Unit 1:

Introduction to Physical Distribution

1.1. Introduction
In order to deliver value satisfaction to target consumers it is not only
sufficient to properly price the product and sell it but it is also necessary to
physically move it to the place of consumption at the time required by
consumers. Economists refer to this function as the " creation of place and
time utilities" . Unless this function is performed, a product fails to fulfill its
mission not withstanding meticulous planning of product and other marketing
inputs. In marketing, the functions involved in physically moving products
are collectively referred to as "physical distribution."
Physical distribution is also referred to as " marketing or business logistics"
in business literature. The term logistics is borrowed from the military
terminology where it is used to describe the process of transporting and
supplying troops and equipment so as to have sufficient strength to meet
military demands. In marketing, however, the term logistics has a broader
connotation relative to physical distribution. In the following topic the
meaning of physical distribution and logistics will be discussed.
1.2. Meaning of Physical Distribution and Logistics
A comprehensive definition of physical distribution activities, called
business logistics, includes the co-ordination of the inbound and outbound
activities, an emphasis on cost effective flows, and customer service.
Physical distribution management is organizing the movement and storage of
finished goods to the customer . This traditional marketing view of physical
distribution management looks at only the outbound flow of finished
products from the manufacturer to the customer. It fails to consider
activities involving the inbound flow of raw materials and parts that often
have a great impact on the success of the marketing program. Logistics
management, which involves the coordination of the movement and storing of
raw materials, parts, and finished goods to achieve a given service level while

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minimizing the total logistics cost of the activities. This concept includes
both physical supply and physical distribution that is both inbound and
outbound activities. On practical level, there is no consistent use of physical
distribution and logistics terms generally, and many people use them loosely.
Both terms- physical distribution and logistics are used interchangeably in
this course material.
hysical distribution, and logistics to the operation of a manufacturing firm.
This chart shows how the firm receives its physical supply in the form of raw
materials and parts from its suppliers, converts these materials and parts in its
plant, and then provides physical distribution to the finished products to its
customers. The concepts of physical supply , physical distribution, and
logistics also apply to non- manufacturing firms, such as retailers and
wholesalers , for which the inbound activities include the finished goods that
are sold to customers without physical modification.

LOGISTICS

PHYSICAL SUPPLY PHYSICAL

DISTRIBUTION

Inbound flow of raw Outbound flow of

materials finished products

SUPPLIER FIRM CUSTOMER

Figure 1: Relation of physical distribution and logistics to a manufacturing

firm's operation
Let us see the definition of physical distribution management in different
forms.
 Physical distribution management is the collective term for the series of
inter related functions (principally transport , stockholding , storage ,

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 goods handling and processing ) involved in the physical transfer of
finished goods from producer to consumer, directly or via intermediaries.
 Some definitions of physical distribution include the movement and
storage of raw materials and semi-finished goods.
 Physical distribution (P.D) is an important marketing function descri bing
the marketing activities relating to the flow of raw materials from the
suppliers to the factory and the movement of finished goods from the
end of production line to the final consumer or user .
 Physical distribution (P.D) is the set of activities concerned with efficient
movement of finished goods from the end of the production operation to
the consumer.
 Physical distribution takes place within numerous wholesaling and
retailing distribution channels, and includes such important decision areas
as customer service, inventory control, materials handling, protective
packaging, order procession, transportation, warehouse site selection, and
warehousing.
 Physical distribution is part of a larger process called “distribution,”
which includes wholesale and retail marketing, as well the physical
movement of products.
 According to Philip Kotler, physical distribution “involves planning,
implementing and controlling the physical flows of materials and final
goods from place of production to the place of end use to satisfy buyers’
needs.”
 According to Wendell M. Smith – “Physical distribution is the science of
Business Logistics where by the proper amount of the right kind of product
is made available at the place where demand for its exists. Viewed in this
light, physical distribution is key link between manufacturing and
demand creation.”
 According to W.J. Stanton – “Physical distribution involves the
management of the physical flow of products and the establishment and
operation of flow system.”

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 According to Cundiff and Still – “Physical distribution involves the actual
movement and storage of goods after they are produced and before they are
consumed.”
 According to Mc Carthy – “Physical distribution is the actual handling and
moving of goods within individual firms and along channel system.”

Logistics
The word, ‟ Logistics ‟ is derived from French word “ loger ‟, which means art
of war pertaining to movement and supply of armies. Basically it is a
military concept, it is now commonly applied to marketing management.
Fighting a war requires the setting of an object, and to achieve this objective
careful planning is needed so that the troops are properly deployed and the
supply line consisting, weaponry , food , medical assistance , etc. is
maintained. Similarly, the plan should be each that there is a minimum loss of
men and material while, at the same time, it is capable of being altered if the
need arises. As in the case of fighting a war in the battle-field, the marketing
managers also need a suitable logistics plan that is capable of satisfying the
company objective of meeting profitably the demand of the targeted
customers. Let us see different scholar’s definitions of logistics .
 Logistics is coordinating the flow of goods, services, and information
among members of the supply chain.
 Logistics is a diverse and dynamic function that has to be flexible and has
to change according to the various constraints and demands imposed upon
it and with respect to the environment in which it works.
 Logistics = Supply + Materials management + Distribution
 Logistics is... the management of all activities which facilitate movement
and the co-ordination of supply and demand in the creation of time and
place utility. (Hesket, Glaskowsky and Ivie, 1973)
 Logistics is the art and science of managing and controlling the flow of
goods , energy , information and other resources . (Wikipedia, 2006)
 Logistics management is... the planning, implementation and control of
the efficient, effective forward and reverse flow and storage of goods,

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 services and related information between the point of origin and the point
of consumption in order to meet customer requirements. ( Council of
logistics management , 2006)
 Logistics is... the positioning of resource at the right time, in the right
place, at the right cost, at the right quality. (Chartered Institute of
Logistics and Transport (UK), 2005)
 An appropriate modern definition that applies to most industry might be
that logistics concerns the efficient transfer of goods from the source of
supply through the place of manufacture to the point of consumption in a
cost-effective way whilst providing an acceptable service to the customer.
If managed effectively, physical distribution can increase customer
satisfaction by ensuring reliable, cost-efficient movement of goods through
the supply chain. Physical distribution involves the handling and moving of
raw materials and finished products from producer to consumer often via an
intermediary. It is sometimes used synonymously with logistics (the branch of
military science concerned with procuring, maintaining and transporting
equipment and facilities etc.). It has been defined as a term employed in
manufacturing and commerce to describe the broad range of activities
concerned with efficient movement of finished products from the end of
production line to the consumer. In short physical distribution refers to the
physical flow of the product from producer to consumers. Physical
distribution management consists of the design and administration of systems
to control the flow of products. Physical distribution creates ‘time’ and
‘place’ utility, which maximises the value of products “by delivering them to
the right customer at the right time and right place.” There are two
dimensions to physical distribution process, the flow of information from the
individual customer or organizer to the producer and the flow of materials
from the producer to the consumer or the user. A channel is a passageway that
allows the happening of certain processes. Marketing is understood to be an
exchange process. Marketing channels help this exchange process to take
place. A marketing channel can be defined as a group of exchange

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relationships, which create customer value in acquiring, consuming and
disposing of products and services. The distribution channel is the movement
of goods and services between the point of production and the point of
consumption through organization that performs a variety of marketing
activities. The major participants in the distribution channel are; producers,
intermediaries and consumers.
1.3. Nature of Physical Distribution
Physical distribution involves planning, implementing and controlling the
physical flow of materials and finished goods from points of origin to points
of use to meet customer needs at profit. It is basically a distribution activity
of physical items. The best physical distribution methods give us the lowest
cost.
The traditional distribution system starts from plants. It emphasis on how to
distribute from plants. The modern physical distribution system, which is
known as marketing logistics starts from market place, then to factory to
satisfy customers. Thus, the marketing logistics manager's task is to
coordinate the whole channel of physical distribution system, that is, the
activities of suppliers, purchasing agents, channel members and customers.
1.4. The Importance of Physical Distribution
Physical distribution refers to the activities: order processing, inventory
management, materials handling, warehousing, and transportations – used to
move products from producers to consumers and other end users. Planning an
efficient physical distribution system is crucial to developing an effective
marketing strategy. Companies that have the right goods in the right place, at
the right time, in the right quantity, and with the right support services are
able to sell more than competitors that do not. Physical distribution is an
important element in a marketing strategy because it can decrease costs and
increase customer satisfaction. Speed of delivery, service, and dependability
are often as important to customers as costs.
Physical distribution deals with physical movement and inventory holding
(storing and tracking inventory until it is needed) both within and among

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marketing channel members. Often, one channel member manages physical
distribution for all channel members involved in exchanges. In fact, there is a
trend toward centralization, with one marketing channel member of the entire
chain.
Physical distribution systems must meet the needs of the supply chain as well
as customers. A construction equipment dealer with a low inventory of
replacement parts requires fast, dependable service from component suppliers
when it needs parts not in stock. Even when the demand for products is
unpredictable, suppliers must be able to respond quickly to inventory needs.
In such cases, the distribution costs may be a minor consideration when
compared with service, dependability, and timeliness.
Companies are placing greater emphasis on physical distribution or logistics
for various reasons. Following are some of the reasons.
 Customer service : satisfaction becomes the corner stone of marketing
strategy in many business and distribution an important customer service
element. Distribution is potent tool even to attract customers by reducing
cost and by giving better service.
 Physical distribution : is a major cost element for most companies. Poor
physical distribution makes the company unable to survive.
 The explosion in product variety: has created a need for improved
physical distribution management. Ordering, shipping, stocking and
controlling of variety of products give a challenge to physical distribution.
 Improvement in information technology: has created opportunities for
major gain in distribution efficiency. Example, use of computers.
1.5. Business logistics
It deals with all move-store activities that facilitate product flow from one
point of raw-material acquisition to the point of final consumption, as well as
the information flows that set the product in motion for the purpose of
providing adequate levels of customer service at a reasonable cost. Product is
used in the broadest sense to include both goods and services (Ballou: 1987).
1.6. The Logistical Mission

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The logistical mission of an enterprise is to develop a system that meets
objectives at the lowest possible birr expenditure. The logistical system is
primarily concerned with support of manufacturing and marketing operations.
At the policy level, the critical question is to determine the associated cost of
logistical operations. Thus, the planning of logistics involves two policy
considerations: (1) service performance, and (2) total cost expenditure.
The logistical performance is measured with respect to availability,
capability, and quality. Availability concerns the system's capacity to
consistently satisfy material or product requirements. As such, availability
deals with inventory level. As a general rule, the lower the frequency of
planned stock outs, the greater the investment in average inventory.
Capability of logistical performance refers to the elapsed time from receipt of
an order to inventory delivery. Performance capability consists of the speed
of delivery and consistency. Naturally, all firms desire to provide customers
fast delivery. However, rapid delivery is of little value unless it is
consistently achieved. It may hinder a firm to promise second day delivery if
in actual performance the standard is achieved only a small percentage of the
time. An enterprise on the receiving end of a logistical system typically
values consistency over speed of service.
Performance quality relates to how well the overall logistical task is
completed with respect to damage, correct type items, and resolution of
unexpected problems. There is no point in speedy delivery of a damaged
product. Quality relates to the maintenance of low error rates and a respected
track record for resolving problems. Performance standards should be
established on a selective basis. Some products are more critical than others
because of their importance to the purchaser and their profitability.
The level of total cost has a direct relationship to the customer service policy.
The simultaneous attainment of high availability, capability, and quality is
expensive. The higher each of these aspects of total performance, the greater
the cost of logistical operations.

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The mission of the logistician is to get the right goods or services to the right
place, at the right time, and in the desired condition at the lowest possible
cost.

1.7. The Physical Distribution Objective

From the viewpoint of logistical system design and administration, a firm
must establish objectives and control several different operational areas. For
most companies, the main objectives of physical distribution are decreasing
costs and transit time while increasing customer service. The General
objectives of the logistics can be summarized as:
1. Cost reduction
2. Capital reduction
3. Service improvement
The specific objective of an ideal logistics system is to ensure the flow of
supply to the buyer, the:
 right product
 right quantities and assortments
 right places
 right time
 right cost / price and,
 right condition
This implies that a firm will aim at having a logistics system which
maximizes the customer service and minimizes the distribution cost. However,
one can approximate the reality by defining the objective of logistics system
as achieving a desired level of customer service i.e., the degree of delivery
support given by the seller to the buyer.
Thus, logistics management starts with as curtaining customer need till its
fulfillment through product supplies and, during this process of supplies, it
considers all aspects of performance which include arranging the inputs,

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manufacturing the goods and the physical distribution of the products.
However, there are some definite objectives to be achieved through a proper
logistics system. These can be described as follows:
1. Improving customer service:
As we know, the marketing concept assumes that the sure way to maximize
profits in the long run is through maximizing the customer satisfaction. As
such, an important objective of all marketing efforts, including the physical
distribution activities, is to improve the customer service.
An efficient management of physical distribution can help in improving the
level of customer service by developing an effective system of warehousing ,
quick and economic transportation , all maintaining optimum level of
inventory . But, as discussed earlier, the level of service directly affects the
cost of physical distribution. Therefore, while deciding the level of service, a
careful analysis of the customers‟ wants and the policies of the competitors is
necessary. The customers may be interested in several things like timely
delivery, careful handling of merchandise, reliability of inventory, economy
in operations, and so on. However, the relative importance of these factors in
the minds of customers may vary. Hence, an effort should be made to
ascertain whether they value timely delivery or economy in transportation,
and so on. One the relative weights are known, an analysis of what the
competitors are offering in this regard should also be made. This, together
with an estimate about the cost of providing a particular level of customer
service, would help in deciding the level of customer service.
2. Rapid Response:
Rapid response is concerned with a firm's ability to satisfy customer service
requirements in a timely manner . Information technology has increased the
capability to postpone logistical operations to the latest possible time and
then accomplish rapid delivery of required inventory. The result is
elimination of excessive inventories traditionally stocked in anticipation of
customer requirements. Rapid response capability shifts operational emphasis
from an anticipatory posture based on forecasting and inventory stocking to

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responding to customer requirements on a shipment-to-shipment basis.
Because inventory is typically not moved in a time-based system until
customer requirements are known and performance is committed, little
tolerance exists for operational deficiencies
3. Reduce total distribution costs:
Another most commonly stated objective is to minimize the cost of physical
distribution of the products . As explained earlier, the cost of physical
distribution consists of various elements such as transportation, warehousing
and inventory maintenance, and any reduction in the cost of one element may
result in an increase in the cost of the other elements. Thus, the objective of
the firm should be to reduce the total cost of distribution and not just the cost
incurred on any one element. For this purpose, the total cost of alternative
distribution systems should be analyzed and the one which has the minimum
total distribution cost should be selected.

