5.0 5.

DISTRIBUTION INTRODUCTION Product distribution is an organization or set of organizations (go-between) involved in

the process of making a product or service available for use or consumption by a consumer or business user. In another words, distribution are activities that bring the products or services to the end users or customers.

Distribution is also a very important component of Logistics & Supply chain management. Distribution in supply chain management refers to the distribution of a good from one business to another. It can be factory to supplier, supplier to retailer, or retailer to end customer. It is defined as a chain of intermediaries; each passing the product down the chain to the next organization, before it finally reaches the consumer or end-user. This process is known as the 'distribution chain' or the 'channel.' Each of the elements in these chains will have their own specific needs, which the producer must take into account, along with those of the allimportant end-user. Distribution is one of the four elements of traditional marketing mix besides product, pricing and promotion.

Figure 5.1: Examples of distribution channels. From left: MYDIN, a major retail and groceries product distributor in Malaysia; UPS, leading shipping and product distribution service provider and Amazon.com, the pioneer of online shopping and distribution company.

5.2

BASIC DISTRIBUTION CHANNELS There are several distribution channels usually used by manufacturers or service

providing companies to distribute their products or services to the customers or end users.

Figure 5.2: Basic Distribution Channels

Figure 5.2 shows the diagram of basic distribution channels normally used in distributing the products and goods to the customers. From the diagram, it can be seen that there are several distributions channels that can be used to meet the goal of the manufacturers or service providers in achieving their distribution goals. The simplest example is by direct distribution from the manufacturers or service providers to the end users or customers while other channels such as using other parties such as agents or brokers, wholesalers or distributors and retailers are also normally used.

Distribution channels may not be restricted to physical products from producer to consumer in certain sectors, since both direct and indirect channels may be used. Hotels, for example, may sell their services (typically rooms) directly or through travel agents, tour operators, airlines, tourist boards, centralized reservation systems, etc. process of transfer the products or services from Producer to Customer or end user.

There have also been some innovations in the distribution of services. For example, there has been an increase in franchising and in rental services - the latter offering anything from televisions through tools. There has also been some evidence of service integration, with services linking together, particularly in the travel and tourism sectors. For example, links now exist between airlines, hotels and car rental services. In addition, there has been a significant increase in retail outlets for the service sector. Outlets such as estate agencies and building society offices are crowding out traditional grocers from major shopping areas.

Figure 5.3: Examples of distribution channels. From left: Fuel Station franchise, Electronic store distributor or retailers, Hypermarket wholesalers or retailers

5.3

OBJECTIVES OF DISTRIBUTION Distribution is carried out to achieve several objectives of business. Whist, it is often said

that distribution is the way of bringing the product or services to the end users or customers, distribution also provide several other benefits to the manufacturers or service providers such as: 5.3.1 Minimize Total Distribution Costs for a Given Service Output

The manufacturers or service providers do not have to think about sales or selling cost if they are using retailers, wholesalers or agents in distributing their product which enable them to focus more in manufacturing and improving their products or services.

In case of direct distribution, the manufacturers or service providers do not have to share profits with the retailers, agents or distributors thus increasing the profit margin of the products or services.

5.3.2 Determine the Market Segment and the Best Channel for Each Segment

Help the manufacturers or service providers to determine the income group who buys the most of their products or services and how the consumers prefer the way of obtaining their products or services

The channel decision is very important. In theory at least, there is a form of trade-off: the cost of using intermediaries to achieve wider distribution is supposedly lower. Indeed, most consumer goods manufacturers could never justify the cost of selling direct to their consumers, except by mail order. Many suppliers seem to assume that once their product has been sold into the channel, into the beginning of the distribution chain, their job is finished. Yet that distribution chain is merely assuming a part of the supplier's responsibility; and, if they have any aspirations to be market-oriented, their job should really be extended to managing all the processes involved in that chain, until the product or service arrives with the end-user. The right selection of distribution channel can determine the sustainability of the products or services in the market.

