Distribution Channels and Logistics Management

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CHAPTER 8
Distribution Channels and Logistics Management

Objective: examining the nature and role of the channels in attracting and satisfying customers

The Nature of Distribution Channels

• Distribution channels are intermediaries used by the producers to bring their products to the market. • Why? Because the use of intermediaries bring greater efficiency in making goods available to target markets. In other words, they match the supply with the demand. • Most important benefit of using intermediaries is that they provide economies. They reduce the amount of work that must be done by both producers and consumers.

How a distributor reduces the number of channel transactions • •

A. Number of contacts without a distributor

B. Number of contacts with a distributor

Distribution Channel Functions
• A distribution channel moves goods from producers to consumers. Therefore they; • • • • • • • give information about the product and consumers promote the offer contact with the consumers match the offer with the consumer’s needs negotiate with the buyers about the price and offer physically distribute (transport) the product may finance the manufacturer to cover the costs of the channel work therefore may take risk.

• All these functions can be carried out by the manufacturers but they then increases their costs and prices.

Number of Channel Levels

• The number of intermediary levels used by the producers vary; • a direct marketing channel; has no intermediary levels. Here, the producer sells directly to consumers e.g. Avon sells their products door to door or through home parties. • An indirect marketing channel; contains 1 (retailer) ,2 (wholesaler + retailer) or 3 (wholesaler + jobber + retailer) intermediary levels.

Channel Behavior

• All channel firms should work together to be successful. Each channel member is dependent on the others e.g. a Ford dealer (retailer) depends on the Ford Motor Company to design cars that meet consumer needs. In turn, Ford depends on the dealer to attract consumers, persuade them to buy Ford cars, and service cars after the sale. The Ford dealer also depends on the other dealers to create a good overall reputation for the entire distribution channel.

• Although channel members are dependent on one another, they often concentrate on their short-term benefits. Channel conflict occurs when disagreement among channel members on goals and roles - who should do what and for what rewards. • Horizontal conflict; occurs among firms at the same level of the channel. In other words, one dealer may complain about the other. • Vertical conflict; occurs among different levels of the same channel. In other words, the producer may complain about its dealers or vise versa.

• Conflict may be healthy or damaging for the channel. Healthy competition would encourage dealers to improve their services.

Vertical Marketing Systems

• Vertical Marketing Systems (VMS) consists of producers, wholesalers, and retailers acting as a unified system - that seek to maximize profits for the whole channel. • Here, one channel members owns the others, has contracts with them or use so much power that they all cooperate. • Such systems occur to control channel behavior and manage channel conflict.

• There are three major types of VMSs which has different means for setting up leadership and power in the channel; • Corporate VMS • Contractual VMS
• Wholesaler-sponsored voluntary chains • Retailer cooperatives • Franchise organizations

• Administered VMS

Types of Vertical Marketing Systems
Vertical marketing systems (VMS) Corporate VMS Contractual VMS Administered VMS

Wholesalersponsored voluntary chains

Retailer cooperatives

Franchise organizations

Corporate VMS
• In a corporate VMS, production and distribution stages are combined under single ownership, in order to manage cooperation and conflict management e.g. AT&T markets its products through its own...
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