4. Generating additional sales:

Another important objective of the physical distribution/logistics system in a
firm is to generate additional sales. A firm can attract additional customers by
offering better services at lowest prices. For example, by decentralizing its
warehousing operations or by using economic and efficient modes of
transportation, a firm can achieve larger market share. Also by avoiding the
out-of-stock situation, the loss of loyal customers can be arrested.
5. Creating time and place utilities:
The logistical system also aims at creating time and place utilities to the
products. Unless the products are physically moved from the place of their
origin to the place where they are required for consumption , they do not
serve any purpose to the users. Similarly, the products have to be made
available at the time they are needed for consumption. Both these purposes
can be achieved by increasing the number of warehouses located at places
from where the goods can be delivered quickly and where sufficient stocks are
maintained so as to meet the emergency demands of the customers. Moreover,

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a quicker mode of transport should be selected to move the products from one
place to another in the shortest possible time. Thus, time and place utilities
can be created in the products through an efficient system of physical
distribution.
6. Price stabilization:
Logistics also aim at achieving stabilization in the prices of the products. It
can be achieved by regulating the flow of the products to the market
through a judicious use of available transport facilities and compatible
warehouse operations. For example, in the case of industries such as cotton
textile, there are heavy fluctuations in the supply of raw materials. In such
cases if the market forces are allowed to operate freely, the raw material
would be very cheap during harvesting season and very dear during off
season. By stocking the raw material during the period of excess supply
(harvest season) and made available during the periods of short supply, the
prices can be stabilized.
7. Quality improvement:
The long-term objective of the logistical system is to seek continuous quality
improvement. Total quality management (TQM) has become a major
commitment throughout all facets of industry. Overall commitment to TQM
is one of the major forces contributing to the logistical renaissance. If a
product becomes defective or if service promises are not kept, little, if any,
value is added by the logistics. Logistical costs, once expended, cannot be
reversed. In fact, when quality fails, the logistical performance typically
needs to be reversed and then repeated. Logistics itself must perform to
demanding quality standards. The management challenge of achieving zero
defect logistical performance is magnified by the fact that logistical
operations typically must be performed across a vast geographical area at all
times of the day and night. The quality challenge is magnified by the fact that
most logistical work is performed out of a supervisor's vision. Reworking a
customer's order as a result of incorrect shipment or in-transit damage is far

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more costly than performing it right the first time. Logistics is a prime part of
developing and maintaining continuous TQM improvement.
8. Life-Cycle support:
A good logistical system helps to support the life cycle. Few items are sold
without some guarantee that the product will perform as advertised over a
specified period. In some situations, the normal value-added inventory flow
toward customers must be reversed. Product recall is a critical competency
resulting from increasingly rigid quality standards, product expiration
dating and responsibility for hazardous consequences. Return logistics
requirements also result from the increasing number of laws prohibiting
disposal and encouraging recycling of beverage containers and packaging
materials. The most significant aspect of reverse logistical operations is the
need for maximum control when a potential health liability exists (i.e. a
contaminated product). In this sense, a recall program is similar to a strategy
of maximum customer service that must be executed regardless of cost.
Firestone classical response to the tyre crisis is an example of turning
adversity into advantage. The operational requirements of reverse logistics
range from lowest total cost, such as returning bottles for recycling, to
maximum performance solutions for critical recalls. The important point is
that sound logistical strategy cannot be formulated without careful review of
reverse logistical requirements.
9. Movement consolidation :
As the logistical system aims at cost reduction through integration,
consolidation One of the most significant logistical costs is transportation.
Transportation cost is directly related to. the type of product, size of
shipment, and distance. Many Logistical systems that feature premium service
depend on high-speed, small-shipment transportation. Premium transportation
is typically high-cost. To reduce transportation cost. it is desirable to achieve
movement consolidation. As a general rule, the larger the overall shipment
and the longer the distance it is transported, the lower the transportation cost
per unit. This requires innovative programs to group small shipments for

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consolidated movement. Such programs must be facilitated by working
arrangements that transcend the overall supply chain.
Evolution of Logistics Management
Logistics activities are among the most persuasive of all human activities and
involve movement and storage of goods for the purpose of achieving the
desired objectives of making the right types of goods available at the right
time and at the right place. Logistics management is a managerial
responsibility to design and administer a system to control the flows of raw
materials, work-in-process and finished goods inventory to meet the strategic
objectives of the enterprise. The goal of logistics is to achieve a pre-
determined manufacturing support and marketing at the lowest possible cost.
The elements of distribution and logistics have, of course, always been
fundamental to the manufacturing, storage and movement of goods and
products. It is only relatively recently, however, that distribution and
logistics have come to be recognized as vital functions within the business
and economic environment. The role of logistics has changed in that it now
plays a major part in the success of many different operations and
organizations. In essence, the underlying concepts and rational e for logistics
are not new. They have evolved through several stages of development, but
still use the basic ideas such as trade-off analysis, value chains and systems
theory together with their associated techniques. There have been several
distinct stages in the development of distribution and logistics.
1950s and early 1960s
In this period, distribution systems were unplanned and unformulated.
Manufacturers manufactured, retailers retailed, and in some way or other the
goods reached the shops. Distribution was broadly represented by the haulage
industry and manufacturers' own-account fleets. There was little positive
control and no real liaison between the various distribution-related functions.
1960s and early 1970s
In the 1960s and 1970s the concept of physical distribution was developed
with the gradual realization that the 'dark continent' was indeed a valid area

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for managerial involvement. This consisted of the recognition that there was a
series of interrelated physical activities such as transport , storage , materials
handling and packaging that could be linked together and managed more
effectively. In particular, there was recognition of a relationship between the
various functions, which enabled a systems approach and total cost
perspective to be used. Under the auspices of a physical distribution manager,
a number of distribution trade-offs could be planned and managed to provide
both improved service and reduced cost. Initially the benefits were recognized
by manufacturers who developed distribution operations to reflect the flow of
their product through the supply chain.
1970s
This was an important decade in the development of the distribution concept.
One major change was the recognition by some companies of the need to
include distribution in the functional management structure of an
organization . The decade also saw a change in the structure and control of
the distribution chain. There was a decline in the power of the manufacturers
and suppliers, and a marked increase in that of the major retailers. The larger
retail chains developed their own distribution structures , based initially on
the concept of regional or local distribution depots to supply their stores.
1980s
Fairly rapid cost increases and the clearer definition of the true costs of
distribution contributed to a significant increase in professionalism within
distribution. With this professionalism came a move towards longer-term
planning and attempts to identify and pursue cost-saving measures. These
measures included centralized distribution, severe reductions in stock-holding
and the use of the computer to pro- vide improved information and control.
The growth of the third-party distribution service industry was also of major
significance, with these companies spearheading developments in information
and equipment technology. The concept of and need for integrated logistics
systems were recognized by forward-looking companies that participated in
distribution activities.

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Late 1980s and early 1990s
In the late 1980s and early 1990s, and linked very much to advances in
information technology, organizations began to broaden their perspectives
in terms of the functions that could be integrated. In short, this covered the
combining of materials management (the inbound side) with physical
distribution (the outbound side). The term 'logistics' was used to describe this
concept. Once again this led to additional opportunities to improve customer
service and reduce the associated costs. One major emphasis recognized
during this period was the importance of the informational aspects as well as
the physical aspects of logistics.
1990s
In the 1990s the process was developed even further to encompass not only
the key functions within an organization's own boundaries but also those
functions outside that also contribute to the provision of a product to a
final customer. This is known as supply chain management . The supply
chain concept thus recognizes that there may be several different
organizations involved in getting a product to the marketplace. Thus, for
example, manufacturers and retailers should act together in partnership to
help create a logistics pipeline that enables an efficient and effective flow of
the right products through to the final customer. These partnerships or
alliances should also include other intermediaries within the supply chain,
such as third-party contractors.
2000 and beyond
Business organizations face many challenges as they endeavor to maintain or
improve their position against their competitors, bring new products to market
and increase the profitability of their operations. This has led to the
development of many new ideas for improvement, specifically recognized in
the redefinition of business goals and the re-engineering of entire systems.
One business area where this has been of particular significance is that of
logistics. Indeed, for many organizations, changes in logistics have provided
the catalyst for major enhancements to their business. Leading organizations

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have recognized that there is a positive 'value added' role that logistics can
offer, rather than the traditional view that the various functions within
logistics are merely a cost burden that must be minimized regardless of any
other implications.
1.8. Logistics' Place in the Firm
To see the relationship between physical distribution and other functional
areas, it is better to perceive first from the logistics perspective. Firms have
been carrying logistical activities of the firm in a more meaningful manner so
that good management is more easily achieved. This means that some
activities previously considered solely as the responsibility of production or
marketing have been regrouped. How does logistics fit with production and
marketing?
Logistics occupies a strategic organizational position between production and
marketing. Because of this, and because it is not possible to divide the
activities of the firm without some overlap of responsibility for at least some
of the activities, interface activities are created. These are activities that must
be jointly managed by two or more functional areas. The logistician must deal
with these "between production and marketing" areas. Sample primary and
interface activities of production, marketing and logistics are presented as
follows.
PRODUCTION SAMPLE ACTIVITIES
 Quality control
 Detailed plant loading
 In-plant materials handling
 Equipment maintenance
MARKETING SAMPLE ACTIVITIES
 Promotion
 Market research
 Product mix
 Sales force management
LOGISTICS SAMPLE ACTIVITIES

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  Transportation
 Inventory maintenance
 Order processing
 Warehousing
 Materials handling
PRODUCTION-LOGISTICS INTERFACE
 Product scheduling
 Plant location
 Purchasing
MARKETING-LOGISTICS INTERFACE
 Customer service standards
 Pricing
 Packaging
 Retail location
The primary responsibility of marketing is to generate revenue for the firm.
This is done through various promotional means (advertising, price incentive,
etc), product offerings, and market research. Production is mainly concerned
with the formation of the product or service and the control of its outgoing
quality while minimizing the unit cost of formation. To achieve this,
production has the responsibility for production system staffing, capacity
planning, quality control, and process scheduling. Because logistics has the
responsibility for product movement and storage, then transportation,
inventory maintenance, order processing, warehousing, materials handling
should be of prime concern.
Activities such as pricing or packaging should be jointly managed by logistics
and marketing. Pricing has both a geographical and competitive component.
Purchasing and product scheduling are examples of interface activities
between logistics and production. Production must acquire goods at an
acceptable cost and quality whereas logistics is concerned with the location of
sources of supply and the timing of these supplies. Purchasing makes these
decisions. Product scheduling is a similar activity. Production is interested in

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the sequence and length of production runs that can be made, whereas
logistics is again concerned with timing and location of production.
Traditional administrative arrangements group activities under several
functional titles, thus requiring cross-functional coordination for a number of
important logistics activities.

Unit 2:
Management of physical distribution

2.1. Introduction
The management of physical distribution provides an exciting opportunity for
improving customer services and reducing costs. For many enterprises, the
physical distribution function often determines how well channels perform to
satisfy customers through product availability .
Efficient distribution can increase profitability by increasing sales and
reducing costs . The impact that physical distribution management can have
on profits is increasing recognized in companies where major benefits are
obtained by managing an integrated system of activities for satisfying
customers at efficient cost levels.
Major activities that are normally grouped together in an integrated approach
to physical distribution management are transportation , inventory ,
warehousing and order processing . Each activity with its many specific
functions represents an important management task, and decisions about it
must be coordinated with all other distribution decisions.
2.2. Physical Distribution Activities
2.2.1. Primary Activities
These activities are of primary importance in achieving cost and service
objective of logistics . Transportation , inventory maintenance and order
processing are primary logistics activities. These activities are considered

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primary to effective management of logistics because they either contribute
most to the total cost of logistics or they are essential to effective
coordination and completion of the logistic task.
TRANSPORTATION
For most firms, transportation is the most important logistics activity simply
because it absorbs, on average, approximately one-third to two-third of
logistics costs. It is essential, because no modern firm can operate without
providing for the movement of its raw materials and/or finished products in
some way. This essential nature is always underscored by financial strains
placed on many firms when freight cost increases for one or other reasons.
" Transportation " refers to the various methods for moving goods .
Transportation choice will affect the pricing of products , on time delivery
performance and the condition of goods when they arrive, all of which will
affect customer satisfaction. Management of transportation activity involves
the making of choices regarding the method of shipment , the routings , and
the utilization of vehicle capacity .
Modes of Transportation
The various modes of transportation include Rail , Truck , Air , Pipeline , and
Water . In the subsequent paragraphs these different modes of transportation
will be discussed.
Rail
Railroads are one of the most cost-effective modes for shipping carload
quantities of bulk products – coal , sand , minerals , farm and forests
products over long land distances . The rate costs for shipping merchandize
are quiet complex. The lowest rate comes from shipping carload rather than
less than carload quantities. Manufacturers will attempt to combine shipments
to common distances to take advantage of lower carload rates.
Truck/Highways – Also Known as Motor Carriers
Motor carriers account for a large portion of intra city (with in cities) as
opposed inter city transportation. They are highly flexible in their routing and

20
time schedules. Regarding cost they are competitive with rail shipment and
they usually offer faster service.
Water
A substantial amount of goods moves by ships and barges on coastal and
inland water ways. Water transportation is very low in cost for shipping
bulky , low value , non-perishable products such as sand , coal , grain , oil ,
and metallic ores . On the other hand, water transportation is the lowest cost
transportation mode and is dependent on climatic conditions.
The major capital investment a water makes is in transport equipment, and to
some extent, in terminal facilities. Waterways and harbors are publicly owned
and operated. Terminal costs include the harbor fees as the carrier enters a
seaport, and the costs of loading and unloading cargo. Loading – unloading
times are particularly slow for water carriers, and high terminal cost are
almost prohibitive for all but bulk commodities for which merchandized
material-handling equipment can be used effectively.
Pipeline
Pipelines are a specialized means of shipping petroleum , coal , and chemicals
from sources to markets. Pipeline shipment of petroleum is less expensive
than rail shipments although more expensive than waterway shipment. Most
pipelines are used by their owners to ship their own product, although they
are technically available for use by a shipper.
Air
Air carriers transport small percentage of the nation's goods but are becoming
more important as a transportation mode . Although airfreight rates are
considerably higher than rail or truck freight rates , air freight is ideal
where speed is essential and/or distant markets have to be reached. Among the
most frequently air freighted products are perishable (e.g., technical
instruments, jewelry). Companies find that airfreight reduces their required
inventory levels, number of warehouses, and costs of packaging.

21
The following table 2.1. summarizes advantages and disadvantages of the five
modes of transportation available.
Mode Relative Advantage Relative Disadvantages
Rail Full capacity Some reliability, damage
Extensive routes problems
Low cost Not always complete pickup and
delivery
Sometimes slow
Truck Complete pickup and delivery Size and weight restrictions
Extensive routes Higher cost
Fairly fast More weather sensitive
Air Fast High cost
Low damage Limited capability
Frequent departure
Pipeline Low cost Limited routes (accessibility)
Very reliable Slow
Water Low cost Slow
Huge capacities Limited routes and schedules
More weather sensitive
Table 2.1. advantage and disadvantage modes of transport
Criteria for Selecting Transportation Modes
Marketers select a transportation mode based on cost, speed, dependability,
flexibility, accessibility and frequency.

22
1. Cost : Marketers compare alternative transportation modes to determine
whether benefits from a more expensive mode are worth higher cost. When
speed is less important marketers prefer lower costs.
2. Speed : It is measured by the total time a carrier has possession of goods;
including the time required to pick up and delivery, handling and
movement between points of origin and destination.
3. Dependability : Dependability of a transportation mode is determined by
the consistency of service provided. Marketers must be able to count on
carriers to deliver goods on time and in an acceptable condition. Along
with speed, dependability affects a marketer's inventory costs, including
sales lost when merchandise is not available.
4. Load Flexibility : It is the degree to which a transportation mode can
provide appropriate equipment and conditions for moving specific kind of
goods and can be adopted for moving other products. Many products must
be shipped under controlled humidity. Other products such as liquids or
gases require special equipment or facilities for shipment.
5. Accessibility : A carrier's ability to move goods over a specific route or
network (rail lines, water ways, or truck roads) is its accessibility.
6. Frequency : It is how often a company can send shipments by specific
transportation mode. When using pipelines shipments can be continuous. In
choosing a transportation mode for a particular product, shippers consider
such criteria as speed, frequency. If the goal is low cost, then water and
pipelines are prime contenders. Trucks stand high on most of the criteria,
and this accounts for their growing share.
Shippers are increasingly combining two or more transportation modes, thanks
to containerization. Containerization consists of putting the goods in boxes or
trailers that are easy to transfer between two transportation modes. PIGGY
BACK describes the use of rail and trucks; FISHY BACK, water and trucks;
TRIANSHIP, water and rail; and AIR TRUCK , air and trucks. Each
coordinated mode of transportation offers specific advantages to the shipper.

23
For example, piggyback is cheaper than trucking alone and yet provides
flexibility and convenience.
In choosing transportation modes, shippers can decide between private,
contract and common carriers. If the shipper owns its own truck or air fleet,
the shipper becomes a private carrier. A contract carrier is an independent
organization selling transportation service to others on a contract basis. A
common carrier provides services between predetermined points on a schedule
basis and is available to all shippers at standard rates.
Transportation decisions must consider the complex trade offs between
various transportation modes and their implications for other distribution
elements such as warehousing and inventory. As the relative costs of different
transportation modes change overtime, companies need to reanalyze their
options in the search for optimal physical distribution arrangements.
Evaluating Mode/Carrier Performance
Among the criteria that are often used in measuring and controlling carrier
performance are speed of service, size of order shipped, on time delivery,
transit time variability and damage. In addition to day-to-day evaluation of
transportation services, a periodic audit is needed in planning, implementing,
and controlling a transportation system. A transportation system audit is a
comprehensive evaluation of transportation's objectives, operations, and
performance. It is useful in identifying performance standards, in measuring
cost and service components, and in developing procedures for managing the
transportation network. Characteristics related to the distribution of the
product, customer's service requirements, and geographic considerations
should be identified and assessed.
Next, transportations modal alternatives, including inter modal combinations
(truck plus rail), should be examined. This is followed by consideration of the
relationship of transportation to physical distribution. Finally, specific
carriers are evaluated. The frequency of transportation system evaluation and
the selection of criteria for such evaluation should be determined as part of
the system audit.

