Channels of Distribution
EMBA 512 – Assessing Business Opportunities
Professor Shikhar Sarin, Ph.D.
Boise State University
Copyright Shikhar Sarin 2012
Outline
• Channel Description
– Types of intermediaries
– Functions
• Channel Management
–
–
–
–
–
Structure (length and integration)
Conflict
Motivation
Growth opportunities
Sourcing
Copyright Shikhar Sarin 2012
Channel of Distribution
Manufacturer
Wholesaler
Retailer
• Intermediaries
• Middlemen
• Supply chain
Copyright Shikhar Sarin 2012
Customer
Types of Intermediaries
• Merchant intermediaries
• Agent intermediaries
Copyright Shikhar Sarin 2012
Functions of the Distribution Channel
• Matching supply and demand
–
–
–
–
–
–
Facilitate searches by buyers and sellers
Transportation & storage
Breaking bulk
Accumulating bulk
Creating assortment
Sorting
• Reducing the number of transactions
• Facilitate transactions (i.e., standardizing payment terms,
delivery schedules, financing etc.)
Copyright Shikhar Sarin 2012
Channels: Market Efficiencies through Reduction of Transactions
Copyright Shikhar Sarin 2010
Channel Management
Copyright Shikhar Sarin 2012
Channel Length
Direct Channel
Manufacturer
Wholesaler
Retailer
Customer
Short Channel
Manufacturer
Wholesaler 1
Wholesaler 2
Long Channel
Retailer
Customer
Factors Influencing Selection of Short vs. Long Channels
Short Channels
Long Channels
Customer
Factors
•Business users
•Geographically concentrated
•Large orders
•Require specialized knowledge/
servicing
•Consumers
•Geographically dispersed
•Small orders
•Do not require specialized
knowledge/servicing
Product
Factors
•Perishable
•Complex
•Expensive
•Durable
•Standardized
•Inexpensive
Producer
Factors
• Channel control important
•Channel control not important
•Possesses adequate resources to
•Does not possess adequate
perform channel functions
resources internally
Copyright channel
Shikhar Sarin 2010
•Dissatisfied with current
•Satisfied with current channel
Channel Integration
• Conventional/traditional channel
– independent members, loose integration
• Vertical marketing system (VMS)
– planned channel system designed to improve efficiency
and effectiveness by integrating various functions
throughout the distribution chain
Copyright Shikhar Sarin 2012
Types of VMS
• Corporate VMS
Owner/Corporate
Manufacturer
Wholesaler
Retailer
• Contractual VMS
Manufacturer
Legal
Contract
Wholesaler
Legal
Contract
Retailer
Types of VMS Cont’d
• Administered VMS
Retailer
Manufacturer
Wholesaler
Copyright Shikhar Sarin 2012
Sources/Bases of Power
• The ability to make others do what you
want them to do
–
–
–
–
–
Reward power
Coercive power
Legitimate power
Referent power
Expert/information power
Copyright Shikhar Sarin 2012
Common Channel Conflicts
• Manufacturer’s adoption of new channels
– i.e., direct marketing, internet channel
– multi-channel strategy
– disintermediation
Direct/Internet Channel
Manufacturer
Wholesaler
Retailer
Copyright Shikhar Sarin 2012
Customer
Common Channel Conflicts
• Vertical conflict
– Over profit distribution
• Horizontal conflict
– Over areas/customers sharing
• Differential treatment of channel members
• Refusal to share info about end user
Copyright Shikhar Sarin 2012
Motivating Channel Members
•
•
•
•
•
Margins/profit sharing
Prime areas/customers/segments/leads
Cooperative advertising
Sales contests
Slotting & display allowances
Copyright Shikhar Sarin 2012
Growth Opportunities in the Channel
Forward
Integration
Manufacturer
Horizontal
Integration
Wholesaler
Retailer
Backward
Integration
Copyright Shikhar Sarin 2012
Customer
Example: Horizontal Integration in the Banking Industry
Sourcing
• In-house vs. outsourcing
– Strategic vs. transaction cost analysis
• Single vs. multi-sourcing
– Risk
– Trust
– Control
Copyright Shikhar Sarin 2012
Key Take Aways
•
•
•
•
Intermediary types and functions
Long vs. short channels
Types of vertical marketing systems (VMS)
Sources of channel conflict
– Bases of power
• Motivating channel members
• Growth opportunities/strategies
• Sourcing decisions
Copyright Shikhar Sarin 2012