5.4

COMPETITIVE ADVANTAGES OF PRODUCT DISTRIBUTION Traditionally, competitive advantages is gained through the products itself, for examples

the certain product is more sought after by its looks and quality but now manufacturers cant rely solely on the products or services alone as these can be copied easily by the competitors. A product or service can also have competitive advantage in term of price with the competitors products or services which are more expensive. However, with the increase of todays living standard, price is not a big issue to the consumers anymore as they are willing to pay more as long as they can have a product or service that can satisfied their needs.

Brand name can also provide the manufacturer or service provider with a competitive advantage but this can only be true if the brand name is strong and the consumers have high faith in the brand. In order to achieve this, the products or services that carry the brand name must have a proven track record or history of excellent performance or lifetime among the customers. That is why more and more marketers and manufacturers are turning and put more effort on distribution channels as it provide them with new means of competitive advantage over their counterparts or competitors.

Objectives may vary with product characteristics for example either the product is perishables, bulky products, non-standard items, products requiring installation & maintenance

5.5

ALIGNING CHANNELS WITH HOW CUSTOMERS BUYS Manufacturers or service providers must correctly align their product distribution

channels with the customers buying behavior in order to have competitive advantage over their competitors and meet the distribution goals and targets. This may be done through these methods. 5.5.1 Identify Customers Channel Preferences and Buying Behaviour. How the customer like to buy the products or services either through small retails, large stores or exclusive boutiques. How much they buy either in small or large quantities. How often they buy the products or services (frequency of buying).

5.5.2 Tabulate Channel Selection to Key Buying Criteria Match the consumers buying or purchasing behaviour to the most profitable distribution channel and emphasize more on that particular channel.

5.5.3 Provide Flexible Channel Option Keep other distribution channel option available to cater the needs of other type of consumer and can also act as contingency option in case there is problems with the main distribution channel.

5.5.4 Monitor and Respond to Changes in Customer Buying Behaviour Alert to changes in current market or economic situation such as price hike or downturn, salary increment of the general population, festive seasons or others that can alter the customers buying behaviour.

5.6

DISTRIBUTION SCOPE STRATEGIES There are several distribution channels or strategies used by the manufacturers or service

providers to distribute their products or services to the customers or consumers. The channels selection normally based by the nature of the products or services and also the buying behaviour of the consumers or the end users.

5.6.1 Exclusive Distribution Exclusive distribution is a situation in which only certain dealers are authorized to sell a specific product within a particular territory. The legality of an exclusive distribution agreement can vary depending on the specifics of the case. In some instances, such agreements are entirely legal, while in others, rivals may create legal challenges. If a firm can show that an exclusive distribution agreement harms competition in some way, it may be able to argue that the agreement is not legal.

This type of distribution agreement is usually seen with high end and luxury products. In an example of an exclusive distribution agreement, a car manufacturer might only agree to allow three dealers to sell its cars in a specific country. Dealers other than these three who attempted to sell new vehicles from that manufacturer would be doing so without authorization; one consequence of this might be that the manufacturer would refuse to honor warranties or provide support for cars sold at unauthorized dealers.

The structure of an exclusive distribution agreement favors both the manufacturer and the distributor or retailer. From the point of view of people moving the product to consumers, having an exclusive contract means that consumers must come to them if they want the product. For example, if a cell phone provider has an exclusive deal with a manufacturer of cell phones, people who want to use cell phones made by that manufacturer must go through that cell phone provider.

Figure 5.4: Example of Exclusive distribution; Naza Italia was officially appointed as the exclusive distributor for Ferrari, Maybach, Maserati and Bugatti Veyron in Malaysia. A main factor in choosing Naza Italia was its expertise in high-quality technical products on the consumer market.

Advantages of Exclusive Distribution Maximize control over service level/output Enhance products image & allow higher markups Promotes dealers loyalty, better forecasting, better inventory and merchandising control Restricts resellers from carrying competing brands

Disadvantages of Exclusive Distribution Betting on one dealer in each market Only suitable for high price, high margin, low volume product

5.6.2 Intensive Distribution Intensive distribution is a type of marketing strategy that involves placing the goods and services offered by a company into as many markets as possible. The idea is that by making the products readily available to as many consumers as possible, the chances of generating sales are increased. There are a number of situations in which this approach allows consumers to easily purchase products from any number of different outlets, ranging from supermarkets to drugstores to the local gas station.