24
INVENTORY MAINTENANCE
Inventory refers to a stock of items kept in the store that is meant for future
use. It is usually not possible or practical to provide instant production or
instant delivery to customers. In order to achieve a reasonable degree of
product availability, inventories need to be maintained as buffers between
supply and demand. The extensive use of inventories results in the fact that,
on the average, they account for approximately one-third to two-thirds of
logistics costs, making inventory maintenance a key logistics activity.
Whereas transportation adds "place" value to a product, inventories add
"time" value. In order to create this time value, inventories are placed close to
customers or close to manufacturing points. The often large number of such
stocking points and the high costs for carrying the products in storage,
typically 25 to 30 percent of the products' value per year, require close
management. The management of inventories involves keeping stock levels as
low as possible while providing the desired level of stock availability for
customers.
Reasons for Inventories
Stockpiling a quantity of goods now in anticipation of future use requires an
investment of an organization's capital resources. It would be ideal if supply
and demand could always be so coordinated that no inventories would be
needed. Because it is either impractical or impossible to know future demand
with certainty, and because the availability of supplies cannot be guaranteed
at any given moment inventories are accumulated to assure an availability of
goods and to minimize the overall costs of producing and distributing the
goods.
Inventories actually serve a number of purposes. That is, they
 improve customer service
 encourage production economies
 permit purchase and transportation economies
 act as a hedge against price changes
 protect against uncertainties in demand and lead time, and

25
 act as a hedge against contingencies.
Let's expand on these benefits.
Improve Customer Service
Inventories are an aid to the marketing of a firm's products. Products can be
spotted near where customers purchase them and in the quantities they wish to
buy. This is an advantage to the customers who desire or must have immediate
stock availability or short delivery times. to the supplying firm, this can mean
a competitive edge and reduced lost sales, especially for those products that
are service sensitive.
Encourage Production Economies
The lowest per unit cost for producing products generally occurs with long
production runs at constant quantities. Inventories act as buffers between
demand and supply so that production can be geared to a more constant output
than fluctuating demand might otherwise allow. A stable work force can be
maintained and the costs for frequent production set-ups avoided.
Permit Purchase and Transportation Economies
When goods are purchased to supply the needs of production or when
customer orders are served from the production line, in many cases small
quantities are involved. This can mean the highest transportation rates are
paid, and only minimum price discounts, if any, are realized. However, one
purpose for establishing an inventory would be to allow shipping to or from
the inventory under the lower per unit rates of full-vehicle-load quantities.
Like wise, lower prices can be realized from price-quantity discount
schedules for purchased goods, because more can be purchased at one time
than is immediately needed.
Hedge Against Price Changes
Goods that are purchased on the open market are subject to the price levels
dictated by changing supply-demand patterns. Products of mines, agricultural
products, and crude oil are examples of such goods. Purchases may be made
in advance of need because of anticipated price increases. This creates an
inventory that the logistician must manage.

26
Protect Against Demand and Lead Time Uncertainties
In most cases, the level of demand on a logistics system and the time required
for re-supply cannot be known for sure. To assure product availability,
additional amounts of stock (safety stock) are maintained. Safety stocks are in
addition to the regular stock to meet production and market place needs.
Hedge Against Contingencies
Labor strikes, fires , and floods are just a few of the contingencies that can
be fall a company. Maintaining backup inventories is one way in which
normal supplies can be maintained for a period of time.
It is clear that maintaining inventories offers a number of benefits, but the
costs are high and risen dramatically with the interest rates on money. For the
logisticians the challenge is one of minimizing the investment in inventories
while balancing the efficiency needs of production and logistics with the
promotional needs of marketing. The high cost of capital has made this a vital
business problem.
Costs Associated with Inventories
Three different cost categories come in to play when managing inventories.
These are (1) carrying costs (2) procurement costs, and (3) out-of-stock
costs.
Carrying Costs : carrying costs refer to all the costs associated with holding a
quantity of goods for a period of time. This is actually a term that represents
a number of costs. Firstly, there is the cost of capital. Inventories tie up
capital that could be put to use in other ways inside the firm. The cost of
capital is usually considered to be the interest rate on money charged by
banks to their best customers.
Secondly , there are inventory service costs such as taxes and insurance.
Property tax levied on the assessed value of the company's assets is part of
the inventory carrying costs. Insurance costs for fire and theft protection of
inventories are only indirectly related to the amount of stock maintained.
However, they have traditionally been accounted for as a carrying cost.

27
Thirdly , there are storage-space costs. These are the recurring costs for
storage that relate to the amount of inventory on hand.
Fourthly , there are the inventory risk costs. These are the costs of stock
becoming unsaleable due to deterioration or obsolescence, damage, and
pilferage.
The overall cost of carrying inventories is surprisingly high to many business
people. Traditionally, a figure of 25% per year of the average value of
inventory maintained has been assumed.
Procurement Costs: are costs associated with acquiring the needed quantities
for stock replenishment. When an order is placed, a number of costs are
incurred as a result of order processing and preparation. More specific,
procurement costs include
1. the cost of processing an order through the order-processing, accounting,
and/or purchasing departments;
2. the cost of transmitting the order to the supplier;
3. the cost of setting up production to produce or setting up handling
procedures to fill the order quantity,
4. the cost of any materials handling or processing of the order at the
receiving dock; and
5. the price of the goods. Production setup costs may not be relevant to an
inventory decision if goods are purchased from outside suppliers. Also,
transportation cost and price may not be relevant if there are no volume
rate breaks.

Out of Stock Costs: when there is demand for goods that are not in stock,
out-of-stock costs are said to be incurred. Depending on how the potential
buyer reacts to the out-of-stock situation, one of two types of costs can occur:
1. lost sales costs, or
2. backorder costs.
Lost sales costs are encountered when a customer withdraws his or her order
for the product when an out of stock occurs. The cost sales cost is the profit

28
that is foregone on the sale, as well as any profits that may not be realized in
the future due to the negative effect that the out of stock may have on
customer goodwill. Products that are highly substitutable such as cigarettes,
foodstuffs, and aspiring tablets incur the lost sales cost. Actually, it is an
opportunity type cost because there is no direct expenditure of birrs. It is also
difficult to estimate because it requires predicting consumers' future intention
about buying the products.
Back order costs are more measurable, and do result in direct birr
expenditures by a firm. When a customer is willing to delay purchasing of a
product until and out of stock situation can be corrected, certain additional
costs are incurred by supplying the order. These back orders can result in
additional clerical and sales costs for order processing, and in additional
transportation and handling costs when such orders must be filled outside of
the normal distribution channel. Products that are likely to be back ordered
are those that can be fairly well differentiated in the customer's mind.
Automobiles and appliances are examples of products that customers may wait
for if they are not immediately available
1 from the stock on Key:
hand.
1. Total cost (inventory
carrying + procurement +
out of stock costs)
2. Inventory carrying costs
Birr
2 3. Procurement costs
4. Out of stock costs
3 5. Minimum cost reorder

4 quantity

5 Quantity
Figure 2.2: Inventory Investment for Various Service Levels
ORDER PROCESSING
Order processing costs tend to be minor compared to transportation or
inventory maintenance costs. Nevertheless, order processing is a primary
logistics activity. Its essential nature comes from the fact that there is a

29
critical time element in getting goods and services to customers. It is also the
primary activity that triggers product movement and service delivery.
As an activity that acts as a trigger for the goods to fulfill the demand
requirements, order processing involves a number of sub activities that every
logisticians should be aware of if he or she is to efficiently manage product
flows. These activities include order entry, order status reporting and
invoicing.
2.2.2. Supporting Activities
Supporting activities are those activities carried out by the logistics
organization that support the primary activities. These are:
A. Warehousing
B. Materials handling
C. Protective packaging
D. Acquisition
E. Product scheduling
F. Information maintenance
A. WAREHOUSING
Warehousing refers to the management of the space required to hold
inventories. It involves such problems as site selection, space determination,
stock layout, stock retrieval, dock design, and warehousing configuration.
Important Functions/Purposes of Warehouses
Warehouses provide a key link in the physical distribution chain. The
location , size , and capabilities of warehouses can proudly affect a company's
credibility to satisfy its customers and deliver products profitability. Modern
warehouses are clean , computerized , and efficient , and they are used for a
variety of purposes:
Storage : not surprisingly, companies store things in warehouses. However,
storage is more than just goods waiting for delivery to customers; warehouses
can also be used for product seals (aging caps with wishes), and blending
(coffee beans, for example).

30
Breaking Bulk : to keep transportation costs down, warehouses are often used
to break bulk. This happens when a centrally located warehouse receives a
large shipment, then breaks it down into smaller shipment intended for local
distribution. By limiting the number of shipment made over long distances,
breaking bulk takes some of the bite out of transportation costs.
Consolidation : on the other hand, warehouses can be used to consider a
number of small shipments to make one large shipment. For example, this is
frequently done with overseas transportation to reduce the number of
individual shipments.
Unitization : it refers to collecting many smaller packages together in a larger,
single load. Products are often unitized to make their transportation faster and
easier.
Containerization : the next step up from unitization is containerization,
collecting goods into large containers for more efficient shipment by truck,
train or ship.
Types of Warehouses
Warehouses can be classified into different categories by taking two basic
points as bases. Based on ownership , warehouses are classified into private ,
public , and bonded . Based on the commodity they store , warehouses can be
general , special , or refrigerated .
Based on ownership:
Private warehouses : are owned by individuals or group of individuals who
rent for future price advantage, rent advantage, and so forth.
Public warehouses : are those warehouses governed by the government. These
warehouses serve who so ever is able to meet the payment.
Bonded warehouses: are special warehouses constructed around airports ,
seaports , and so forth. They harbor imported goods or products to be
exported until the importer or the exporter pays the customs charges.
Based on the commodity they store:
General warehouses : are warehouses constructed for any kind of product
without any special commodity specification.

31
Special commodity warehouses : are those warehouses, unlike general
warehouses, constructed for accommodation special products, coffee for
example.
Refrigerated warehouses: are those warehouses that are specially designed
for perishable products. They are designed to keep temperature as per
requirement for different perishable products like fruits, eggs, flowers, milk
and so forth.
A major advancement in both public and private warehousing is the
distribution center, a specialized facility designed to rapidly direct goods
from suppliers to store or final consumers. Distribution centers use advanced
equipment and computers to receive, sort, reload, and route tens or hundreds
of thousands of packages daily.
B. MATERIALS HANDLING
Materials handling goes hand in hand with warehousing, and it also supports
inventory maintenance. It is an activity that is concerned with the movement
of the product at the stocking point-for example, transfer of goods from
warehouse receiving point to storage location and from storage location to
warehouse delivery point. A number of problems are important to materials
handling, such as selecting materials handling equipment, order picking
procedures, and workload balancing.
Product, or materials, handling is the problem of moving small quantities of
goods over relatively short distances compared with the longer-haul product
movement by transportation companies. It is an activity that takes place in
warehouses, production facilities, and retail stores, and also between
transportation modes. The concern is to be able to move the goods with speed
and low cost. Because the handling activity must be repeated many times,
what may be minor inefficiencies in any one trip can add up to substantial
diseconomies when taken over many products and a period of time. Materials
handling equipment and methods have shown more progress in improving
efficiency than perhaps any of other logistical activities.
C. PROTECTIVE PACKAGING

32
One of the objectives of logistics is to move goods with no more damage than
is economically reasonable. Good design of the package for the product's
protection helps to assure damage-free movement. In addition, proper package
dimensions encourage efficient storage and handling.
Product package has three important aspects. First, the package is a tool for
product promotion and use. Second, it provides protection for the product.
Finally, it is an instrument for improved distribution efficiency. Designing a
package therefore requires consideration of a number of interest areas.
Packaging for the Customer
Walk into any modern retail store and note the colorful array of products.
Products? No, packages! The packages may be necessary to protect products,
but marketers have used them to good advantage in promoting their firms'
products. Consider just a few of the ways.
First, the package provides an attractive method for getting the company's
message across the customers. It may be used to convey price information and
the virtues of the product. The package is an advertisement.
Second, the package dimensions may have to conform to shelf-space
requirements in stores. This offers consumers the greatest exposure to the
product among the other products competing for the same shelf space.
Finally, the package may offer some utility that enhances the product.
Packaging for Protection
One of the basic reasons for incurring the added expense of packaging is to
reduce the occurrence of damage, loss through theft or misplaced goods, or
spoilage. The greatest concern of the logistician for most of the products that
must be handled is damage.
Packaging for Distribution Efficiency
The final concern is how the package affects the efficiency of handling,
storing, and moving the product. These are some of the most important
concerns to the logistician in package design.
D. ACQUISITION

33
Acquisition is the logistics activity that makes the product available to the
logistics ystem. It is concerned with the selection of supply-source locations,
quantities to be acquired, timing of purchases, and the form in which the
product is to be acquired. The importance of acquisition to logistics is that
buying decisions have geographical and time dimensions that affect logistics
costs. Acquisition should not be confused with purchasing. Purchasing
includes many of the detail of the buying process (for example, price
negotiation and vendor rating) that are not specifically related to the logistics
task, hence the substitute term of acquisition used.
Acquisition, or purchasing, refers to those activities that take place between
the organization and its suppliers. Purchasing generally brings to mind the
idea of buying. The term acquisition is used here to mean those aspects of
purchasing that affect the availability and flow of the supply product.
Although product price and quality are vital considerations for choosing any
supplier, the third key element is delivery.
To some organizations, logistical management of supply side activities may
be of little concern. This is not because these activities are unimportant, but
because there may be relatively little control over supply movements.
Delivered pricing arrangements, lack of receiving inventories, and lack of
control over transport services may place the acquisition activities outside the
logistician's interest. More often than not, however, the organization is able
to exercise a degree of control over the logistics activities of its supply
channel. To many organizations, especially service organizations, the most
important logistical problems often center on the acquisition activity. The
logistics problems of supply management are only slightly different from
those of physical distribution. Acquisition in supply management is more a
matter of selecting among a limited number of supply sources, where as
physical distribution is concerned with distributing to customers located at
many points. Also, the volumes moved per shipment tend to be larger in the
supply channel than those in the distribution channel.

34
The benefits to the organization for good management of acquisition are quite
impressive. Normally, a firm spends between 40 and 60 percent of its sales
birr for purchased materials. Even small reductions in the cost of purchased
materials, whether through lower price or more efficient movement, can have
a dramatic effect on profitability.

E. PRODUCT SCHEDULING
Whereas acquisition relates to the supply (in bound) side of a manufacturing
firm, product scheduling relates to the distribution (out bound) side. It refers
primarily to the aggregate quantities to be produced and where and when they
should be produced. It does not refer to the detailed production scheduling
that is carried out on a daily basis by production planners.
Because productive capacity is limited and often dispersed geographically,
providing the right goods at the place and time needed for production
becomes a critical concern as goods flow from suppliers through the
productive facility and on to customers.
Timing the convergence of materials for the production process greatly affects
the efficiency with which the process can be carried out. Therefore,
production scheduling is not just a production process management problem,
but it involves logistical considerations as well.
The logistician is more concerned with the aggregate production schedule
than the detailed one. In fact, it is becoming more the case that the corporate
logistician specifies the overall product requirements that are needed to meet
demand. It is production's responsibility to create the product in quantities
and at locations at which company costs can be minimized. The details of
bringing land, labor, and capital together are generally production concern
rather than a logistics concern. At any given producing location, the questions
of what quantities to produce and when to produce them are important concern
because raw material flows must be planned, as well as provision made for
transportation and storage of both raw materials and finished goods. The

35
question of where goods should be produced involves all the activities in the
logistics mix.
Production scheduling at a given location has two distinct problems. First,
there is planning the timing of material flows, or aggregate planning. Second,
there is planning the sequence in which products are to be produced.

