7_Easy_Designing and Managing Distribution Channels

• Marketing channels facilitate the flow of goods and services
• Marketing channels connect producers to end consumers, bridging time and place gaps
• The role of marketing channels is ensuring items are available when and where customers need them

Key Functions channels perform

• Information: Collect and share data on customers, competitors, and market conditions
• Promotion: Develop and present persuasive communications for the brand
• Negotiation: Agree on terms of sale (e.g., pricing, quantity)
• Financing & Risk-Taking: Obtain funds to carry inventory and assume risk in the distribution process
• Ordering & Payment: Manage the backward flow of orders and payment from customers to producers

Channel Levels

• Channel levels refers to the number of intermediaries between producer and final user

Consumer-Goods Channels

• Zero-Level (Direct) involves the Producer reaching the Final Customer directly (e.g., online, mail order, door-to-door)
• Single-Level involves the Producer reaching the Retailer, who then reaches the Consumer
• Dual-Level includes the Producer to Wholesaler, and then to Retailer, and finally to the Consumer
• More levels are possible in some markets, like multiple wholesalers in certain countries

B2B Channels

• Often zero-level (direct sales force) or one- to two-level (distributors, reps) to reach industrial customers

Reverse-Flow Channels

• Reverse-flow channels are for recycling, returns, or refurbishing
• Intermediaries handle product take-backs and disposal

Multichannel Distribution

• This involves using two or more marketing channels to reach customer segments, e.g., selling both online and through retail stores

Benefits of Multichannel distribution

• Increased Market Coverage: Different channels can cater to distinct buyer segments or needs, potentially capturing more total demand
• Lower Channel Costs: Some channels (e.g., online) can be cheaper than a direct sales force for smaller accounts
• Customized Selling: Different channels can specialize in different levels of personal attention

Challenges of Multichannel distribution

• Potential channel conflict (e.g., overlapping customers, pricing inconsistencies)
• Coordination issues (ensuring messaging and product availability match across channels)
• Some channel additions might fail if they don't align with how consumers prefer to buy or if costs outweigh benefits

Key channel-management decisions

• Establishing Channel Objectives involves setting goals for the types of customers to reach, the service levels to deliver, and the cost and support requirements

Influencing Factors in channel management

• Product Characteristics (bulky items, custom products, etc.) dictate appropriate channel structures
• Market Environment (economic conditions, legal constraints) can favor shorter channels or direct control
• Competitor Moves (e.g., rivals' distribution presence in new markets) may inform channel expansion or partnership decisions

Selecting Channel Members

• Channel partners effectively “represent” the company to consumers
• Producers decide whether to use agents, distributors, retailers, or direct sales (e.g., online, manufacturer stores)
• Each choice has pros/cons (cost, control, coverage)

Distribution Strategy types

• Exclusive: Few outlets, supports higher-priced or luxury items
• Selective: Some but not all intermediaries, striking a balance between coverage and exclusivity
• Intensive: As many outlets as possible, appropriate for convenience goods
• Franchising: A growing format where the franchisor licenses its brand and system to franchisees under strict guidelines

Motivating & Controlling Channel Partners

Channel Power

• Exercising Coercive or Reward Power involves threatening or incentivizing financially
• Using Legal Power involves contractual obligations
• Exercising Expert Power involves unique knowledge
• Referent Power involves prestige of association

Incentives

• Positive Incentives (training, cooperative advertising) can encourage best performance

Channel Partnership Models

• Conventional Channels: Each member operates independently to maximize individual profit
• Vertical Marketing Systems (Corporate, Administered, Contractual) coordinate production and distribution under unified control or strong leadership
• Horizontal Marketing Systems: Two or more unrelated companies combine strengths to pursue a market opportunity

Evaluating & Modifying the Channel

• Performance Review: Track sales quotas, service quality, and cooperation with promotional efforts
  • Underperformers: Provide training or, if necessary, terminate relationships
• Channel Evolution
  • Channels must adjust as product life cycles evolve, customer needs change, or technology and competition shift
  • Adding or dropping channels or members requires incremental analysis: "Does this intermediary add enough value to justify its cost?"

