UNIT 5

Distribution Planning & Control

Distribution:

Distribution means the process by which we make the goods or the service available to
the end consumer. Generally, the place of production is not the same as the place
of consumption. So the goods have to be distributed to overcome the barrier of place.

Now the distribution of the products can be done by the organisation itself which is
direct distribution. Or it can hire intermediaries and form distributions channel i.e.
indirect distributions. The plan will depend on several factors, some of which are

 Product: Whether the product is perishable or durable will be a factor in

deciding its distributions model.
 Market: The size of the market will be a factor. In a large market, the direct
distribution may not be a perfect choice. Also if the markets are scattered indirect
channel will be more suitable
 Company: The size of the company and its product-mix are also deciding
factors in the decision about distributions.
 Marketing Environment: In a slow economy or depression a shorter
distributions chain is preferable. In a healthy economy, there is a wider choice for
alternatives.
 Cost: The cost of the channel like transportation, warehousing and storage,
tolls etc are obviously a factor in this decision.

Distribution Channel:

A distribution channel (also called a marketing channel) is the path or route

decided by the company to deliver its good or service to the customers. The route
can be as short as a direct interaction between the company and the customer or
can include several interconnected intermediaries like wholesalers, distributors,
retailers, etc.Hence, a distribution channel can also be referred to as a set of
interdependent intermediaries that help make a product available to the end
customer.
Types of Distribution Channels:

Channels of distribution can be divided into the direct channel and the indirect
channels. Indirect channels can further be divided into one-level, two-level, and
three-level channels based on the number of intermediaries between manufacturers
and customers.

Direct Channel or Zero-level Channel (Manufacturer to Customer)

Direct selling is one of the oldest forms of selling products. It doesn’t involve
the inclusion of an intermediary and the manufacturer gets in direct contact with the
customer at the point of sale. Some examples of direct channels are peddling, brand
retail stores, taking orders on the company’s website, etc.  Direct channels are
usually used by manufacturers selling perishable goods, expensive goods, and
whose target audience is geographically concentrated. For example, bakers,
jewellers, etc.

Indirect Channels (Selling Through Intermediaries)

When a manufacturer involves a middleman/intermediary to sell its product to the
end customer, it is said to be using an indirect channel. Indirect channels can be
classified into three types:

 One-level Channel (Manufacturer to Retailer to Customer): Retailers buy

the product from the manufacturer and then sell it to the customers. One level
channel of distribution works best for manufacturers dealing in shopping goods
like clothes, shoes, furniture, toys, etc.
 Two-Level Channel (Manufacturer to Wholesaler to Retailer to
Customer): Wholesalers buy the bulk from the manufacturers, breaks it down
into small packages and sells them to retailers who eventually sell it to the end
customers. Goods which are durable, standardised and somewhat inexpensive
and whose target audience isn’t limited to a confined area use two-level channel
of distribution.
 Three-Level Channel (Manufacturer to Agent to Wholesaler to Retailer to
Customer): Three level channel of distribution involves an agent besides the
wholesaler and retailer who assists in selling goods. These agents come
handy when goods need to move quickly into the market soon after the order
is placed. They are given the duty to handle the product distribution of a
specified area or district in return of a certain percentage commission. The
agents can be categorised into super stockists and carrying and forwarding
 agents. Both these agents keep the stock on behalf of the company. Super
stockists buy the stock from manufacturers and sell them to wholesalers and
retailers of their area. Whereas, carrying and forwarding agents work on a
commission basis and provide their warehouses and shipment expertise for
order processing and last mile deliveries. Manufacturers opt for three-level
marketing channel when the userbase is spread all over the country and the
demand of the product is very high.

Dual Distribution
When a manufacturer uses more than one marketing channel simultaneously
to reach the end user, he is said to be using the dual distribution strategy. They may
open their own showrooms to sell the product directly while at the same time use
internet marketplaces and other retailers to attract more customers.

Functions of Distribution Channels

In order to understand the importance of distribution channels, you need to understand
that it doesn’t just bridge the gap between the producer of a product and its user.

Distribution channels provide time, place, and ownership utility. They make the product available
when, where, and in which quantities the customer wants. But other than these transactional
functions, marketing channels are also responsible to carry out the following functions:
 Logistics and Physical Distribution: Marketing channels are responsible for assembly,
storage, sorting, and transportation of goods from manufacturers to customers.
 Facilitation: Channels of distribution even provide pre-sale and post-purchase services
like financing, maintenance, information dissemination and channel coordination.
 Creating Efficiencies: This is done in two ways: bulk breaking and creating assortments.
Wholesalers and retailers purchase large quantities of goods from manufacturers but break
the bulk by selling few at a time to many other channels or customers. They also offer
different types of products at a single place which is a huge benefit to customers as they don’t
have to visit different retailers for different products.
 Sharing Risks: Since most of the channels buy the products beforehand, they also share
the risk with the manufacturers and do everything possible to sell it.
 Marketing: Distribution channels are also called marketing channels because they are
among the core touch points where many marketing strategies are executed. They are in
direct contact with the end customers and help the manufacturers in propagating the brand
message and product benefits and other benefits to the customers.
Factors Determining the Choice of Distribution Channels:

Selection of the perfect marketing channel is tough. It is among those few

strategic decisions which either make or break your company.