F. INFORMATION MAINTENANCE

No logistics function within a firm is likely to operate very efficiently

without necessary cost and performance information. Such information is
essential to good logistics planning and control. Maintaining a database of
important types of information-for example, customer locations, sales volume,
shipping patterns, and inventory levels supports efficient and effective
management of both primary and supporting activities.

2.3. Managing Physical Distribution on Three Levels

The management of physical distribution is a job that is carried out on three

levels: (1) strategic, (2) tactical, and (3) operational. The strategic level deals
with the strategic planning problem. That is, deciding in a broad sense what
the overall system configuration should be for distribution. More simply, it is
the placing of the warehouses, the selecting of the transportation modes, and
the designing of the order processing system. Strategic planning shapes the
distribution system in broad general terms. Physical distribution management
at the tactical level is resource utilization. In many respects, it is short-range
planning. When a firm invests in some part of the distribution system, such as
trucks, warehouses, order-transmittal equipment, or materials handling
equipment, there is the problem of using this owned equipment and these
facilities efficiently this is a tactical problem. If transportation equipment
could always move fully loaded, if warehouse space could always be fully
occupied, and if order transmittal equipment were never idle, the cost of

36
ownership would be at a minimum. Therefore, by the careful planning of
distribution flows on a routine basis (often a daily basis), management
attempts to achieve the highest utilization possible.

Operational management refers to the daily tasks that a distribution manager

and subordinates perform to assure that the product moves through the
distribution channel and on to the ultimate consumer. This includes such
activities as picking product from warehouse stocks, loading trucks for
delivery, packaging product for shipment, keeping track of inventory levels,
preparing stock replenishment orders etc. The focus of this aspect of
distribution management is mainly supervision and task accomplishment.
Strategic – what should our distribution system be? Tactical – how can the
distribution system best be utilized? Operational – let's get the goods out!
This is a way of classifying distribution management. It should be obvious
from the brief foregoing discussion that a great portion of top management's
job involves strategic planning. Middle management is most heavily involved
in tactical planning, and supervisory personnel are involved in more of the
operational activities.

2.4. Three Important Concepts of Physical Distribution

By this point in the discussion, at least some general ideas as to what the
strategic distribution problem should be established. But how can one
approach such seemingly complex problems? There are some basic concepts
that help. These are (1) cost tradeoffs, (2) the total cost concept, and (3) the
total system concept. It was the recognition of these important principles that
led to the grouping of logistics activities, as they are currently defined. They
represent capstone ideas for physical distribution management.
(1) The Cost Trade-off

37
The concept of the cost trade-off is fundamental to physical distribution
management. Without it, physical distribution management would probably
not be practiced as we know it today.

The cost trade-off concept is the recognition that the cost patterns of the
various activities of the firm sometimes display characteristics that put them
in economic conflict with one another. Consider the pattern of costs shown in
Figure 3 for the three primary logistics activities as they are influenced by the
selection of the number of warehouses in a distribution system. Notice that as
the number of warehouses is increased, transportation costs decline. This is
because bulk shipments can be made to warehouses at low volume rates.

A
Key
A. Total costs (Addition of
transportation,
Birr

B inventory and order

C
D processing costs).
B. Transportation costs
C. Inventory costs
Number of Warehouses in
Distribution System D. Order processing costs

Figure 3: Basic cost trade offs in determining the number of warehouses in a

distribution system.
Also, the distance that small-volume shipments must move from warehouse to
customer is reduced, lowering out bound transportation costs. Thus the
combinations of warehouse inbound and outbound transportation costs shows
a cost pattern that declines with increasing numbers of warehouses.
On the hand, inventory and order processing costs show the opposite pattern
to transportation costs and are therefore said to be in conflict with them.
Inventory costs increase with the number of warehouses because more stock is
needed to maintain the same level of stock availability than with fewer

38
warehouses. Order processing costs may also increase with the number of
warehouses if the warehouses serve as order processing points.
To make a decision as to the number of warehouses, the manager tries to
balance or "trade-off" the conflicting costs. This achieves the lowest cost
distribution system.
(2) The Total Cost Concept
The total cost concept and the cost trade off go hand in hand. The total cost
concept is the recognition that conflicting cost patterns should be examined
collectively and balanced at optimum. As show in Figure 3, the total relevant
cost for the number of warehouses is the addition of the three costs to form a
total cost curve. Note that the least-cost point on this curve is not at the point
where the transportation cost is minimum or where inventory or order
processing costs are minimum. Rather the least cost point lies at a point
between these. It was recognized that managing transportation, inventories,
and order processing activities collectively could lead to substantial cost
reduction when compared with managing them separately. The total cost idea
was instrumental in deciding which of a firm's activities should be grouped
together and called physical distribution activities. Further, it provided the
basic argument for the collective management of the logistics activities as
identified in this unit.
It is a general rule in distribution that the faster and more reliable the
transportation service, the lower the inventory requirement on both ends of
the goods movement. In addition, the speed of goods movement affects the
length of time that money is tied up in inventories while goods are in transit.

The essence of the total cost concept is to consider all the relevant cost
factors in a particular decision, add them to form the total cost, and search for
the minimum total cost alternative.
(3) The Total System Concept
The third important principle is the total system concept. This concept is an
extension of the total cost concept and is probably one of the most over used,

39
under defined terms in business today. It represents a philosophy for
distribution management that considers all those factors in a decision that are
in some way affected by the outcome of the decision. For example, in
choosing a mode of transportation, the total cost concept would encourage us
to consider the impact of the decision on the firm's inventories. On the other
hand, the total-system concept would encourage us to consider the impact of
the transportation choice on the buyer's inventories as well.
The total system approach is to look broadly at distribution problems in order
to uncover relationships that if neglected, could lead to sub optimal decisions.
This approach is particularly important to logistics because so much of
logistics management interfaces with other functional areas within, and
beyond, the legal boundaries of the firm.
2.5 Physical Distribution Versus Other Functional Areas
Physical distribution is the newest member of the organizational team.
Marketing and production are established areas within many firms. What is
the relationship of physical distribution to these areas?
2.5.1 Relationship to Marketing
Paul converse, a leading authority and teacher of marketing some years ago,
referred to physical distribution as "The Other Half of Marketing". Most
leading textbooks on marketing identify physical distribution as a key part of
the subject matter. For example, Jerome McCarthy defines the marketing mix
as made up of product, place (physical distribution), promotion and price.
Why do marketing people consider physical distribution to be such an integral
part of the marketing function? The answer lies in the basic mission of
marketing as practiced by most firms, that is, to generate the revenue for the
firm. Physical distribution contributes to this mission. Richard Lewis has
suggested that marketing has two basic purposes. One is the obtaining
demand, and the other is the servicing of demand. The two are linked by the
customer service level provided.

40
 Obtaining demand is a result of the promotional efforts of marketing, as well
as the price and product mix offered to consumers. Once the demand has been
secured, it must be served. This is where physical distribution comes in. The
physical distribution effort put the right product in the right place at the right
time to meet demand requirements. If there were no more to the relationship
than this, the demand obtaining and demand servicing activities could easily
be separated. But sales people have long recognized that physical distribution
actually contributes to creating demand. Product availability, prompt delivery,
and accurate order filling are just a few of the services that can please a
customer. Sales can be generated by good service. It is the service level that
binds the promotional and distribution efforts together. Figure 4 illustrates
the relationship.
Conversely, marketing efforts can help to control physical distribution.

Managerial Marketing Effort

area

Managerial Obtaining Demand Servicing Service

purpose Demand Level

Personal Advertising Warehousing Inventory

Selling

Activities
Sales Merchandising Pricing Transportation Order
Promotion Processing

PROMOTIONAL EFFORTS PHYSICAL DISTRIBUTION EFFORTS

Figure 4: Dividing the marketing efforts into its demand obtaining and
demand servicing activities.

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2.5.2 Relationship to Production
Production has been defined as the process by which goods and services are
created. Recently, there has been a movement to broaden the concept of
production into "operations". Operations not only include manufacturing
activities but service producing activities as well. Some have suggested that
logistics activities are a part of production, or that they can be integrated into
production concepts. No attempt is made here to resolve the argument as to
whether physical distribution is a part of production. Rather, it should be
recognized that producing activities and goods moving activities overlap to a
substantial degree. It is at this interface that the production/physical
distribution relationship occurs.
This relationship has not been as well defined as the one between physical
distribution and marketing. Nevertheless, the relationship is strong. It occurs
in at least two ways: (1) around the scheduling of replenishment of orders for
warehouses, and (2) around the product loading at plants.
It is often a distribution responsibility to initiate replenishment orders to
replace field warehouse stocks. If carried out without regard for production
costs, production may be forced into poor product sequencing and short
production runs. On the other hand, if production disregards distribution cost
in its product scheduling decisions, distribution costs may be too high, due to
the uneconomic transportation patterns and inflated inventory levels that are
forced into the distribution system. Better coordination between the timing
and the quantities flowing is needed.
Second, distribution patterns usually determine the quantities and the product
types produced at each of the plants that make up a multiple-plant network.
How the demand is assigned to the plants can greatly affect total production
costs. Therefore, plant loading and goods movement patterns must be planned
as a joint program.
Physical distribution activities are strategically linked to the production and
sales functions in a firm. Each function claims an interest in the physical
distribution activities, and rightfully so. The management of performance of

42
each function is affected by distribution activity levels. When this is fully
appreciated, we can see that it is not important to concern ourselves with
whether physical distribution is a part of production or a part of marketing or
a separate managerial function of equal status with production and marketing.
What is important is that effective coordination be achieved among the
various distribution activities so that the cost tradeoffs of physical
distribution are exploited.

2.6 The Future in Physical Distribution

Executives involved in physical distribution face tremendous challenges and
opportunities in the years ahead. These pressures originate both within their
companies and from external environmental forces.
Within most firms there is a need to coordinate physical distribution activities
more effectively so that they function as a system. Essentially this is a
problem in organization. If you ask, "Who is in charge of physical
distribution?" all too often, the answer is "No one". These activities often are
not coordinated. Managerial responsibility is fragmented among units that
may have conflicting goals. Fortunately, there is a trend toward the
establishment of a separate department responsible for all physical
distribution activities.
It is imperative that top management view logistics as one of its prime
responsibilities. Physical distribution costs are the largest single operating
cost in many firms. For countless companies, effective customer service
(which involves physical distribution activities primarily) can mean the
difference between a strong and a weak marketing position. Once the top
executives become aware of the stakes, they are likely to play an active role
in logistics management. If these internal conditions are not sufficient
incentive, then certainly the macro environmental forces should do the job.

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Unit 3:
The Retail Market and Retailing Institutions

3.1 Introduction
Retailing entails the business activities involved in selling goods and services
to consumers for their personal, family, or household use. It may be viewed
from the perspective s of manufacturers, service firms, consumers, and
traditional retailers. It includes tangible and intangible items, does not have
to use a store, and can be conducted by manufacturers and others as well as by
retail firms.
Retailing is the last stage in a channel of distribution, which contains the
businesses and people involved in the physical movement and transfer of
ownership of goods and services from producer to consumer. In a channel,
retailers perform many valuable functions as the intermediaries between
manufacturers, wholesalers, and other suppliers and final consumers. Via the
sorting process, retailers collect an assortment of goods and services from
various suppliers and offer them to customers. Retailers communicate with
customers and with other channel members, like manufacturers and
wholesalers. Retailers may ship, store, mark, advertise, and pre-pay for items.
They complete transactions with customers and often provide customer
services.
Retailers and their suppliers have complex relationships because retailers
serve two roles. They are part of a distribution channel aimed at the final
consumer, and they are also major customers for their suppliers. Thus,
divergent viewpoints may occur, and they must be reconciled. Channel

44
relations are smoothest with exclusive distribution; they are most volatile
with intensive distribution. Selective distribution combines aspects of both in
an attempt to balance sales goals and channel member cooperation.
Retailing has several special characteristics. The average size of a sales
transaction is small. Final consumers make many unplanned purchases. Most
retail customers must be drawn to a store location. In this unit the retail
market and retailing institution will be discussed.
3.2 Middlemen and channels of distribution
3.2.1 What Are Middlemen?
Middlemen are institutions or individuals situated in the marketing channels
at points between producers and final buyers. A middleman renders services
in connection with the purchase and/or sale of products moving from
producers to customers. A middleman either takes title to the merchandize or
actively aids in the transfer of ownership. Accordingly, middlemen are
commonly classified as merchant middlemen and agent middlemen. Merchant
middlemen actually take title to the goods. Agent middlemen like brokers and
manufacturers' agents never actually take title to the goods, but they do
actively assist in the transfer of title. The two major groups of merchant
middlemen are wholesalers and retailers.
Middlemen takeover some of the burden of marketing from producers. The
marketing functions they perform include buying, selling, grading, risk
taking, and developing and maintaining information database.
3.2.2 What Are Channels of Distribution?
Channels of distribution otherwise known as marketing channels can be
viewed as sets of independent organizations involved in the process of making
a product or service available for use or consumption by the consumer or
industrial user. In other words, they are the routes that products follow as
they are bought and sold on their way to the ultimate consumer or industrial
user. A channel always includes both the producer and the final customer for
the product, as well as middlemen involved in the title transfer. Even though
agent middlemen do not take actual title to the goods, they are included as

45
part of a distribution channel. This is because they play an active role in the
transfer of ownership.
Distribution channels are either direct or indirect. A channel of distribution is
said to be direct when products move directly from the producer to the final
consumer or industrial user. Whereas a distribution channel is referred to as
indirect when products pass through various intermediaries or middlemen.
Distribution channel decisions are among the most complex and challenging
decisions facing a firm.
3.3 Basic Retailing Terms
Retailers: Businesses or individuals that sell more of their goods and/or
services to final consumers in small quantities.
Retailing: Basically it is defined as the selling of goods or services
individually or in small quantities directly to the consumer for personal, non-
business use. It is also often referred to as marketing at the level of the final
consumer.
Retail mix: A combination of activities – planning physical facilities,
determining merchandize or services, pricing, promotional services, finance,
and control – engaged in by retailers in an attempt to satisfy their target
markets.
A retail sale: A sale made by any firm-manufacturer, wholesaler or retail
store to ultimate consumers for their personal and non-business use.
Guiding premise of retailing: The assumption that retailers must have the
right merchandise at the right time, in the right place, at the right price, and
in the right quantity in order to satisfy their customers and make a profit. This
basic premise of retailing should be thought of as the foundation for all retail
decision making.

3.4 Nature of Retail Market

Retailing is omnipresent (everywhere all the time), educational, dynamic, and

challenging. It is as old as biblical markets and as new as the personal

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computer. It is small town and big city, local and regional, national and
international. It is the most important link in the distribution chain from
producer to consumer, for almost all of our gross national product (GNP)
reaches us through some form of retailing.

To get into retailing is easy. To be forced out is just as easy. Consequently, to

survive in retailing a company must do a satisfactory job in its primary role –
catering to the consumer – and in its secondary role – serving producers and
wholesalers. This dual responsibility is both the justification for retailing and
the key to success in retailing.

3.5 Retailing's Place in the Marketing Channel

Distribution is one of the most important concerns of marketers today. There
would be little economic utility and even less satisfaction if manufacturers
created new, items but gave no though about how to get them to the consumer.
In an industrial world, where people are no longer self-sufficient, the key to
success in having the goods in the right place at the right time. If a marketing
system works well, it also provides for the four basic utilities isolated by
economists: time, place, possession, and form. In other words, the system
arranges for producing and having goods available when and where they are
wanted, that is, in retail stores. The completed retail sales transaction then
provides possession utility.

Are retailers always involved as goods move from manufacturer to user?

There is no single answer to this question because retailers and other engaged
in retailing exist at every level of the marketing channel and are therefore not
always in the same channel position. For example, although the route traveled
by a product may usually be through a traditional marketing channel, there is
always the possibility of buying it direct from a wholesaler or manufacturer.

47
A firm does not have to be a retailer by definition in order to engage in
retailing. Even though the largest percentage of consumer goods is marketed
through the retail sector, many other firms throughout the channel engage in
the functions traditionally performed by retailers.