With intensive distribution, the focus is not necessarily on targeting specific consumer demographics for the purpose of deciding where to distribute those products. While a company may in fact have a core or target consumer base in mind, the business will also make it a point to sell its products in venues that are frequented by consumers other than that target audience. For example, a soda manufacturer may currently be focusing on older teens and younger adults as its primary market thrust, but will continue to distribute the soda products to outlets that are not necessarily destinations of that targeted demographic. This means that in addition to selling sodas at convenience stores, malls, and supermarkets, there is a good chance those same sodas will be found at retirement resorts, golf courses, and other locations that are traditionally visited by consumers outside that key demographic.

Figure 5.5: Examples of Intensive Distribution Products: From left (clockwise): Fast moving items in newsstand i.e newspapers, magazines, stationeries; soft drinks; ice creams; photo processing shops and nonprescriptive medicines

Advantages of Intensive Distribution Better market coverage than exclusive distribution. More control and less cost than intensive distribution. Concentrate effort on few product outlets. Selected firms capable of carrying full product line and provide the required service.

Disadvantages of Intensive Distribution May not cover the market adequately Difficult to select dealers (retailers) that can match your requirement and goals Impulse buying

5.6.3 Selective Distribution Selective distribution is a retail strategy that involves making a product or group of products available only in certain markets. This is the opposite of open distribution, where a product line is distributed to as many markets as possible. There are several reasons for employing this approach, including the potential for limiting competition and

minimizing distribution costs so that net profits are higher.

The process of selective distribution focuses on identifying specific markets where a companys products are highly likely to be favored by consumers in the area, while avoidingdistribution to areas where there is less of a chance of gaining a significant market share. Often, this situation comes about because a number of similar products are already available through certain markets, and the level of competition is higher. By choosing to distribute goods

through handpicked retailers within certain geographic regions, it is possible to avoid some of this competition, while still tapping into the demand for products of that type.

One approach to selective distribution that some businesses take is to contract with a limited number of retailers who will sell the products in their stores. For example, a company making a specific brand of cologne may choose to only allow their product to be sold at a couple of high-end department stores, and withhold distribution to supermarkets, drugstores, and discount retailers. The idea is that by focusing on consumers who are more likely to shop at one or more of the high-end stores, the product begins to be seen as somewhat prestigious, and will command a higher price per unit.

Along with the selection of retailers, a company may choose to limit distribution of its products to specific geographical areas. This is sometimes the case where there is a strong demand for a given product, but very few opportunities to purchase the product locally. In this scenario, the manufacturer may identify specific retailers with stores in those geographical areas and make arrangements for those products to be carried on their shelves. The retailers benefit from being able to offer a product that is not widely available in the area, while the manufacturer stands to increase sales by having little to no competition from similar products within that area.

It

is

important

to

draw

distinction

between

exclusive

distribution and selective distribution. An exclusive model would involve the identification of a

single retailer to offer the product within a particular market, and would also call for the retailer to not carry competing brands. This is not often the best approach for the manufacturer or the retailer, in that it limits options to reach consumers. A selective distribution model does not prevent retailers from selling at least one similar product, and does not limit the manufacturer from working with other retailers in the area to carry the product line. Under normal circumstances, the selective approach is much more likely to maximize profits in a given market than the exclusive approach.

Figure 5.6: Examples of Selective Distribution products: Top from left: Cosmetics, electronic appliances. Bottom from left: Luxurious shoes, fuel stations, fast food restaurants

Advantages of Selective Distribution Better market coverage than exclusive distribution More control and less cost than intensive distribution Concentrate effort on few product outlets Selected firms capable of carrying full product line and provide the required service

Disadvantages of Selective Distribution May not cover the market adequately Difficult to select dealers (retailers) that can match your requirement and goals Impulse buying

5.6.4 Competitive Channels In the early stages of the firm's development, a single strategy may be used, which later branch into a hybrid channel. When a number of distribution strategies are combined, such as the use of an internet platform to ship products directly to consumers, in addition to retail stores, the manufacturer is employing a hybrid channel strategy. For example, the computer manufacturer Dell employed this type of strategy when it began to distribute select models through the discount warehouse retailer, while continuing to fulfill the majority of its product orders directly. What to Look Out for Over extending yourself Dealers resentment Control problems