Even though direct selling eliminates the intermediary expenses and gives
more control in the hands of the manufacturer, it adds up to the internal workload
and raises the fulfilment costs. Hence these four factors should be considered before
deciding whether to opt for the direct or indirect distribution channel.

Market Characteristics
This includes the number of customers, their geographical location, buying habits,
tastes and capacity and frequency of purchase, etc. Direct channels suit businesses
whose target audience lives in a geographically confined area, who require direct
contact with the manufacturer and are not that frequent in repeating purchases.

Product Characteristics
Product cost, technicality, perishability and whether they are standardised or
custom-made play a major role in selecting the channel of distribution for them.
Perishable goods like fruits, vegetables and dairy products can’t afford to use longer
 channels as they may perish during their transit. Manufacturers of these goods often
opt for direct or single level channels of distribution. Whereas, non-perishable goods
like soaps, toothpaste, etc. require longer channels as they need to reach customers
who reside in areas which are geographically diverse.

Competition Characteristics
The choice of the marketing channel is also affected by the channel selected by the
competitors in the market. Usually, the firms tend to use a similar channel as used by
the competitors. But some firms, to stand out and appeal to the consumer, use a
different distribution channel than the competitors.

Company Characteristics
Financial strength, management expertise, and the desire for control act as
important factors while deciding the route the product will take before being available
to the end user.

Types of marketing intermediaries:

Marketing channels which generally have one or more intermediaries can be
categorized into agent / broker, wholesaler and retailer.

AGENT
Agent middlemen are specialized wholesalers who do not own the product
they sell but only help in buying and selling. Agents can be classified into:
1.         Manufacturer’s Agent: They sell products for several non competition producers
for a commission on what is actually sold.
2.         Commission merchant: They handle products shipped to them by sellers
complete the sale, and send the money minus commission to each seller.
3.         Auction companies that provide a place for buyers and sellers to meet for
transaction.

WHOLESALER
A wholesaler is a marketing intermediary that buys from the producer and
sells to other organization such as retailers and hospitals. The functions of the
wholesaler include some of the following:

1.     Bulk buying from manufacturer to ease their operations.

2.     Breaking the bulk to make it possible for retailers due to their limited capital.
3.     Advance payment or prompt settlement or payment for goods enabling producer to
continue operations. Financing retailers through provision of credit facilities.
4.     Warehousing of goods pending when they are needed.
5.     Stabilization of product prices through storage.
6.     Offering professional advice to retailers.
7.     Completion of production process e.g. packaging.
8.     Assisting manufacturers in promotional activities.
 RETAILER
A retailer is an individual or an organization that sells to ultimate consumers. The
functions of retailer includes:

1.     Selling to consumers at convenient place and time.

2.     Completion of production processes such as labeling
3.     Providing after sales service to customers such as installation and maintenance
services.
4.     Provision of wide range or variety of gods to consumers.
5.     Offer of credit facilities to reliable customers.
6.     Passes information from consumers about their complaints and preferences to
wholesalers for on ward transfer to the producer.

The functions of intermediaries are -

1. Information Provider
2. Price stability
3. Promotion
4. Financing
5. Title
6. Help in Production function
7. Pricing
8. Matching buyers and sellers
9. Standardizing Transactions
10. Matching demand and supply