3.6 Functions Performed by Retailers

Retailers undertake business functions or activities that increase the value of

the products and services they sell to consumers. These functions are:
providing an assortment of products and services.
breaking bulk – offering products in small quantities tailored to the
consumption pattern of individual consumers and households.
storing products (holding inventory) so that consumers can buy products when
they want them and in the quantities they want.
providing services to improve the ease with which consumers can purchase
and use products.
Offering Assortments
Manufacturers specialize in producing specific types of products. If each of
these manufacturers had its own stores that only sold its own products,
consumers would have to go many different stores to buy groceries to prepare
a single meal.

Retailers offer an assortment of products and services to their customers. By

offering an assortment, retailers enable their customers to choose from a wide
selection of brands, designs, sizes, colors, and prices in one location.

All retailers offer assortments of products, but they specialize in the

assortments they offer. Supermarkets provide assortments of food, health and
beauty aids and household products. Most consumers are well aware of the
product assortments retailers offer.

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Breaking Bulk
To reduce transportation costs, manufacturers and wholesalers typically ship
cases of frozen dinners or cartons of blouses to retailers, and then the
retailers provide the products in smaller quantities to meet consumer needs.

Storing Products
A major function of retailers is to keep inventory so that products will be
available when consumers want them. Thus, consumer can keep a much
smaller inventory of products, such as a tube of tooth paste or a half-gallon of
milk, at home because they know the retailers will have the products available
when they need more.

By maintaining an inventory, retailers provide a benefit to consumers – they

reduce the consumer's cost of storing products. First, the investment to store
products ties up the consumers' money that could be put in a bank account and
earn interest, or put to other use. Second, the products can be damaged or may
spoil while they are being stored.

Providing Services
Retailers also add value to their merchandise by providing a variety of
services. They offer credit so that consumers can have a product now and pay
for it in the future. They display products so that consumers can see and test
them before making a purchase. Retailers may have salespeople available to
answer questions and provide additional information about the products. Some
other retailers services include home delivery, gift wrapping, warranty
coverage, repairs, alternations, and unit pricing information for making
comparisons between brands.

3.7 Classifications of Retailing

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Broadly, retailing is classified into store retailing and non store retailing.
Although most retailing is done in retail stores, in recent years non-store
retailing has grown tremendously.

3.7.1 Store Retailing

Retail stores come in all shapes and sizes. They can be classified by one or
more several characteristics like amount of service, product line, relative
prices, control of outlets, and store cluster.

Retailers Classified by Amount of Service

Different products require different amount of service and customer service,
and customer service preference vary.

Self-service retailers: in such retailer stores, customers are willing to perform

their own "locate-compare-select" process to save money. Self-service is the
basis of discount operations and typically is used by sellers of convenience
goods (such as supermarkets) and nationally branded, fast moving shopping
goods (such as catalog show rooms).
Limited service retailers: these type of retailers provide more sales assistance
because they carry more shopping goods about which customers need
information. Their operating costs are higher resulting from higher process.
Full service retailers: sales people assist customers in every phase of the
shopping process. They carry usually more specialty goods for which
customers like to be "waited on". They provide more liberal return policies,
various credit plans, free delivery, home serving, and extras such as lounges
and restaurants. More services result in much higher operating costs, which
are passed along to customers as premium price.

Retailers Classified by Product Line

Retailers can also be classified by the length and breadth of their product
assortment.

50
Specialty stores: these retail stores carry a narrow product line with deep
assortment within that line (i.e., a number of product items). Specialty stores
should not be confused with specialty goods. In a sense, specialty stores may
carry any category of consumer goods, not just specialty goods. Specialty
stores can be classified further by the narrowness of their product lines. For
example:
a clothing store is a single line store
men's clothing store is a limited line store
men's custom shirt store is a super specialty store.
Department stores: department stores are retailers that carry a wide variety
and deep assortment, offer considerable customer services, and are organized
into separate departments for displaying merchandize.

A department store is organized into departments selling men's, women's, and

children's clothing and accessories; home furnishings and furniture; toys and
games, consumer electronics such as TVs, VCRs, and stereos; and kitchen
ware and small appliances.

Each department within the store has a specific selling space allocated to it, a
cash register to transact and record sales, and sales people to assist
customers. The department store often resembles a collection of specialty
shops.

Department stores are often looked to as the retailing leaders. They usually
lead in customer services – including credit, merchandise return, delivery,
fashion shows and Christmas displays. They also are leaders because of their
size.
Supermarkets: they are large stores specialized in groceries with self service
and wide assortments. Supermarkets introduced self-service, provided a very
broad product assortment in large stores, and emphasized low price by

51
reducing high cost services. Profits came from large volume of sales and not
from high markups.

Supermarkets offer few customer services. Most of them emphasize prices.

However, nowadays, they are improving their facilities and services to attract
more customers. Typical improvements are better locations, improved décor,
longer store hours, check cashing, delivery and even child care centers.
Convenience stores: provide a limited assortment of merchandise at a
convenient location and time in a neighborhood.

Convenience stores provide an opportunity for consumers to make fill-in

purchases quickly, without having to search through a large store and wait in
long checkout lines. Due to their small size and high turnover, convenience
stores typically receive deliveries every day.

Since the principal benefit provided by convenience stores is convenience,

they only have to offer a limited assortment and variety and can charge higher
prices than supermarkets.
Superstores, combination stores and hypermarkets: they differ from
conventional supermarkets by size and assortment. They are larger than the
conventional supermarkets.

Superstores: are larger versions of the supermarket. They are almost twice the
size of regular supermarkets and carry a large assortment of routinely
purchased food and non-food items. They offer such services as dry cleaning,
post offices, photo finishing, check cashing, bill paying, lunch counters, car
care and pet care.
Combination stores: are usually even larger than superstores. They are
combined food and drug stores. They are combined food and drug stores. They
offer more groceries and non-foods than a supermarket. Some combination
stores are joint ventures between supermarkets and drug chains.

52
Hyper stores: are even bigger than combination stores. They combine
supermarket, discount, and warehouse retailing. They carry more than just
routinely purchased goods, also selling furniture, appliances, clothing and
many other things.

Service retailing: service businesses are those businesses whose "product

line" is actually a service. There is considerable growth in service retailing.
Many organizations that offer services to consumers – such as banks,
hospitals, health spas, doctors, legal clinics, and universities – traditionally
have not considered themselves as retailers. Due to increased competition,
these organizations are adopting retailing principles to attract customers and
satisfy their needs.

Some service retailers provide services in the customer's home, while others
provide services in an office, often located in a strip shopping center.

Retailers Classified by Relative Prices

Retailers also can be classified according to the prices they charge. Most
retailers charge regular prices and normal quality goods and customer service.
Some offer higher quality goods and services at higher prices.

Discount stores: discount stores sell standard merchandise at lower prices by

accepting lower margins and selling higher volume. A true discount store
regularly sells its merchandise at lower prices, offering mostly national
brands, not inferior goods.
Off-price retailers: off-price retailers buy less than regular wholesale prices
and sell at less than retail. They tend to carry a changing and unstable
collection of higher-quality merchandise, often-leftover goods, overruns, and
irregulars obtained at reduced price from manufacturers or other retailers.

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There are three main types of off-price retailers. Namely: factory outlets,
independents and warehouse clubs.

Factory outlets: are off-price operations that are owned and operated by
manufacturers and they normally carry the manufacturer's surplus,
discontinued, or irregular goods.

Independents: are either owned and run by entrepreneurs or are divisions of

large retail corporations.

Warehouse clubs (wholesale clubs): sell a limited selection of brand name

grocery items, appliances, clothing and other goods at deep discounts to
members who pay annual membership fees.
Catalog showrooms: catalog showrooms sell a wide selection of high-mark
up, fast moving, brand name goods at discount prices by placing a complete
catalog and a number of sample items in a showroom and the remaining
inventory in an attached warehouse.

They offer a broad but shallow assortment of merchandise, low prices, and
few customer services. They stress selected product lines, such as cameras,
consumer electronics, jewelry, sporting goods, and gift items. Shoppers
examine the samples and catalogs available in the showroom or they may have
already received a catalog in the mail.

Retailers Classified by Control of Outlets

Corporate chains/chain stores: chain stores are two or more outlets that are
commonly owned and controlled, have central buying and merchandising, and
sell similar lines of merchandise. They appear in all types of retailing, but
they are strongest in department stores, variety stores, food stores, drugstores,
shoe stores, and women's clothing stores.

54
They achieve economies of scale through central buying for different stores,
which allows them to take advantage of quantity discounts. They also have
advantages in promotion and management – spreading the costs to many
stores.
Voluntary chains and retailer cooperatives: the growth of corporate chains
has encouraged the development of both voluntary chains and cooperative
chains.

Voluntary chains: are wholesaler – sponsored group of independent retailers

that engage in-group buying and common merchandising. The wholesaler
sponsor often provides training programs, computer and accounting
assistance.

Cooperative chains: are retailer – sponsored groups formed by independent

retailers to run their own buying organization and conduct joint promotion
effort.
Franchise: is a contractual association between a manufacturer, wholesaler,
or service organization (a franchiser) and independent business people
(franchisees) who buy the right to own and operate one or more units in the
franchise system.

Franchising is based on some unique product or service, on a method of doing

business, or on the trade name, goodwill, or patent that the franchiser has
developed the franchise benefit from the experience, buying power and the
image of the franchiser (the parent company). In return, the franchisee signs a
contract to pay fees and commissions – and to strictly follow the franchiser
rules.
Merchandising conglomerate: they are corporations that combine several
different retailing forms under central ownership and share some distribution
and management functions. Diversified retailing provides superior

55
management systems and economies that benefit all the separate retail
operations.

Retailers Classified by Type of Store Cluster

Most stores today cluster together to increase their customer pulling power
and to give consumers the convenience of one-stop shopping. The main types
of store cluster are central business district and shopping centers.

Central business district: they are retail cluster with department stores,
specialty stores, banks, and movie theaters. They are usually located in down
towns.
Shopping centers: they are groups of retail businesses planned, developed,
owned and managed as a unit.
Regional shopping centers: the largest shopping centers containing between
40 and 100 stores attracting customers from wide area.
Community shopping centers: contain 15 and 50 retail stores. They normally
contain a branch of a department store, supermarket, specialty stores, and
sometimes a bank.
Neighborhood shopping centers: generally contain 5 – 15 stores. They are
close and convenient for consumers. They usually contain a supermarket,
perhaps a discount store and several service stores dry cleaner, self-service
laundry, drugstore, video rental outlet, barber or beauty shop.

3.7.2 Non-Store Retailing

Although a large majority of retail transactions are made in store, a growing
volume of sales is taking place away from stores. Retailing activities resulting
in transactions that occur away from a retail store are termed non-store
retailing. Non-store retailing includes direct selling, telemarketing, automatic
vending and direct marketing. Each type may be used by producers and/or
retailers.

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Direct Selling
Direct selling is a personal contact between a sales person and a consumer
away from retail store. The two kinds of direct selling are door to door and
party plan.
Door to door: this means going directly to the consumers' home. It gives
consumers the opportunity to buy at home or another convenient non store
location. However, with the changing roles of women i.e., women now
working outside home, direct selling firms find new ways of making contract
with prospective customers. As the result office to office and house-sales
parties appear in the place of door to door retailing.
Party Plan/Home Sales Parties: in this plan, a host invites some friend to a
party and will make a sales presentation. This creates a more favorable selling
conditions than door to door as guest get to shop in a friendly, social
atmosphere.

Direct selling provides the most aggressive form of retail promotion for the
seller as well as the chance to demonstrate a product in the shopper's (rather
than the seller's) environment. The drawback is that direct selling is the most
expensive form of retailing due to higher costs for sales commission. This
resulted in higher prices.

Telemarketing
Sometimes called telephone selling, telemarketing refers to a sales person
initiating contract with a shopper and also closing a sale over the telephone.
It may rely on prospects who have requested information from the company or
whose demographics match those of the firm's target market.

Many products that can be bought without being seen are sold over the
telephone. Examples are magazine subscriptions, credit-card-membership etc.

57
Telemarketing allows customers to shop at house-usually placing order by
telephone and charging the purchase to a credit card. Typically, catalogs let
customers see the offerings. This can be real convenience to customers
especially if desired products are not available at local stores.

Automatic Vending
Automatic vending is selling and delivering products through vending
machines. This type of retailing involves no personal contact between the
buyer and seller.

Most products sold by automatic vending are convenience oriented or are

purchase on impulse. They are usually well known brands with high rate of
turnover. And the bulk of automatic vending sales has come from the "4 C's":
Cold drinks, coffee, candy, and cigarettes. They are also used to sell good
newspapers, food and snacks, cosmetics, audio tapes and even shoe shining
services.

Vending machines are found everywhere in factories, offices, lobbies, retail

stores, gasoline stations, airports, and train and bus terminals. However,
automatic vending machines are expensive to buy, stock and repair relative to
the volume they sell. And therefore prices of vended goods are higher.

Direct Marketing
Direct marketing through various advertising media that interact directly with
consumers, generally calling for the consumer to make a direct response. It
involves the use of non-personal media to contact customers who, in turn,
purchase products without visiting a retail store.

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To contact consumers, direct marketers use one or more of the following
media, radio, TV, newspapers, magazines, catalogs, and mailing (direct mail)
and computers.

Direct marketing allows sellers to focus efficiently on mini markets with

offers that better match specific consumer needs. It provides many benefits to
consumers as well. It saves them time, and it introduces them to new life style
and a larger selection of goods. In general, direct marketing allows great
selectivity to markets and provides convenient shopping for customers.

The major types of direct marketing are direct mail, catalog retailing and on
line shopping.
Direct Mail: companies mail consumers letters, brochures, and even product
sample, and ask that orders be placed by mail.
Catalog retailing: companies mail catalog to consumers or make them
available at retail stores.
On line shopping: shopping through interactive on line computer service two
way systems that link consumers with sellers electronically. These services
create computerized catalogs of products and services which enable
consumers compare the brands, then order one using a charge card all with out
leaving home.
3.8 Retailer Marketing Decisions

Retail marketing decisions in the area of target market, product assortment

and services, price, promotion and place are discussed in the following
paragraphs.

Target Market Decisions

A retailer's most important decision concerns the target market. Until the
target market is defined and profiled, the retailer cannot make consistent
decisions on product assortment, store décor, advertising messages and media,

59
price levels, and so on. Some stores are able to define their target market
quite well. Many retailers, however, do not clarify their target market or are
trying to satisfy too many markets, satisfying none of them well.

A retailer should carry out periodic market research to check that it is

satisfying its target customers.

Product Assortment And Services

Retailers have to decide on three major "product" variables: products
assortment, service mix, and store atmosphere. The retailer's product
assortment must match the shopping expectations of the target market. In fact,
it becomes a key element in the competitive battle among similar retailers.
The retailer has to decide on product assortment width (narrow or wide) and
depth (shallow or deep). Another product assortment dimension is the quality
of the goods. The customer is interested not only in the range of choice but
also in the quality of the product.

Retailers must also decide on the services mix to offer customers. The old
"mom and pop" grocery stores offered home delivery, credit, and conversation
services that today's supermarkets have completely eliminated. Some of the
major services that full service retailers can offer. The services mix is one of
the key tools of non price competition for differentiating one store from
another.

The store's atmosphere is a third element in its product arsenal. Every store
has a "feel", one store is dirty, another is charming, a third is palatial, a
fourth is somber. The store must embody a planned atmosphere that suits the
target market and leans them toward purchase. A funeral parlor should be
quiet, somber, and peaceful, and a discothque should be bright, loud, and
vibrating. The atmosphere is designed by creative people who know how to

60
combine visual, aural, olfactory, and tactile stimuli to achieve the desired
effect.

Price Decision
The retailers prices are a key competitive factor and reflect the quality of
goods carried and services offered. The cost of merchandise is the basis for
their pricing, and their ability to buy intelligently is a key ingredient in
successful retailing. Retailers can often make as much money through smart
buying as through smart selling. Beyond this, they must price carefully in a
number of other ways.

Promotion Decisions
Retailer use the normal promotional tools – advertising, personal selling,
sales promotion, and publicity – to reach consumers. Retailers advertise in
newspapers, magazines, radio, and television. The advertising is occasionally
supplemented by hand-delivered circulars and direct-mail pieces. Personal
selling requires careful training of the sales people in how to greet customers,
meet their needs, and handle the doubts and complaints. Sales promotion may
take the form of in store demonstrations, trading stamps, grand prizes, and
visiting celebrities. Publicity is always available to retailers who have
something interesting to say.