Modification Towards Competitive Channels When the Following Occurs Consumer markets and buying habits Customer needs Competitors perspectives Relative importance of outlet types Manufacturers financial strength Sales volume level of existing products, and The marketing mix

5.6.5 Online Distribution (E-Commerce/Internet Shopping) Electronic commerce, or e-commerce, refers to economic activity that occurs online. Ecommerce includes all types of business activity, such as retail shopping, banking, investing and rentals. Even small businesses that provide personal services, such as hair and nail salons, can benefit from e-commerce by providing a website for the sale of related health and beauty products that normally are available only to their local customers.

Although e-commerce once required an expensive interface and personal security certificate, this is no longer the case. Virtual storefronts are offered by a variety of hosting services and large Internet presences that offer simple solutions to vendors who have little or no online experience. Tools for running successful e-commerce websites are built into the hosting servers, eliminating the need for the individual merchant to redesign the wheel. These tools include benefits such as virtual shopping carts, inventory and sales logs and the ability to accept a variety of payment options, including secure credit card transactions.

Early e-commerce was stunted by security fears, but improved technology has made millions of people worldwide feel comfortable buying online. Seeing the vast potential in online commerce, most credit card companies helped allay fears by guaranteeing that cardholders would not be held responsible for fraudulent charges as a result of online shopping. All of these factors have helped e-commerce become a booming industry.

The popularity of online commerce is understandable, considering the time and hassle involved in running from store to store, searching for an item. It not only takes valuable time and energy, but using transportation usually costs money. Shopping online whenever the mood strikes, even in the middle of the night has many advantages. Not only is it convenient to shop at a myriad of vendors from the comfort of a computer chair, its also a snap to find the best deal by allowing certain shopping sites to sift through all of the sellers.

E-commerce also has other advantages. Employee overhead is virtually nonexistent, and the cost of operating a website usually is nominal, especially when compared with the cost of storefront property. To top it off, most transactions are handled by software processes, never requiring a real person until the item is ready to be packed and shipped. This translates into real savings to the customer. As a result, physical businesses often cannot compete with their online counterparts, although consumers do have to watch for inflated shipping fees that might negate the savings of buying online.

Figure 5.7: E-commerce or Internet Shopping has become a norm in todays world with the higher access to the internet and the growing numbers of internet shopping providing companies like e-bay, GSC Cinemas etc.

5.6.6 M-Commerce (Mobile Commerce) M-commerce is a term that is used to refer to the growing practice of conducting financial and promotional activities with the use of a wireless handheld device. The term mcommerce is short for mobile commerce, and recognizes that the transactions may be conducted using cell phones, personal digital assistants and other hand held devices that have operate with Internet access. While still in its infancy, the concept of m-commerce has been refined in recent years and is beginning to become more popular.

One of the basic examples of m-commerce has to do with receiving sales promotions via the hand held device. The most common application would involve the service provider sending text messages to the subscriber that promote new product offerings, free trials on additional services, or other types of promotional campaigns. The subscriber is not charged a fee for the text message, and often can respond with a return text message without incurring any type of fee. Several major cellular services off subscribers to opt into this type of m-commerce, or be excluded from receiving the messages.

Offers that are received through the use of m-commerce may be accepted and paid for using the hand held device. For example, if a customer chooses to respond to an offer, there are usually several payment options available. The most common option is adding a charge to the monthly invoice for services rendered. However, many companies that engage in m-commerce also offer the option of paying for the item by the use of a credit card that is linked to the SIM card on the hand held device.

Currently, the use of m-commerce is more prominent in Europe and Asia. However, with the launch of enhanced services with cell phones and other mobile devices, the concept is beginning to become more common in North and South America as well. Currently, mcommerce is growing in Canada and the United States on a steady basis, while Brazil is leading South America in embracing this enhanced technology.

Figure 5.8: Mobile Commerce or M-Commerce has become popular with the introduction of smart phones and its M-Commerce applications and with rapid participations of the retails companies and the financial institutions