1.       Information provider: - Middlemen have a role in providing information about the

market to the manufacturer. Developments like changes in customer demography,
psychology, media habit and the entry of a new competitor or a new brand and
change in customers preferences are some of the information that all manufacturers
wants. Since these middlemen are present in the market place and close to
customers they can provide this information at no additional cost.
2.       Price stability: - Maintaining price stability in the market is another function a
middleman performs. Many a time the middlemen absorb an increase in the price of
the products and continue to charge the customer the same old price. This is
because of the intra-middlemen competition. The middlemen also maintains price
stability by keeping his overhead low.
3.       Promotion: - Promoting the products in his territory is another function that
middlemen perform, many of them design their own sales incentive programmes,
aimed at building customers traffic at the other outlets.
4.       Financing: Middlemen finance manufacturer’s operation by providing the
necessary working capital in the form of advance payments for goods and services.
The payment is in advance even though the manufacturer may extend credit
 because it has to be made even before the products are bought, consumed and paid
for by the ultimate consumer.
5.       Title: - Most middlemen take the title to the goods, services and trade in their own
name. This helps in diffusing the risks between the manufacturer and middlemen.
This also enables middlemen to be in physical possession of the goods, which in
turn enables them to meet customer demand at very moment it arises.
6.       Help in production function: The producer can concentrate on the production
function leaving the marketing problem to middlemen who specialize in the
profession. Their services can best utilize for selling the product.
7.       Pricing: In pricing a product, the producer should invite the suggestions from the
middlemen who are very close to the ultimate users and know what they can pay for
the product. Pricing may be different for different markets or products depending
upon the channel of distribution.
8.    Matching Buyers and Sellers: The most crucial activity of the marketing channel
members is to match the needs of buyers and sellers. Normally, most sellers do not
know where they can reach potential buyers and similarly, buyers can reach
potential sellers.
9.   Standardizing Transactions: - Standardizing transaction is another function of
marketing channels. Taking the example of the milk delivery system, the distribution
channels standardized throughout the marketing channel so that consumers do not
need to negotiate with the sellers on any aspect. Whether it is price, quality, method
of payment or location of the product.
By standardizing transactions, marketing channels automate most of the stages in
the flow of products from the manufacturer to the customers.
10.  Matching Demand and Supply: The chief functions of intermediaries is to
assemble the goods from many producers in such a manner that a customer can
affect purchases with ease. The goal of the marketing is the matching of segments of
supply and demand.

Channel Dynamics:
Vertical Marketing System
Definition: A Vertical Marketing system (VMS) comprises of the main distribution
channel partners- the producer, the wholesaler and the retailer who work together as
a unified group to serve the customer needs.

In conventional marketing system, the producer, wholesaler and the retailer worked
separately with the intention to maximize their profits even at the expense of one
another. This led to the unending conflicts between the channel partners resulting in
less profits for the business as a whole.

In order to overcome these conflicts, several firms have started using a vertical
marketing system wherein producers, wholesalers and retailers have joined hands
with each other and are working in unison towards the accomplishment of the
business objective as a whole. This has led to the increased profits for each involved
in the channel of distribution.
 Vertical Marketing System is further divided into three parts which are explained
below:

1. Corporate Vertical Marketing System– In Corporate VMS, one member of the

distribution channel be it a producer, a wholesaler or a retailer Owns all the other
Members of the Channel, thereby having all the elements of production and
distribution channel under a single ownership.For example,: Amway is an American
cosmetic company, which manufactures its own product range and sell these
products only through its authorized Amway stores. Here the ownership of
production and distribution is with the company itself.
2. Contractual Vertical Marketing System– In Contractual VMS, every member in
the distribution channel works independently and integrate their activities on
a Contractual Basis to earn more profits that are earned when working in isolation.
The most common form of Contractual VMS is Franchising. In franchising, the
producer authorizes the distributor to sell its product under the producer’s name
against some annual license fee. For example, Mc-Donalds, Dominos, Pizza Hut,
etc. are all forms of the franchise which are working on a contractual basis.
3. Administered Vertical Marketing System– Under Administered VMS, there is
no contract between the members of production & distribution channel but their
activities do get influenced by the Size and Power of any one of the member. In
simple words, any powerful and influential member of the channel dominate the
activities of other channel members. For example, Big brands like HUL, ITC,
Procter& Gamble, etc. command a high level of cooperation from the retailers in
terms of display, shelf space, pricing policies, and promotional schemes.

Thus, through a vertical marketing system, the channel partners establishes a close
contact with each other and work in unison towards the accomplishment of common
objectives thereby enjoying more profits which they would have been earning when
working alone.
 Horizontal Marketing System
Definition: A Horizontal Marketing system is a form of distribution channel
wherein two or more companies at the same level unrelated to each other come
together to gain the economies of scale.

In other words, Horizontal marketing system is the merger of two unrelated

companies who have come together to exploit the market opportunities.

Generally, this type of marketing system is followed by companies who lack in

capital, human resources, production techniques, marketing programs and are afraid
of incurring the huge losses. In order to overcome these limitations, the companies
join hands with other companies who are big in size either in the form of joint venture
–that can be temporary or permanent, or mergers to sustain in the business.

Horizontal marketing system has gained popularity in the recent times due to an
immense competition in the market where everybody is striving to gain a good
position in the market along with huge profits.

In this marketing system, the collaboration can be between:

 Two or more Manufacturers- With an objective of making optimum utilization

of scarce resources.
 Two or more Wholesalers-With the objective of covering a larger area of the
distribution of goods and services.
 Two or more Retailers- With the objective of providing bulk quantities in a
particular area.
Multi Channel Marketing
Definition: The Multi channel Marketing is the marketing strategy wherein the
direct sales companies encourage its existing distributors to recruit new distributors
to facilitate the sale of goods and services. The distributor is compensated not only
for the sales generated by him but also gets a percentage of sales revenue of the
other distributor that he recruits.