Place Decision
The retailer's choice of location is a key competitive factor in its ability to
attract customers. For example, customers primarily choose a bank that is
nearest to them. The problem breaks down into selecting regions of the
country in which to open stores, then particular cities, and then particular
sites.

Large retailers must wrestle with the problem of whether to locate several
small stores in many locations or larger stores in fewer locations. Generally

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speaking, the retailer should locate enough stores in each city to gain
visibility and distribution economies. The larger the individual stores, the
greater their trading area to reach. Firms use a variety of methods to assess
locations, including traffic counts, surveys of consumers shopping habits,
analysis of competitive locations, and so on.

3.9 The Future of Retailing

New Retail Forms: Shortening Retail Lifecycles new retail forms continue to
emerge to meet new situations and consumer needs but the lifecycle of new
retail forms is getting shorter.

Many retailing innovations are partially explained by the wheel of retailing

concept. According to this concept many new types of retailing forms begin as
low margin, low price, low status operations. They challenge established
retailers that have become "fat" by letting their costs and margins increase.
The new retailers loss increase forcing them to increase their price. The wheel
of retailing concept seems to explain the initial success and the later troubles
of department stores, supermarkets, discount stores and the recent success of
the price retailers.
Growth of Non Store Retailing: although most retailing still takes place the
old fashioned way across countries in store. Consumers now have an array of
alternative including mail order, television, phone and on line shopping. Such
advance may threaten some traditional retailers. They offer exciting
opportunities for others. Most store retailers are now actively exploring direct
retailing channels.
Increasing Inter Type Competition: today's retailers increasingly face
competition from many different forms of retailers. The competition between
chain superstores and small independently owned store has become
particularly heated. Because of their bulk buying power and high sales

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volume, chains can buy margins. The arrival of super stores can quickly force
near by independents out of business.
The Risk of Mega Retailers: the rise of huge mass merchandisers and specialty
super stores, the formation of vertical marketing systems and buying alliances
and a rash of retail mergers and acquisitions have created a core of super
power mega retailers. Through their superior information systems and buying
power, these giant retailers are able to offer better merchandise selection
goods and services and strong price savings to customers.
The mega retailers also are shifting the balance of power between retailers
and producers. A relative handful of retailers now control access to enormous
numbers of consumers giving them the upper hand in their dealing with
manufacturers.
Growing importance of retail technology: retail technologies are becoming
critically important as competitive tools. Progressive retailers are using
computer to produce better forecasts, control inventory costs, order
electronically from suppliers, and send e-mail between stores and even sell to
customers within a store.
Global Expansion of Major Retailers: retailers with unique formats and strong
brand positioning are increasingly moving into other countries. Many are
expanding internationally to escape mature and saturated home markets.
Retail Stores as "Communist" or "Hangouts": with the rise in the number of
people living alone, working at home or living in isolated, there has been
resurgence of establishments that regardless of the product or service they
offer, also provide a place for people to get together.

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Unit 4:
The Wholesale Market and Wholesaling Middlemen
4.1 Introduction

Wholesalers are intermediaries used in marketing channels. They perform

important marketing functions for the manufacturers and retailers. Like other
intermediaries in a distribution channel, wholesalers take over some of the
burden of marketing from the manufacturers. They are engaged in
transactional, logistical, and facilitating functions.

Wholesalers are categorized into various types. Some take title to the goods
they handle, whereas some others do not actually take title to the products
they deal with. Rather, they do actively assist in the transfer of title.

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Wholesalers are those individuals or institutions that are primarily engaged in
wholesaling activities. The only real criterion that wholesalers have to qualify
is their purpose for buying. Broadly viewed, sales made by one manufacturer
to another are wholesale transactions, and the selling manufacturer is engaged
in wholesaling. However, here we are concerned with companies that are
engaged primarily in wholesaling.

4.2 Nature and Importance of Wholesaling

Wholesaling includes all activities involved in selling goods or services to

those who buy for resale or business use. It excludes manufacturers and
farmers because they are engaged primarily in production, and it excludes
retailers.

Wholesalers (also called distributors) differ from retailers in a number of

ways. First, wholesalers pay less attention to promotion, atmosphere, and
location because they are dealing with business customers rather than final
consumers. Second, wholesale transactions are usually larger than retail
transactions, and wholesalers usually cover a larger trade area than retailers.
Third, the government deals with wholesalers and retailers differently in
regard to legal regulation and taxes.

Why are wholesalers used at all? Manufacturers could by pass then and sell
directly to retailers or final consumers. The answer lies in several efficiencies
that wholesalers bring about. First, small manufacturers with limited financial
resources cannot afford to develop direct selling organizations. Second, even
manufacturers with sufficient capital might prefer to use their funds to expand
production rather than carry out wholesaling activities. Third, wholesalers are
likely to be more efficient at wholesaling because of their scale of operation,
their wider number of customer contacts, and their specialized skills. Fourth,

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retailers who carry many lines often prefer to buy assortments from a
wholesaler rather than buy directly from each manufacturer.

4.3 Functions Performed by Wholesalers

Wholesalers perform the following important functions.

Selling and Promoting: wholesalers provide a sales force enabling
manufacturers to reach many small-business customers at a relatively low
cost. The wholesaler has more contracts and is often more trusted by the
buyer than is the distant manufacturer.
Buying and Assortment Building: wholesalers are able to select items and
build assortments needed by their customers, thus saving the customers
considerable work.
Bulk Breaking: wholesalers achieve savings for their customers through
buying in huge quantities and breaking the bulk into smaller units.
Warehousing: wholesalers hold inventories, thereby reducing the inventory
costs and risks to suppliers and customers.
Transportation: wholesalers provide quicker delivery to buyers because they
are closer than the manufacturer.
Financing: wholesalers finance their customers by granting credit, and they
finance their suppliers by ordering early and paying their bills on time.
Risk Bearing: wholesalers absorb some risk by taking title and bearing the
cost of theft, damage, spoilage, and obsolescence.
Market Information: wholesalers supply information to their suppliers and
customers regarding competitors' activities, new products, price development,
and so on.
Management Services and Counseling: wholesalers often help retailers
improve their operations by training their sales clerks, helping with stores'
layouts and displays, and setting up accounting and inventory control systems.
They may help their industrial customers by offering training and technical
services.

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4.4 Types of Wholesalers

Wholesalers vary greatly in products they carry, markets to which the sell and
method of operation. Accordingly, wholesalers can be classified as merchant
wholesalers, agent wholesaling middlemen (brokers and agents), and
manufactures' sales facilities (sales branches and offices).

4.4.1 Merchant Wholesalers

Merchant wholesalers are independently owned businesses that take title to
the merchandise they handle. In different trades they are called jobbers,
distributors, or mill supply houses. Merchant wholesalers can be sub
classified into full service wholesalers and limited service wholesalers.

Full Service Wholesalers

Full-service wholesalers provide such services as carrying stock, maintaining
a sales force, offering credit, making deliveries, and providing management
assistance. They include two types: wholesale merchants and industrial
distributors.

Wholesale Merchants: sell primarily to retailers and provide a full range of

services. General merchandise wholesalers carry several merchandise lines
while general line wholesalers carryout one or two lines in greater depth.
Specialty wholesalers specialize in carrying only part of a line. (Examples are
health food wholesalers, seafood wholesalers, and so on).
Industrial Distributors: are merchant wholesalers who sell to manufacturers
rather than to retailers. They provide several service, such as carrying stock,
offering credit, and providing delivery. They may carry a broad range of
merchandise, a general line, or a specialty line. Industrial distributors may
concentrate on such lines as MRO items (Maintenance, Repair, and Operating

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suppliers), OEM items (Original Equipment Suppliers such as ball bearings,
motors), or equipment (such as hand and power tools, fork trucks).

Limited Service Wholesalers

Limited service wholesalers offer fewer services to their suppliers and
customers. There are several types.
Cash and Carry Wholesalers: have a limited line of fast moving goods and
sell to small retailers for cash and normally do not deliver.
Truck Wholesalers: truck wholesalers perform a selling and delivery function
primarily. They carry a limited line of semi perishable merchandise (such as
milk, bread, snack foods), which they sell for cash as they make their rounds
of supermarkets, small groceries, hospitals, restaurants, factory cafeterias,
and hotels.
Drop Shippers: operate in bulk industries, such as coal, lumber, and heavy
equipment. They do not carry inventory or handle the product. Upon receiving
an order, they select a manufacturer, who ships the merchandise directly to
the customer on the agreed terms and time of delivery. The drop shipper
assumes title and risk from the time the order is accepted to its delivery to the
customer.
Rack Jobbers: serve grocery and drug retailers, mostly in the area of non food
items. They send delivery trucks to stores, and the delivery person sets up
toys, paper backs, hardware items, health and beauty aids, and so on. They
price the goods, keep them fresh, set up point of purchase displays, and keep
inventory records. Rack jobbers sell on consignment, which means that they
retain title to the goods and bill the retailers only for the goods sold to
consumers. Thus they provide such services as delivery, shelving, inventory
carrying, and financing. They do little promotion because they carry many
branded items that are highly advertised.
Producers' Cooperatives: are owned by farmer members and assemble farm
produce to sell in local markets. Their profits are distributed to members at

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the end of the year. They often attempt to improve product quality and
promote a co-op brand name.
Mail Order Wholesalers: send catalogs to retail, industrial, and institutional
customers featuring jewelry, cosmetics, specialty foods, and other small
items. Their main customers are businesses in small outlying areas. No sales
force is maintained to call on customers. The order is fill and sent by mail,
truck, or other efficient means of transportation.

4.4.2 Brokers and Agents

Brokers and agents differ from merchant wholesalers. They do not take title to
goods, and they perform only a few functions. Their main function is to
facilitate buying and selling, and for this they will earn a commission. They
generally specialize by product line or customer types.
Brokers
The chief function of a broker is to bring buyers and sellers together and
assist in negotiation. They are paid by the party who hired them. They do not
carry inventory, get involved in financing, or assume risk. The most familiar
examples are food brokers, real estate brokers, insurance brokers, and security
brokers.
Agents
Agents represent either buyers or sellers on a more permanent basis. There are
several types.
Manufacturers' Agents : represent two or more manufactures of
complementary lines. They enter into a formal written agreement with each
manufacturer covering pricing policy, territories, order handling procedure,
delivery service and warranties, and commission rates. They know each
manufacturer's product line and use their wide contacts to sell the
manufacturer's products. Manufacturers' agents are used in such lines as
apparel, furniture, and electrical goods. Most manufacturers' agents are small
businesses, with only a few employees, who are skilled salespeople. They are
hired by small manufacturers who cannot afford to maintain their own sales

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forces and by large manufacturers who want to use agents to open new
territories or to represent them in territories that cannot support full time
salespeople.
Selling Agents : are given contractual authority to sell a manufacturer's entire
output. The manufacturer either is not interested in the selling function or
feels unqualified. The selling agent serves as a sales department and has
significant influence over prices, terms, and conditions of sale. The selling
agents are found in such product areas as textiles, industrial machinery and
equipment, coal and coke, chemicals, and metals.
Purchasing Agents : generally have a long term relationship with buyers and
purchases for them, often receiving, inspecting, warehousing, and shipping
the merchandise to the buyers. One type consists of resident buyers in major
apparel markets, who look for suitable lines of apparel that can be carried by
small retailers located in small cities. They are knowledgeable and provide
helpful market information to clients as well as obtaining the best goods and
prices available.
Commission Merchants or houses : are agents who take physical possession
of products and negotiate sales. Normally, they are not employed on a long-
term basis. They are used most often in agricultural marketing by farmers who
do not want to sell their own output and do not belong to producers'
cooperatives. A commission merchant would take a truck load of commodities
to a central market, sell it for the best price, deduct a commission and
expenses, and remit the balance to the producer.

4.4.3 Manufacturers' Branches and Offices

Unlike merchant wholesalers, agents and brokers, manufacturer's branches

and offices are wholly owned extensions of the producer that perform
wholesaling activities. Producers will assume wholesaling functions when
there are no intermediaries to perform these activities, customers are few in
number and geographically concentrated, or orders are large or require

70
significant attention. Wholesaling activities performed by producers are
conducted by means of a branch office or sales office. A manufacturer's
branch office carries a producer's inventory, performs the functions of a full
service wholesaler, and is an alternative to a merchant wholesaler. A
manufacturer's sales office does not carry inventory, typically performs only a
sales function, and serves as an alternative to agents and brokers.

4.5 Wholesaler Marketing Decisions

Wholesalers-distributors have experienced mounting competitive pressures in

recent years. They have faced new sources of competition, demanding
customers, new technologies, and more direct buying programs by large
industrial, institutional, and retail buyers. As a result, they have had to
develop appropriate strategic responses. One major drive has been to increase
asset productivity by managing better their inventories and receivables. And
they have had to improve their strategic decisions on target markets, product
assortment and services, pricing, promotion, and place.
Target Market Decision
Wholesalers need to define their target markets and not try to serve everyone.
They can choose a target group of customers according to size criteria (e.g.,
only large retailers), type of customer (e.g., convenience food stores only),
need for service (e.g., customers who need credit), or other criteria. Within
the target group, they can identify the more profitable customers and design
stronger offers and build better relationships with them. They can propose
automatic reordering systems, set up management training and advisory
systems, and even sponsor a voluntary chain. They can discourage less
profitable customers by requiring larger orders or adding surcharges to
smaller ones.
Product Assortment and Services Decisions
The wholesalers "product" is their assortment. Wholesalers are under great
pressure to carry a full line and maintain sufficient stock for immediate

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delivery. But this can kill profits. Wholesalers today are reexamining how
many lines to carry and are choosing to carry only the more profitable ones.
They are grouping their items on an ABC basis, with A standing for the most
profitable items and C for the least profitable. Inventory carrying levels are
varied for the three groups. Wholesalers are also examining which services
count most in building strong customer relationships and which ones should
be dropped or changed for. The key is to find a distinct mix of services valued
by their customers.
Pricing Decisions
Wholesalers usually mark up the cost of goods by a conventional percentage,
say 20%, to cover their expenses. Expenses may run 17% of the gross margin
leaving a profit margin of approximately 3%. In grocery wholesaling, the
average profit margin is often less than 2%. Wholesalers are beginning to
experiment with new approaches to pricing. They might cut their margin on
some lines in order to win important new customers. They will ask suppliers
for a special price break when they can turn if into an opportunity to increase
the suppliers sales.
Promotion Decision
Wholesalers rely primarily on their sales force to achieve promotional
objectives. Even here, most wholesalers see selling as a single salesperson
talking to a single customer instead of a team effort to sell, build, and service
major accounts. As for non-personal promotion, wholesalers would benefit
from adopting some of the image making techniques used by retailers. They
need to develop an overall promotion strategy involving trade advertising,
sales promotion, and publicity. They also need to make greater use of
suppliers promotion materials and programs.
Place Decision
Wholesalers typically located in low rent, low tax are as retailers and put
little money into their physical setting and offices. Often the materials
handling systems and order processing systems lag behind the available
technologies. To meet rising costs, progressive wholesalers have been making

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time and motion studies of materials handling procedures. The ultimate
development is the automated warehouse. Orders are fed into a computer and
items are picked up by mechanical devices and conveyed on a belt to the
shipping platform, where they are assembled. Most wholesalers now use
computers to carryout accounting, billing, inventory control, and forecasting.

4.6 Organizations that Facilitate Wholesaling Functions

In addition to the three main categories of wholesalers that have been

described, there are other highly specialized organizations that perform
wholesaling functions. Certain facilitating organizations make it unnecessary
for a manufacturer or retailer to utilize a wholesaling establishment. The
following sections show ways in which typical wholesaling functions can be
performed by such facilitating agencies.
Public Warehouses
Public warehouse serves as storage facilities. An organization rents space in a
warehouse instead of constructing its own facilities or using a merchant
wholesaler's storage services. Public warehouses also provide other
wholesaling activities. Many warehouses order, deliver, collect accounts, and
maintain display rooms where potential buyers can inspect products. A
producer can place products in a bonded warehouse and use them as collateral
for a loan.