Channel cooperation and conflict

• Channel conflict occurs when one channel member's actions prevent another channel member from achieving its goal

Types of Channel conflict

• Horizontal Conflict: Occurs among intermediaries at the same level (e.g., franchisees hurting each other's sales or brand image)
• Vertical Conflict: Arises between different levels in the channel (e.g., manufacturers vs. wholesalers, or manufacturers vs. retailers)
• Multichannel Conflict: Exists when a firm uses two or more channels to sell to the same market (e.g., direct online sales that undercut a traditional distributor)

Causes of Channel Conflict

• Goal Incompatibility: Manufacturer might want high market share via low prices, but intermediaries might prefer high margins and short-term profits
• Differences in Strategies and Tactics: Conflicting views on inventory levels, promotion, or pricing
• Power Imbalance: One party (e.g., a large retailer or key manufacturer) has disproportionate leverage
• Unclear Roles & Rights: Confusion about territory boundaries, credit for sales, or channel responsibilities

Managing and Minimizing Conflict

• Proper management can keep it constructive rather than dysfunctional
  • Strategic Justification
    • Demonstrate to channel members that distinct segments or product variations reduce direct competition
    • Example: Offering exclusive product variants to specific retailers
  • Dual Compensation
    • Pay existing partners for sales made via new channels
    • Example: An insurance company paying a small commission to agents even on online quotes to avoid resentment
  • Superordinate (Shared) Goals
    • Establish overarching goals that unite all channel members (e.g., survival, customer satisfaction)
    • Often effective when facing an external threat or new competitor
  • Employee Exchange & Joint Memberships
    • Employee Exchange: Temporarily swap personnel to promote mutual understanding
    • Joint Memberships: Encourage shared memberships in trade associations to foster collaboration and solve mutual problems
  • Co-optation
    • Invite channel partner leaders into advisory councils or boards, legitimizing their concerns and potentially reducing conflict
  • Diplomacy, Mediation, Arbitration
    • Diplomacy: Each side sends representatives to negotiate directly
    • Mediation: A neutral third party helps reconcile interests
    • Arbitration: Both sides agree to abide by a third party's ruling
  • Legal Recourse
    • As a last resort, channel members may file lawsuits or negotiate legal settlements if conflicts remain unresolved

Market logistics

• Market logistics involves planning, implementing, and controlling the physical flow of goods—from production through storage, transportation, and delivery to the final customer—while ensuring profitability
• It is part of a broader supply chain management system that includes procuring inputs, production, distribution, and even how suppliers obtain their materials
• Objectives deliver the right goods to the right places at the right time while minimizing total costs
• However, firms must balance customer service levels (e.g., on-time delivery, careful handling, quick replacements) against the costs incurred (e.g., maintaining large inventories, premium transportation)

Market Logistics Decisions

Order processing

• Goal: Shorten the order-to-payment cycle
  • Tasks Involved:
    • Order transmission, entry, and customer credit checks
    • Scheduling production and inventory
    • Shipping orders and invoices, then collecting payment
    • Impact: Faster processing improves customer satisfaction and cash flow

Warehousing

- Decisions:
    - Location: Centralized versus decentralized warehouses. For instance, many department stores now use individual-store warehouses to speed up delivery
     - Functions: Warehouses may also handle product assembly, packaging, and even constructing promotional displays
- Trade-Off: More stocking locations can speed delivery but increase overall warehousing and inventory costs

Inventory management

- Challenges:
    - Balancing the risk of stock-outs (which hurt customer satisfaction) with the high cost of maintaining inventory (storage, insurance, capital costs)
- Key Concepts:
    - Order (Reorder) Point: The stock level at which a new order is placed
    - Order Quantity: The amount ordered each time, which affects the frequency of orders and carrying costs
- Techniques:
    - Just-in-Time (JIT) inventory management minimizes stock levels and uses customer prepayments to fund production
        - However, JIT requires a robust, uninterrupted logistics network to avoid shortages during disruptions

Transportation

- Options:
    - Firms choose from air, rail, truck, waterway, or pipeline based on factors such as speed, frequency, cost, and reliability
    - Combined Modes: Containerization and intermodal solutions (e.g., piggyback, fishyback) allow seamless transitions between transportation modes
- Carrier Types:
    - Private Carriers: When the firm owns its transportation means
    - Contract Carriers: Independent firms that operate under contract
    - Common Carriers: Offer standardized services to all shippers
- Considerations:
    - Transport mode affects final pricing, delivery speed, and product condition upon arrival
 - Firms may adjust packaging (e.g., shelf-ready packaging) to reduce handling costs and damage during transit