Thus, a multi channel marketing is a type of direct selling wherein the distributor sells
the product via relationship referrals and word-of-mouth marketing. Here, the
salespersons or distributor not only sell the products but also encourages others to
join the company. The recruits are called as the participant’s
“Downline” or distributor’s “Downline”. Example, Tupperware, and Amway are
the direct sales companies that use the multilevel marketing.

The multi channel marketing is also called as a network marketing, referral marketing
or pyramid selling. Though this is a legitimate business strategy, it is subject to
criticism and lawsuits because of its similarity to the illegal pyramid schemes. Since
the compensation is determined on the basis of recruitments done by the
distributors, there are chances that more emphasis is laid on the recruitment and
less on the product sales. Hence, there is more emphasis on the recruitment of
others over the actual sales.

Channel Conflict Management

Definition: The Channel Conflict arises when the channel partners such as
manufacturer, wholesaler, distributor, retailer, etc. compete against each other for
the common sale with the same brand.

In other words, there is a conflict among the channel partners when one prevents the
other from achieving its objective. It results in a huge loss for all the partners in the
channel.

Types of Channel conflict

1. Vertical Channel Conflict: This type of conflict arises between the different
levels in the same channel.
E.g.The conflict between the manufacturer and the wholesaler regarding price,
quantity, marketing activities, etc.
2. Horizontal Channel Conflict: This type of conflict arises between the same
level in the same channel.
E.g. The conflict between two retailers of the same manufacturer faces disparity in
terms of sales target, area coverage, promotional schemes, etc.
3. Multichannel Conflict: This type of conflict arises between the different
market channels participating in the common sale for the same brand.
E.g. If a manufacturer uses two market channels, first is the official website through
which the products and services are sold. The second channel is the traditional
channel i.e. through wholesaler and retailer. If the product is available at a much
lower price on a website than is available with the retailer, the multichannel conflict
arises.

Managing the Channel Conflict

In order to overcome the destructive channel conflict some solutions are listed
below:
 Subordinate Goals: The channel partners must decide a single goal in terms
of either increased market share, survival, profit maximization, high quality,
customer satisfaction, etc. with the intention to avoid conflicts.
 Exchanging employees: one of the best ways to escape channel conflict is
to swap employees between different levels i.e. two or more persons can shift to a
dealer level from the manufacturer level and from wholesale level to the retailer
level on a temporary basis. By doing so, everyone understands the role and
operations of each other thereby reducing the role ambiguities.
 Trade associations: Another way to overcome the channel conflict is to form
the association between the channel partners. This can be done through joint
membership among the intermediaries. Every channel partner works as one entity
and works unanimously.
 Co-optation: Under this, any leader or an expert in another organization is
included in the advisory committee, board of directors, or grievance redressal
committees to reduce the conflicts through their expert opinions.
 Diplomacy, Mediation and Arbitration: when the conflict becomes critical
then partners have to resort to one of these methods.
In Diplomacy, the partners in the conflict send one person from each side to
resolve the conflict.

In Mediation, the third person is involved who tries to resolve the conflict through
his skills of conciliation.

In Arbitration, when both the parties agree to present their arguments to the
arbitrator and agree to his decision.
 Legal resource: When the conflict becomes crucial and cannot be resolved
through any above mentioned ways, the channel partners may decide to file a
lawsuit.

Channel Control

 Channel arrangements must be reassessed regularly and altered when

distribution does not work as planned, consumer buying patterns change, the market
develops, new competition occurs, inventive distribution channels appear, and the
product moves into later stages in the product life cycle. No marketing channel
remains successful over the entire product life cycle. Early purchaser might be willing
to pay for high-cost value-added channels, but later buyers will change to lower-cost
channels. In highly competitive markets with low entry barriers, the best channel
structure will transform over time. The company may add or drop individual channel
members, add or drop particular market channels, or develop a new way to sell
merchandise. The process of adding or dropping an individual channel member
needs an incremental analysis to decide profitability of company. Additionally,
marketers adopt data mining to analyse customer shopping data as input for channel
decisions. The most complicated decision is whether to modify the overall channel
scheme. Channels can become old-fashioned when gap occurs between the existing
distribution system and the ideal system to gratify customer’s needs and wants.

The most challenging face of channel management is the maintenance of

control over all parts of distribution flow and marketing activities. Marketers have to
undergo legal issues in controlling marketing channels therefore they need to
develop successful channel programs that will stimulate the action planned without
creating conflict among competitive channel members.