Field Warehouses
Field warehouses are producer controlled storage spaces that separate part of
the inventory in to a secure area within the warehouse. A field warehouse
manager takes control and becomes responsible for the products. This
operation makes it possible for a seller to obtain a warehouse receipt that can
be used as collateral for a loan.
Finance Companies

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Products can be owned by a finance company or a bank while wholesalers or
retailers maintain physical possession. Automobile dealer often call this form
of financing "floor planning", it allows them to maintain a large inventory of
cars to give customers greater selection and increase sales.
Transportation Companies
Rail, truck, air and other carriers help manufacturers and retailers transport
products without aid of middlemen. For example, freight forwarders combine
less than full shipments into standard full loads at savings to customers.
Perhaps at a carload rate rather than a less than car load rate. United parcel
service is an example of a freight forwarder that provides door-to-door
service for small containers and packages.
Trade Shows and Trade Marts
Tradeshows and trade marts allow manufactures or wholesalers to exhibit
products to potential buyers and, therefore, assist in the selling and buying
functions. Trade shows offer both selling and non-selling benefits. On the
selling side, they allow vendors to identify prospects; gain access to key
decision makers in current or potential customer companies; disseminate facts
about their products, services, and personnel; and actually sell products and
service current accounts through contacts at the show. The non-selling
benefits include opportunities to maintain the company image with
competitors, customers and the industry and to gather information on
competitor's products and price. Other important marketing variables on
which trade shows have a positive influence include maintaining or enhancing
corporate morale, product testing, and product evaluation.

Tradeshows can permit direct buyer-seller interaction and may eliminate the
need for agents. Trade marts are relatively permanent facilities that firms can
rent to exhibit producers year round.
4.7 Trends in Wholesaling
Manufacturers always have the option of bypassing wholesalers or of
replacing in efficient wholesalers with better ones. The distinction between

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wholesaling activities that can be performed by any business and the
traditional wholesaling establishment is somewhat blurred. Manufactures,
retailers, and facilitating organizations perform wholesaling functions to
bridge the gap between manufacturers and consumers. Wholesaling functions
can be shifted or shared, but note eliminated. Wholesaling activities have to
be performed by someone or by some institution.
Prominence Among Types of Wholesalers
Two kinds of shifts have been taking place in wholesaling activities. First,
merchant wholesalers have increased while manufacturers' sales branches
have declined. This shift indicates that merchant wholesalers have provided
more efficient stocking operations than manufacturers could provide for
themselves. (Exceptions to this pattern are seen in industries producing drugs,
automobiles, hardware, machinery, and equipment). Second, the share of trade
for manufacturers' sales offices has increased, while agents and brokers'
shares have declined. Manufactures' sales offices perform essentially the same
wholesaling functions as agents and brokers; the shift is from one type of
selling operation to another. This movement indicates that manufacturers'
sales offices have developed more effective selling methods than independent
agents.
In reaction to the integrated wholesaling activities of large corporate chains
owned by retailers, voluntary chain wholesalers have evolved and have
become strong establishments in the food industry. Voluntary wholesale
chains can be formed by independent retailers or independent wholesaler's.
Through innovative wholesaling methods, small independent food retailers
can operate as efficiently and effectively as large chains.
Bypassing Wholesalers
There is a trend to bypass traditional wholesaling establishment when
alternative channels offer advantages for retailers or manufactures. New
factory outlet malls illustrate the desire of some manufacturers to sell directly
to the public. The following environmental conditions favor circumvention of
traditional wholesalers:

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Selling directly to retailers and industrial users becomes more important as
unit value, perishablitiy, and the need for service and installation increase.
If the manufacturer is strong financially and has a long line of products,
direct sales are more feasible.
When retailers or users make large scale purchases or when customers are
concentrated, direct sales may be employed.
In general, there is a trend toward simplified marketing channels and fewer
distribution points, with a corresponding opportunity for greater
centralization and control of distribution. Many producers are opening retail
stores to gain a larger share of the market by exposing their product lines to
more consumers.
The nature of new types of wholesaling establishments that arise will depend
on the changing mix of activities that retailers and producers perform and on
the innovative efforts of wholesalers to develop efficiency in the marketing
channel. The trend toward larger retailers – super stores and the like – will
provide opportunities as well as threats to wholesaling establishments.
Opportunities will develop from the expanded product lines of these mass
merchandisers. A merchant wholesaler of groceries may want to add other
low-cost, high volume products that are sold in superstores. On the other
hand, some limited function merchant wholesalers may not be needed. The
volume of sales may eliminate the need for rack jobbers, for example, who
usually handle slow moving products that are purchased in limited quantities.
The future of independent wholesalers, agents, and brokers depends on their
ability to delineate markets and provide desired services. Wholesalers with
low cost of operations are the only ones that will do well.

Unit 5:
Distribution/Marketing Channels
5.1 Introduction

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Most producers do not sell their goods directly to the final users. Between
them and the final users a host of marketing intermediaries performing a
variety of functions and bearing a variety of names (like retailers and
wholesalers discussed in unit 3 and 4) are involved.

Distribution channels can be compared to a pipeline through which water

flows from a source to terminus. Marketing channels make possible the flow
of goods from a producer, through intermediaries, to a buyer.

Marketing channel decisions are among the most critical decisions facing
management. The company's chosen channels intimately affect all the other
marketing decisions like pricing and promotion.

Reaching prospective buyers, either directly or indirectly, is a prerequisite for

successful marketing. At the same time buyers benefit from distribution
systems used by firm.

This unit focuses on marketing channels of distribution and why they are
important component in the marketing mix. It then shows how such channels
benefit consumers and the sequence of firms that make up a marketing
channel. Finally it describes factors that influence the choice and management
of marketing channels, including channel conflict and legal restriction.

5.2 Nature and Importance of Channels of Distribution

As defined in unit three-distribution channel (also called marketing channel

or trade channel) is the route that products follow as they are bought and sold
on their way to the final user. Marketing channel consists of various
intermediaries that perform important marketing functions.

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The use of middlemen largely boils down to their superior efficiency in
marketing goods widely available and accessible to target markets. Marketing
intermediaries, through their contacts, experience, specialization, and scale of
operation, offer the producer more than it can usually achieve on its own. The
importance of intermediaries is made even clearer when we consider the
functions they perform and the benefits they create for buyers. Few consumers
appreciate the value of intermediaries, however, producers recognize that
intermediaries make selling goods and services more efficient because they
minimize the number of sales contacts necessary to reach a target market.

5.3 Marketing Channels Functions and Flows

A marketing channel performs the work of moving goods from producers to

consumers. It overcomes the time, place, and possession gaps that separate
goods and services from those who would use them. Members in the
marketing channel perform a number of key functions and participate in the
following marketing flows:
Information : the collection and dissemination of marketing research
information about potential and current customers, competitors, and other
actors and forces in the marketing environment.
Promotion : the development and dissemination of persuasive communications
about the offer designed to attract customers.
Negotiation : the attempt to reach final agreement on price and other terms so
that transfer of ownership or possession can be effected.
Ordering : the backward communication of intentions to buy by the marketing
channel members to the manufacturer.
Financing : the acquisition and allocation of funds required to finance
inventories at different levels of the marketing channel.
Risk taking : the assumption of risks connected with carrying out the channel
work.

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Physical possession : the successive storage and movement of physical
products from raw materials to the final goods.
Payment : buyers paying their bills through banks and other financial
institutions to the sellers.
Title : the actual transfer of ownership from the organization or person to
another.

These functions and flows are listed in the normal order in which they arise
between any two channel members. Some of these flows are forward flows
(physical, title, and promotion): others are backward flows (ordering and
payment); and still others move in both directions.

The question is not whether these functions need to be performed – they must
be – but rather who is to perform them. All of the functions have three things
in common: they use up scarce resources; they can often be performed better
through specialization; and they are shiftable among channel members. To the
extent that the manufacturer performs the functions, the manufacturer's costs
go up, and its prices must be higher. When some functions are shifted to
middle men, the producer's costs and prices are lower, but the middle men
must add a charge to cover their work. If the middle men are more efficient
than the manufacturer, the prices faced by consumers should be lower.
Consumers might decide to perform some of the functions themselves, in
which case they should enjoy lower prices. The issue of who should perform
various channel tasks is one of relative efficiency and effectiveness.

Marketing functions, then, are more basic than the institutions that at any
given time perform them. Changes in channel institutions largely reflect the
discovery of more efficient way to combine or separate economic functions
that must be carried on to provide meaningful assortments of goods to target
customers.
5.4 Number of Channel Levels

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Marketing channels can be characterized by the number of channel levels.
Each middleman that perform work in bringing the product and its title closer
to the final buyer constitutes a channel level. Since the producer and the final
customer both perform work, they are part of every channel. We will use the
number of intermediary levels to designate the length of a channel.

A zero level channel (also called a direct marketing channel) consists of a

manufacturer selling directly to the final customer. The major ways of direct
marketing are door to door, home parties, mail order, telemarketing, TV
selling, and manufacturer owned stores.

A one level channel contains one selling intermediary, such as a retailer. A

two level channel contains two intermediaries. In consumer markets, they are
typically a wholesaler and a retailer. A three level channel contains three
intermediaries.

5.5 Channel Design Decisions

We will now examine several channel decision problems facing

manufacturers. In designing marketing channels, manufacturers have to
struggle between what is ideal, what is feasible, and what is available. A new
firm typically starts as a local operation selling in a limited market. Since it
has limited capital, it usually uses existing middlemen. The number of
middlemen in any local market is apt to be limited: a few manufacturer's sales
agents, a few wholesalers, several established retailers, a few trucking
companies, and a few warehouses. Deciding on the best channels might not be
a problem. The problem might be to convince one or a few available
middlemen to handle their line.

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Designing a channel system calls for analyzing customer needs, establishing
channel objectives, identifying the major channel alternatives, and evaluating
them.
5.5.1 Analyzing Service Output Levels Desired by Customers
Understanding what, where, why, when, and how target customers buy is the
first step in designing the marketing channel. The marketer must understand
the service output levels desired by the target customers. Channels produce
five service outputs:

Lot Size : is the number of units that the marketing channel permits a typical
customer to buy on a buying occasion. The small the lot size, the greater the
service output level that the channel must provide.
Waiting Time : is the average time that customers of that channel wait for
receipt of the goods. Customers normally prefer fast delivery channels. Faster
service requires a greater service output level.
Spatial Convenience : expresses the degree to which the marketing channel
makes it easy for customers to purchase the product. Spatial convenience is
being further augmented by the use of direct marketing.
Product Variety : represents the assortment breadth provided by the marketing
channel. Normally customers prefer greater assortment breadth because it
increases the chance of exactly meeting their need.
Service Backup : represents the add on services (credit, delivery, installation,
repairs) provided by the channel. The greater the service backup, the greater
the work provided by the channel.

The marketing channel designer must know the service outputs desired by the
target customers. Providing increased levels of service outputs means
increased costs for the channel and higher prices for customers. The success
of discount stores indicates that many customers are willing to accept lower-
service outputs when this translates into lower prices.

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5.5.2 Establishing the Channel Objectives and Constraints
The channel objectives should be stated in terms of targeted service output
levels. Usually, several segments can be identified that desire differing
service output levels. Effective channel planning requires determining which
market segments to serve and the best channel to use in each case. Each
producer develops its channel objectives in the face of several constraints.
Channel objectives vary with products characteristics. Perishable products
require more direct marketing because of the dangers associated with delays
and repeated handling. Bulky products, such as building materials or soft
drinks, require channels that minimize the shopping distance and the number
of handlings in the movement from producer to consumers. Non-standardized
products, such as custom-built machinery and specialized business forms, are
sold directly by company sales representatives because middlemen lack the
requisite knowledge. Products requiring installation and/or maintenance
services are usually sold and maintained by the company or exclusively
franchised dealers. High unit value products are often sold through a company
sales force rather than through middlemen.

Channels design must take into account the strengths and weaknesses of
different types of intermediaries. For example, manufacturers' representatives
are able to contact customers at a low cost per customer because the total cost
is shared by several clients. But the selling effort per customer is less intense
than if the company's sales representatives did the selling. Channel design is
also influenced by the competitors' channels.

Channel design must adapt to the larger environment. When economic

conditions are depressed, producers want to move their goods to market in the
most economical way. This means using shorter channels and dispensing
goods. Legal regulations and restrictions also affect channel design. The law
looks unfavorably upon channel arrangements that "may tend to substantially
lessen competition or tend to create a monopoly."

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5.5.3 Identified the Major Channel Alternatives
After a company has defined its target market and desired positioning, it
should identify its channel alternatives. A channel alternative is described by
three elements. Namely: the types of business intermediaries, the number of
intermediaries, and the terms and responsibilities of each channel participant.

A. Types of Intermediaries
The firm needs to identify the types of intermediaries available to carry on its
channel work.

B. Number of Intermediaries/Intensity of Distribution

The intensity of distribution refers to the number of middlemen to be
employed at the wholesale and retail levels. Three degrees of distribution
density exist: intensive, exclusive, and selective.
Intensive distribution: utilizes as many outlets as possible and is especially
appropriate for convenience goods and common raw materials.
Exclusive distribution: is the extreme opposite of intensive distribution
because only one retail outlet in a specified geographical area carries the
firm's product. It is typically chosen for specialty products or services.
Selective distribution: uses more than one outlet per market but less than all
available outlets. This strategy gains good market coverage and gains better
than average selling effort.

C. Terms and Responsibilities of Channel Members

The producer must determine the conditions and responsibilities of the
participating channel members. The main elements in the "trade relations
mix" are price policies, conditions of sale, territorial rights, and specific
services to be performed by each party.

Price Policy calls for the producer to establish a price list and schedule of
discounts. The middlemen must see these as equitable and sufficient.

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Conditions of Sale refer to payment terms and producer guarantees. Most
producers grant cash discounts to their distributors for early payment.
Producers might also guarantee distributors against defective merchandise or
price declines. A guarantee against price declines induces distributors to buy
larger quantities.
Distributors' Territorial Rights are another element in the trade-relations mix.
Distributors want to know where the producer will enfranchise other
distributors. They would also like to receive full credit for all sales taking
place in their territory, whether or not they did the selling.
Mutual Services and Responsibilities must be carefully spelled out, especially
in franchised and exclusive agency channels.
5.5.4 Evaluating the Major Channel Alternatives
Suppose a producer has identified several channel alternatives and wants to
determine the best one. Each alternative needs to be evaluated against
economic, control, and adaptive criteria.

Economic Criteria
Each channel alternative will produce a different levels of sales and costs.
The first question is whether more sales will be produced through a company
sales force or through a sales agency. Most marketing managers believe that a
company sales force will sell more. Company sales representatives
concentrate entirely on the company's products; they are better trained to sell
the company's products. They are more aggressive because their future
depends on the company's success; they are more successful because many
customers prefer to deal directly with the company.

Control Criteria
Channel evaluation must be broadened to include control issues. Using a sales
agency poses a control problem. A sales agency is an independent business
firm seeking to maximize its profits. The agents may concentrate on the
customers who buy the most, not necessarily of the manufacturer's goods.

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Furthermore, the agents might not master the technical details of the
company's product or handle its promotion materials effectively.

Adaptive Criteria
In order to develop a channel, the channel members must make some degree
of commitment to each other for a specified period of time. Yet these
commitments invariably lead to a decrease in the producer's ability to respond
to a changing market place. In rapidly changing, volatile, or uncertain product
markets, the producer needs to seek channels structures and policies that
maximize control and ability to swiftly change marketing strategy.

5.6 Selecting Channel of Distribution

Most distribution channels include middlemen, but some do not. A channel

consisting only of producer and final consumer, with no middlemen providing
assistance is called direct distribution. In contrast, a channel of producer,
final customer, and at least one level of middlemen represent indirect
distribution. With indirect distribution a producer must determine the type(s)
of middlemen that will best serve its needs. A wide range of options are
available in selecting channels of distribution.

5.6.1 Major Channels of Distribution

All products whether they be consumer goods, industrial goods or services
require a channel of distribution. Industrial channels tend to be shorter than
consumer channels because of the small number of ultimate customers, the
greater geographic concentration of industrial customers, and the greater
complexity of the products, which require close producer customer liaison.
Service channels also tend to be short because of the intangibility of services
and the need for personal contact between the service provider and consumer.

