right hand side of the screen is produced automatically, and
the total cost appears: $408,000. This cost is significantly lower than the baseline
of $19.2 million shown by the dotted line in the chart.
E. The instructor should emphasize that the cost reduction is due to the decrease in
the number of channel transactions.
F. When ready, the instructor can click on the “Next” button to proceed to the next
screen.
Next Screen
5. This screen explains the possible cost differences between the channel containing the
wholesaler and the channel with no wholesalers.
A. When the wholesaler is added, manufacturer-to-wholesaler costs per transaction
will likely increase due to, among other things, higher volume purchases.
B. Wholesaler-to-retailer transaction costs are also higher than in the manufacturerto-retailer channel due to the additional functions performed by wholesalers, such
as breaking bulk, accumulating, etc.
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C. When ready, the instructor can click on the “Next” button to proceed to the next
screen.
Next Screen
6. The instructor can ask the students to supply numbers representing significant
increases in cost for both the manufacturer-to-wholesaler transactions and the
wholesaler-to-retailer transactions.
A. Even a 100-fold increase in manufacturer-to-wholesaler transaction cost and a 10fold increase in wholesaler-to-retailer transaction cost will still provide a more
cost-efficient channel than the original channel with no wholesaler.
B. The key point for the instructor to stress is that the addition of the wholesaler
increases channel efficiency by reducing the total number of transactions required
and by lowering the total cost of channel operations.
C. When ready, the instructor can click on the “Next” button to proceed to the next
screen.
Next Screen
7. This screen shows what happens when the channel adds another wholesaler.
A. Each manufacturer deals with each wholesaler, but the wholesalers split the retail
market, with each wholesaler serving 400 retailers.
B. When ready, the instructor can click on the “Next” button to proceed to the next
screen.
Final Screen
8. This screen shows that even though the number of manufacturer-to-wholesaler
transactions increases, there can still be cost advantages over the initial scenario in
which there were no wholesalers.
A. As before, the instructor can engage the students in experimenting with different
costs for both the manufacturer-to-wholesaler transactions and the wholesaler-toretailer transactions.
B. When ready, the instructor can click on the “Exit” button to end the exercise.
This exercise gives the instructor an opportunity to show students that adding middlemen
doesn’t necessarily increase the costs of purchasing a product. As such, the exercise
builds on the information that is presented in Chapter 11 of the text about the functions of
middlemen and their role in reducing discrepancies and separations.
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