Some Distribution Related Successes and
Failures



A company whose exclusive dealer network was an
enormous strength, but turned into a liability as
consumer shopping patterns changed.
A company whose stock is up 20,000% since 1990,
sales have grown at 54% per year, and in a
commoditizing market.
A company which faces a class action for
incompetent management from 200 of its
franchisees; whose much hyped new product
bombed on the market.
1
The Role of the Traditional Distributor is
Changing
High
OEM
Direct
Outsourcing
JIT Contracts
Traditional
Distributor
Sales
Volume
Low
Mail Order
Wholesale
Clubs
Specialty
Distributors
Low
High
Customer Need for Value
2
Relationships With Manufacturers Are No
Longer Working
Manufacturers generally give
distributors adequate support
Distributors are doing the necessary
planning to enhance performance
Distributors are doing a good job in
performing marketing functions for
customers
Distributors are doing a good job in
performing marketing functions for
manufacturers
%Agreeing
Distb.
Manuf
33
70
34
4
56
29
73
31
3
Why Use Channel Intermediaries?
Why Use Channel Intermediaries?
Without Intermediaries
Milk P1
Bread P2
C1
Reducing
Transaction Costs
ShampooP3
C2
Soap P4
C3
3 + 3 + 3 + 3 = 12 Transactions
With Intermediaries
P1
P2
P3
P4
Wholesaler
or Retailer
C1
C2
C3
5
Other Reasons

Customers buy baskets or “assortments” of goods.
Economizes on the time cost of shopping.

Retail Service is most efficiently provided by an
intermediary
» faster check-out, product demonstration, after-sales service

Inventory carrying
» Intermediaries provide inventory buffer and hedge against
demand fluctuations for the manufacturers.
6
Intermediary Functions
Channel Inter mediary Functions
Transactional Functions
Contacting and Promoting
Negotiating
Logistical Functions
Physical Distribution
Sorting
Sorting out
Accumulation
Allocation
Assorting
Facilitating Functions
Market Research
Financing
3
7
Channel Control: Manufacturer Objectives



Manufacturers must find ways to maximize total
channel profits.
» Why?
The incremental profits can be used in two ways:
» Absorbed by the manufacturer leaving the retailer
or other down stream channel member no worse
than before.
» Shared with the channel members to reward them
for providing better service.
The challenge is to get the retailers to “behave”.
8
Problems with an Independent Channel

The lack of channel coordination:
» Each member has own private interests or profits in mind.
» National vs. Local perspective
» Perspective is short-term profits.
» Examples
» “Free-Riding” McDonald’s franchisees in a region.
» Manufacturer shirking on advertising and retailer on retail
service.
» Retailer pricing is either “too high” or “too low”.
9
Contracts Help Achieve Coordination

Types of Contracts:
» Exclusive dealers - high end clothing.
» Provides incentives to manufacturers to invest in advertising
and retailers to invest in service
» Exclusive territories: - beer distributors, auto dealerships
» Prevents free-riding of retail services
» Quantity Forcing: - Auto companies
» Ensures that the right level of price and retail service is
provided.
» Price Floors
– Nintendo MAP and allowances.
– Why Price Floors?
10
Factors Affecting Channel Choice: Retail
Competition
Channel intermediaries shield manufacturers
from excessive retail competition
Company
Owned
XX
High Retail
Competition
Low Retail
Competition
Independent
XX
11
Factors Affecting Channel Choice: Role of
Sales Volume
Corporate
xx
High Volume
Low Volume

Independent
xx
With growing IT expertise, many manufacturers and
industries are moving from independent dealers to
corporate distribution (e.g., Dell, Gateway, Apple)
12