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Distribution of Consumer Goods
Five channels are widely used in the marketing of consumer products. In each,
the manufacturer also has the alternative of using sales branches or sales
offices.

Producer Consumer
The shortest, simplest channel of distribution for consumer products is from
the producer to the consumer, with no middlemen involved. The producer may
sell from house to house or by mail.

Producer Retailer Consumer

Many large retailers buy directly from manufacturers and agricultural
producers.

Producer Wholesaler Retailer Consumer

If there is a "traditional" channel for consumer goods, this is it. Small
retailers and small manufacturers by thousands find this channel the only
economically feasible choice.

Producer Agent Retailer Consumer

Instead of using wholesaler, many producers prefer to use a manufacturers'
agent or some other agent middleman to reach the retail market, specially
large scale retailers. For example, a manufacturer of a glass cleaner selected a
food broker to reach the grocery store market, including the large chains.
Producer Agent Wholesaler Retailer Consumer
To reach small retailers, the producers mentioned in the preceding paragraph
often use agent middlemen, who in turn call on wholesalers that sell to small
stores.

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Distribution of Industrial Goods
Four types of channels are widely used in reaching industrial users. Again, a
manufacturer may use a sales branch or a sales office to reach the next
institution in the channel.

Producer Industrial User

This direct channel accounts for a grater birr volume of industrial products
than any other distribution structure. Manufacturers of large installations,
such as airplanes, generators, and heating plants, usually sell directly to
users.

Producer Industrial Distributor User

Producers of operating supplies and small accessory equipment frequently use
industrial distributors to reach their markets. Manufacturers of building
material and air conditioning equipment are two examples of firms that make
heavy use of the industrial distributor.

Producer Agent User

Firms without their own marketing department find this a desirable channel.
Also, a company that wants to introduce a new product or enter a new market
may prefer to use agents rather than its own sales force.

Producer Agent Industrial Distributor User

This channel is similar to the preceding one. It is used when, for some reason,
it is not feasible to sell through agents directly to the industrial user. The unit
sale may be too small for direct selling. Or decentralized inventory may be
needed to supply users rapidly in which case the storage services of an
industrial distributor are required.

c) Service Channel

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Distribution channels for services are usually short, either direct or by using
an agent. Since stocks are not held, the role of the wholesaler, retailer or
industrial distributor does not apply. There are two alternatives whether they
be consumer or industrial customers.
Service Provider Consumer or Industrial Customer
The close personal relationships between service providers and customers
often mean that service supply is direct. Examples include health care, office
cleaning, accountancy, marketing research and law.

Service Provider Agent Consumer or Industrial Customer

A channel intermediary for a service company usually takes the form of an
agent. Agents are used when service provider is geographically distant from
customers, and where it is not economical for the provider to establish their
own sales team. Examples include insurance, travel, secretarial and theatrical
agents

5.6.2 Factors Affecting Choice of Distribution Channels

Because a channel of distribution should be determined by customer buying
patterns, the nature of the market is the key factor influencing management's
choice of channels. Other major considerations are the product, the
middlemen, and the company itself. Basically, when selecting its channels of
distribution, a company should follow the criteria of the three C's – Channel
Control, Market Coverage, and a Cost that is consistent with the desired level
of customer service.
a) Market Considerations
Perhaps the most obvious point to consider is whether the produce is intended
for the consumer or industrial market. If it is going to the industrial market,
of course retailers will not be included in the channel. In either case, other
significant market variables should be considered.
Number of potential customers : with relatively few potential customers, a
manufacturer may use its own sales force to sell directly to consumers or

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industrial users. For a large number of customers, the manufacturer would
more likely use middlemen. A related point is the number of different
industries to which a firm sells. One company, marketing drilling equipment
and supplies only to the oil industry, sold directly to users. A paper products
manufacturer, on the other hand, made extensive use of industrial distributors
to reach many different industries.
Geographic concentration of the market: direct sale to the textile or the
garment manufacturing industry is feasible because most of the buyers are
concentrated in a few geographic areas. Even in the case of a national market,
some segments have a higher density rate than others. Sellers may establish
sales branches in densely populated markets, but they would use middlemen in
the less concentrated markets.
Order size : manufacturers would sell directly to retailers (like large grocery
chains) because the larger order size and total volume of business make this
channel economically desirable. The same manufacturer, would use
wholesalers to reach small grocery stores whose order are usually too small to
justify direct channel.

b) Product Consideration
Unit value : the unit value of a product affects the amount of funds available
for distribution. Thus, the lower the unit values, the longer, usually are the
channels of distribution. However, when products of low unit value are sold
in large quantities or are considered with other goods so that the total order is
large, shorter channels may be economically feasible.
Perishability: products subject to physical or fashion perishability must be
speeded through their channels. The channels are short.
Technical nature of a product : an industrial product that is highly technical
is often distributed directly to industrial users. The producer's sales force
must provide considerable presale and post-sale service; wholesalers normally
cannot do this.

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Consumer products of a technical nature provide a real distribution challenge
for manufacturers. Ordinarily manufacturers cannot sell the goods directly to
the consumer. As much as possible, manufacturers try to sell directly to
retailers, but even then the servicing of the product often poses problems.

c) Middlemen considerations
Service provided by middlemen : each producer should select middlemen that
will provide those marketing services that the producer either is unable to
provide or cannot economically perform.
Availability of desired middlemen : the middlemen whom a producer desires
may not be available. They may be carrying competitive products and may not
wish to add another line.
Attitude of middlemen toward manufacturers' policies: sometimes,
manufacturers' choices of channels are limited because their marketing
policies are not acceptable to certain types of middlemen. Some retailers or
wholesalers, for example, are interested in carrying a line only if they can get
an exclusive franchise in a territory.

d) Company considerations
Financial resources : a financially strong company needs middlemen less than
one that is financially weak. A business with adequate finances can establish
its own sales force, grant credit, or warehouse its own products. A financially
weak firm would have to use middlemen who could provide these services.
Ability of management : channel decisions are affected by the marketing
experience and ability of the firm's management. Many companies lacking
marketing know how prefer to turn the distribution job over to middlemen.
Desire for channel control : some producers establish short channels simply
because they want to control the distribution of their products, even though
the cost of the more direct channel may be higher. By controlling the channel,
producers can achieve more aggressive promotion and better control both the
freshness of merchandise stocks and the retail prices of their products.

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Services provided by seller : often producers' channel decisions are influenced
by the marketing services they can provide in relation to those demanded by
middlemen. For example, often a retail chain will not stock a given product
unless it is pre sold through heavy manufacturer advertising.
5.7 Distribution Channel Management

A number of channel management issues must be addressed. These are the

selection, motivation, training, evaluation of channel members, and managing
conflict between manufacturers and other channel members.
Selection
For some producers (notably small companies) the distribution problem is not
so much channel selection as channel acceptance. Selection then involves
identifying candidates and developing selection criteria.

Identifying sources: sources for identifying candidates include trade sources,

reseller enquiries, customers of distributors, and the field sales force. Trade
sources include trade associations, exhibitions and trade publications.
Reseller enquiries show that the possible distributor is enthusiastic about the
possibility of a link. Customers of distributors are a useful source since they
can comment on their merits and limitations. Finally, if a producer already
has a field sales force calling on intermediaries, sales people are in a good
position to seek out possible new distributors in their own territory.
Developing selection criteria: common selection criteria include marketing,
product and customer knowledge, market coverage, quality and size of the
sales force (if applicable) reputation among customers, financial standing, the
extent to which competitive and complementary products are carried,
managerial competence and hunger for success, and the degree of enthusiasm
for handling the producer's lines.
Motivation
Once selected, channel members need to be motivated to agree to act as a
distributor, and allocate adequate commitment and resource to the producer's

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lines. The key to effective motivation is to understand the needs and problems
of distributors since needs and motivations are linked. Possible motivators
include financial rewards, territorial exclusivity, providing resource support
and developing strong work relationships.

In short, management of independent distributors is best conducted in the

context of informal partnerships. Producers should seek to develop strong
relationships with their distributors based on a recognition of their
performance and integrated planning and operations. For example, jointly
determined sales targets could be used to motivate and evaluate sales people
who might receive a bonus upon achievement.
Training
The need to train channel members obviously depends on their internal
competences. Large market-supermarket chains, for example, may regard an
invitation by a manufacturer to provide marketing training as an insult.
However, many smaller distributors have been found to be weak on sales
management, marketing, financial management, stock control and personnel
management and may welcome producer initiatives on training. From the
producer's perspective training can provide the necessary technical knowledge
about a supplier company and it products, and help to build a spirit of
partnership and commitment.
Evaluation
The evaluation of channel members has an important bearing on distributor
retention, training and motivation decisions. Evaluation provides the
information necessary to decide which channel member to retain and which to
drop.

Evaluation criteria include sales volume and value, profitability, level of

stocks, quality and position of display, new accounts opened, selling and
marketing capabilities, quality of service provided to customers, market

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information feedback, ability and willingness to deep commitments, attitudes,
and personal capability.

Channel conflict
It is disagreement among marketing channel members on goals and roles-who
should do what and for what rewards (this issue will be discussed in detail in
the following topics).

5.8 Channel Cooperation, Conflict, and Competition

No matter how well channels are designed and managed, there will be some
conflict, if for no other reason than the interests of independent business
entities don't always coincide. Here we examine three questions: what types
of conflict arise in channel? What are the major causes of channel conflict?
What can be done to resolve situations of conflict?

5.8.1 Types of Conflict and Competition

Channels conflict arises when one channel member believes another channel
member is engaged in behavior that prevents it from achieving its goals.
Three types of conflict can be identified. Namely: vertical conflict, horizontal
conflict and multi-channel conflict.

Vertical conflict occurs between different levels in a marketing channel; for

example, between a manufacturer and a wholesaler or retailer or between a
wholesaler and a retailer. Three sources of vertical conflict are most common.
First, conflict arises when a channel member by passes another member and
sells or buys products direct. Second, disagreements over how profit margins
are distributed among channel members produce conflict. A third conflict
situation arises when manufacturers believe wholesalers or retailers are not
giving their products adequate attention.

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Horizontal conflict occurs between intermediaries at the same level in a
marketing channel, such as between two or more retailers or two or more
wholesalers that handle the same manufacturer's brands. Two sources of
horizontal conflict are most common. First, horizontal conflict arises when a
manufacturer increases its distribution coverage in a geographical area.
Second, dual distribution causes conflict when different types of retailers
carry the same brands.
Multi-channel conflict exists when the manufacturer has established two or
more channels that compete with each other in selling to the same market.
Multi-channel conflict is likely to be especially intense when the members of
one channel either get a lower price (based on larger volume purchases) or are
willing to work with a lower margin.

5.8.2 Causes of Channel Conflict

It is important to distinguish the different causes that might produce channel
conflict. Some causes are easy to resolve, others more difficult.

A major cause is goal incompatibility. For example, the manufacturer may

want to achieve rapid market growth through a low price policy. The dealers,
on the other hand, may prefer to work with high margins and pursue short run
profitability. This is a difficult conflict to solve.

Sometimes the conflict arises from unclear roles and rights. Territory
boundaries, credit for sales, and so forth are grounds for conflict. The conflict
can also stem from differences in perception. The manufacturer may be
optimistic about the near term economic outlook and want dealers to carry
higher inventory. But the dealers may be pessimistic about the near term
outlook.

The conflict might arise because of the great dependence of the middlemen on
the manufacturer. Exclusive dealers, such as auto dealers, have their fortunes

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intimately affected by the product design and pricing decisions of the
manufacturer. This creates a high potential for conflict.

5.8.3 Managing Channel Conflict

Conflict can have destructive effects on the workings of a marketing channel,
so it is necessary to secure cooperation among channel members. One means
is through a channel captain, a channel member that co-ordinates, directs and
supports other channel members. Channel captains can be producers,
wholesalers, or retailers. A firm becomes a channel captain because it is
typically the channel member with the greatest power to influence the
behavior of other members. Power can take four forms. First, economic power
arises from the ability of a firm to reward or influence other members.
Expertise is a second source of power over other channel members. Third,
identification with a particular channel member may also create power for
that channel member. Finally power can arise from the legitimate right of one
channel member to dictate the behavior of other member.

Other than the role of channel captain in avoiding and resolving conflict,
there are several ways to managing conflict.

Developing a partnership : this calls for frequent interaction between

producer and resellers to develop a spirit of mutual understanding and
cooperation. Producers can help channel members with training, financial help
and promotional support. Distributors, in turn, may agree to mutually agreed
sales targets and provide extra sales resources. The objective is to build
confidence in the manufacturer's products and relationships based on trust.
When conflicts arise there is more chance they will be resolved in a spirit of
cooperation. Organizing staff exchange programmes can be useful in allowing
each party to understand the problems and tensions of the other rather than
animosity.

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Training in conflict handling : staffs who handle disputes need to be trained
in negotiation and communication skills. They need to be able to handle high
pressure conflict situations without resorting to emotion and blaming
behavior. In stead, they should be able to handle such situations calmly and
be able to handle concession analysis, in particular the identification of win-
win situations. These are situations where both the producer and reseller
benefit from an agreement.
Market partitioning : to reduce or eliminate conflict from multiple
distribution channels, producers can try to partition markets on some logical
basis such as customer size or type. This can work if channel members accept
the basis for the partitioning. Alternatively, different channels can be
supplied with different product line.
Improving performance : many conflicts occur because of genuine reasons.
For example, poor delivery by manufacturers or inadequate sales effort by
distributors can provoke frustration and anger. Rather than attempt to placate
the aggrieved partner, the most effective solution is to improve performance
so that the source of conflict disappears. This is the most effective way of
dealing with such problems.
Channel ownership : an effective but expensive way of resolving conflicting
goals is to buy the other party. Since producer and channel member is under
common ownership the common objective is to maximize joint profits.
Conflicts can still occur but the dominant partner is in a position to resolve
them quickly.
Coercion : in some situations, conflict resolution may be dependent on
coercion: one party forces compliance through the use of force. For example,
producers can threaten to withdraw supply, deliver late, or withdraw financial
support; channel members, on the other hand, can threaten to delist the
manufacturer's products, promote competitive products and develop own
label-brands.

5.9 Legal and Ethical Issues in Channel Relations (American Case)

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For the most part, companies are legally free to develop whatever channel
arrangements suits them. In fact, the laws affecting channels seek to prevent
the exclusionary tactics of companies that might keep other companies from
using a desired channel. Of course, this means that the company must itself
avoid using such exclusionary tactics. Most channel law deals with the mutual
rights and duties of the channel members once they have formed a
relationship.

Exclusive dealing : many producers and wholesalers like to develop exclusive

channels for their products. When the seller allows only certain outlets to
carry its products, this strategy is called exclusive distribution. When the
seller requires that these dealers not handle competitor's products, its strategy
is called exclusive dealing. Both parties benefit from exclusive arrangements:
the seller obtains more loyal and dependable outlets, and the dealers obtain a
steady source of supply and stronger seller support. But exclusive
arrangements exclude other producers from selling to these dealers. This
situation brings exclusive dealing contracts under the scope of the Clayton act
of 1914. They are legal as long as they do not substantially lessen competition
or tend to create a monopoly and as long as both parties enter into the
agreement voluntarily.
Exclusive territories : exclusive dealing often includes exclusive territorial
agreements. The producer may agree not to sell to other dealers in a given
area, or the buyer may agree to sell only in its own territory. The first
practice is normal under franchise systems as a way to increase dealer
enthusiasm and commitment. It is also perfectly legal-a seller has no legal
obligation to sell through more outlets than it wishes. The second practice,
where by the producer tries to keep a dealer from selling outside its territory,
has become a major legal issue.
Tying agreements : producers of a strong brand sometimes sell it to dealers
only if the dealers will take some or all of the rest of the line. This is called

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full line forcing. Such tying agreements are not necessarily illegal, but they
do violate the Clayton act if they tend to lessen competition substantially. The
practice may prevent consumers from freely choosing among competing
suppliers of these other brands.
Dealers' rights : producers are free to select their dealers, but their right to
terminate dealers is somewhat restricted. In general, sellers can drop dealers
"for cause". But they cannot drop dealers if, for example, the dealers refuse to
cooperate in a doubtful legal arrangement, such as exclusive dealing or tying
agreements.

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