DISTRIBUTION CHANNEL MANAGEMENT
Distribution channels refer to a set of interdependent organizations involved in the process of making a product or service available for use or consumption by the consumer or business user. Intermediaries form the components of the distribution channel and usually include:
Distribution channel management is the collective set of activities and operations B2B firms employ to get their product to market via channel partners as efficiently and effectively as possible. These include but are not limited to the following business impact areas:
Distribution managers analyze, plan, and direct operations related to the procurement and distribution of products. Distribution management includes involvement in operations such as transportation, warehousing, forecasting, order processing, inventory control, production planning, site selection, and customer service. The area of distribution is quite expensive and is associated with physically moving products from location to location, buying and selling goods, as well as channel management activities.
The channel management decision primarily revolves around selecting channel members, motivating channel members, and evaluating channel members. The key issues include:
SELECTION OF DISTRIBUTION CHANNELS
The intensity of distribution i.e. the total proportion of the market covered will depend upon decisions made in the context of the overall marketing strategy. In simple terms there are two alternatives: skimming the market and market penetration. A skimming strategy involves being highly selective in choosing target customers. Normally, these will be relatively affluent consumers willing and able to pay premium prices for better quality, sometimes highly differentiated products. A penetration strategy is one where the decision has been made to mass market and the object is to make the product available to as many people as possible. The decision as to which of these is adopted as with immediate implications for distribution strategy. Three principal strategies these being; intensive, selective and exclusive distribution:
Extensive distribution: Those responsible for the marketing of commodities, and other low unit value products, are, typically, seek distribution, i.e. saturation coverage of the market. This is possible where the product is fairly well standardised and requires no particular expertise in its retailing. Mass marketing of this type will almost invariably involve a number of intermediaries because the costs of achieving extensive distribution are enormous. Where commercial organisations opt for extensive distribution, channels are usually long and involve several levels of wholesaling as well as other middlemen.
Selective distribution: Suppliers, who appoint a limited number of retailers, or other middlemen, are chosen to handle a product line, have a policy of selective distribution. Limiting the number of intermediaries can help contain the supplier’s own marketing costs and at the same time enables the grower/producer to develop closer working relations with intermediaries. The distribution channel is usually relatively short with few or no intermediaries between the producer and the organisation which retails the product to the end user. Selective distribution is common among new businesses with very limited resources. Their strategy is usually one of concentrating on gaining distribution in the larger cities and towns where the market potential can be exploited at an affordable level of marketing costs. As the company builds up its resource base, it is likely to steadily extend the range of its distribution up to the point where further increases in distribution intensity can no longer be economically justified.
Exclusive distribution: Exclusive distribution is an extreme form of selective distribution. That is, the producer grants exclusive right to a wholesaler or retailer to sell in a geographic region. Some market coverage may be lost through a policy of exclusive distribution, but this can be offset by the development and maintenance of the image of quality and prestige for the product and by the reduced marketing costs associated with a small number of accounts. In exclusive distribution producers and middlemen work closely in decisions concerning promotion, inventory to be carried by stockists and prices. The details of an exclusivity agreement can have important ramifications for both producer and distributor.
KEY DECISIONS IN CHANNEL MANAGEMENT
There are a number of key decision areas pertaining to the appointment of intermediaries. These include: price policy, terms and conditions of sale, territorial rights and the definition of responsibilities.
Price policy: List prices, wholesale/retail margins and a schedule of discounts have to be developed. These have to reflect the interests of the intermediary, as well as those of the producer/supplier if lasting alliances are to be formed with channel members.
Terms and conditions of sale: In addition to price schedules the producer/supplier must explicitly state payment terms, guarantees and any restrictions on where and how products are to be sold. If the product enjoys a sizeable demand then the producer/supplier may evaluate intermediaries on the basis of performance criteria such as the achievement of sales quota targets, inventory levels, customer delivery times, etc. Intermediaries whose performance is below target may have their right to handle the product withdrawn.
Territorial rights: In the case of certain products, distributors will be given exclusive rights to market a product within a specified territory. This happens, for example, with agricultural equipment. In deciding upon the boundaries of territories the manufacturer or supplier has to strike a balance between defining territories which are sufficiently large to provide good sales potential for distributors but small enough to allow distributors to adequately service the customers within the territory.
Definition of responsibilities: The respective duties and responsibilities of supplier and distributor have to be clearly defined. For instance, if a customer experiences a problem with a product and requires technical advice or a repair needs to be effected, then it should be immediately clear to both the supplier and the distributor as to which party is responsible for responding to the customer. In the same way, the agreement between the producer/supplier and the distributor should clearly specify which party is responsible for the cost of product training when new employees join the distributor or new products are introduced.
EVALUATION OF CHANNEL MEMBERS
After selecting the sales channel, marketing managers should control their distributors and ongoing daily activities and support them and improve their relationships with their distribution channel partners, identify their needs and coordinate company sales objectives in channel. Such evaluation criteria include:
Every year companies lose billions of dollars in their distribution channel operations through a combination of lost revenue opportunities and leakage, channel inefficiencies and lack of tight compliance disciplines. One reason for this is that channel members being external independent entities work for their own goals and agendas, often at the cost of company’s plans and priorities, and of late are becoming more demanding and difficult to deal with. In order to effectively manage such channel complexities, sales managers today need to have a new paradigm, new perspectives, and good conceptual understanding about channels.