Chapter One

An overview of logistics and channel management

Chapter objectives At the end of this chapter you will be able to

 Define logistics
 Describe the role and importance of logistics
 Analyze the logistics system
 Identify the logistics cost and components

1.1 Introduction

All organizations move materials. Manufacturers build factories that collect raw materials from
suppliers and deliver finished goods to customers; retail shops have regular deliveries from
wholesalers; a television news service collects reports from around the world and delivers them
to viewers; most of us live in towns and cities and eat food brought in from the country; when
you order a book or DVD from a website, a courier delivers it to your door. Every time you buy,
rent, lease, hire or borrow anything at all, someone has to make sure that all the parts are brought
together and delivered to your door. Logistics is the function that is responsible for this
movement. It is responsible for the transport and storage of materials on their journey between
suppliers and customers.

1.2. Evolution of logistics Management

The concept of “Logistics” started many years before Christ and was used by Greek generals
(Leon the Wise, Alexander the Great) in order to describe all the procedures for the army’s
procurement on food, clothing, ammunition, etc.
 Alexander the Great was a big fan of the mobility of his troops and he didn’t want his
troops to stay in one place waiting for supplies from Macedonia. Thus, he tried to resolve
the issues of supplies by using supplies from the local resources of his defeated enemies.
 For many years, logistics were always an issue in war affairs. Kingdoms and generals
with strategic planning on logistics were those who won the war. World War II was the
major motivation of logistics to increase recognition and emphasis, following the clear
importance of their contribution toward the Allied victory.
Prior 1950s the practice of LM at an enterprise level was fragmentary. However, the late 1950s
were destined to witness the start of a major change in Logistical Management practices.
Because of:
1. The use and development of computer and quantitative techniques
 2. The volatility of economic situation forced management to create an
attitude conducive to cost reduction. For this purpose logistics provided a
fertile area for realizing such cost control.
The subsequent development of integrated logistics is reviewed in four time periods during
which revised attitudes and practices emerged regarding movement and storage of materials.

1. 1956-1965 - decade of conceptualization-integrated logistical concept began to

crystallized
2. 1966-1970 -Time to test for relevancy
3. 1971-1979 - period of changing priority
4. 1980-1985 – A period of significant political and technological change
5. 1986 and beyond – Toward integrated logistics
The present and the future offer greater payoffs from the full implementation of integrated
logistical management. The physical/market distribution, manufacturing support and
purchasing/procurement operations must be integrated for better performance because of the
following reasons:
 There is a great deal of interdependence between all logistical areas which can be
exploited to the advantage of the organization
 Control requirements to each operation is similar
 There is a tradeoff between manufacturing economics and marketing
requirements
 The complexity of logistical operation requires innovative approach It involves
the management of the flow of products from the point where they exist as raw
materials to the point where they are finally discarded, suggesting that logistics is
a process.
 The objective of Logistics is to arrange delivery of finished inventory, WIP
inventory, and materials assortments, when required, in usable condition, to the
location where needed, and at the lowest total cost.
 It is through the logistical process that materials flow in to manufacturing
capacity/facilities and products are distributed through marketing channels for
consumption.
1.3 Definition of Logistics

Logistics is the art and science of management, engineering and technical activities concerned
with requirements, design and supplying, maintaining resources to support objectives, plans and
operation.

Fierce competition in today’s market has forced business enterprises to invest in and focus on
supply chains. The growth in telecommunication and transportation technologies has led to
further growth of the supply chain. The supply chain, also known as the logistics network,
consists of suppliers, manufacturing centers, warehouses, distribution centers and retail outlets,
as well as raw materials, work-in-process inventory and finished products that flow between the
facilities.

The logistics management takes into consideration every facility that has an impact on cost. It
plays an important role in making the product conform to customer requirements. Also it
involves efficient integration of suppliers, manufacturers, warehouses and stores and
encompasses the firms’ activities at many levels, from the strategic level through the tactical to
the operational level.

Logistics is a challenging and important activity because it serves as an integrating or boundary

spanning function. It links suppliers with customers and it integrates functional entities across a
company. With the ever-growing competition in today’s market place it becomes necessary for a
firm to use its resources to focus on strategic opportunities. This includes several internal factors
like management style, culture, human resources, facilities and several external factors like
technology, globalization and competition. This is where the concept of logistics plays a major
role, i.e. it helps to leverage certain advantages the firm has in the marketplace.

Logistics management is that part of supply chain process that plans, implements, and controls
the efficient, effective flow and storage of goods, services, and related information from the
point of origin to the point of consumption in order to meet customers’ requirements. It can be
defined as:

Logistics is the process of planning, implementing and controlling the efficient, cost-
effective flow and storage of raw materials, in-process inventory, finished goods and related
information from the point of origin to point of consumption for the purpose of conforming
to customer requirements. (Council of Logistics Management)

 Logistics is the management of all activities which facilitate movement and the
coordination 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 reverses flow and storage of goods, services and related
information between the point of origin and the point of consumption in order to meet
customer requirements. (CSCMP, 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)
1.4 The role and importance of logistics

The role of logistics

 The movement of the right amount of the right product to the right time in essence of the
role of logistics in the market channel.

Importance of logistics

 Business logistics is the planning process as well as the implementation of efficient and effective
storage of raw materials, inventory, finished goods and services. It also refers to the flow and
transportation of product from the warehouse to the consumer. Service organizations also value
business logistics. Logisticians make certain that materials and information is provided at the time
of service delivery.
 Maintaining Competitive Edge Successful business logistics provide a competitive edge
against other organizations. It provides a system or process by which customer needs can
be fulfilled in a more efficient manner. A business should strive to provide shipments of
merchandise in a more accurate and fast manner than competitors do. The Internet has
made it possible for many companies to do this.
 Building Good Consumer Relations Providing product in an efficient manner, which
business logistics helps to do, also helps to build good consumer relations. This is not only
important for immediate monetary gain, but also because good customer relations can
mean more business. One of the best ways to advertise and grow your business is to
provide good, quality service that customers will tell other customers about.
 Creating Finished Product A business needs to ensure there are enough raw materials
available to make finished products. Without quality goods, a business cannot make
quality product. Having enough products stocked is also necessary for supply and demand
purposes and to maximize customer satisfaction.
 Providing Organization Each time a product is created, business logistics can help to
ensure the process goes efficiently. It is important that inventory be tracked, transported,
stored and manufactured in a way that accommodates all of an organization’s
departments. Controlling this flow so that each department knows what to do and what is
expected will help to ensure that the company’s plans and goals stay on track.
 Importance In The Economy One such study indicated that about 30 per cent of the
working population in the UK are associated with work that is related to logistics.
Another study undertaken by Armstrong and Associates (2007) found that, for the main
European and North American economies, logistics represents between about 8 per cent
and 11 per cent of the gross domestic product of each country. For developing countries
this range is higher at around 12 per cent to 21 per cent – with India at about 17 per cent
and China at 21 per cent.



1.5. Logistical System

The logistical process is viewed as a system that links an enterprise with its customers and
suppliers. Information flows from and about customers in the form of forecasts and orders and is
refined through planning in to specific manufacturing and purchasing objectives. As materials
and products are purchased, a value added inventory flow is initiated which ultimately results in
ownership transfer of finished products to customers. Thus, the logistical process is viewed in
terms of two inter related efforts:

1. Value – added inventory flow, and

2. Requirements information flow
 Value – added inventory flow Logistics is about creating value-value for customers and
suppliers of the firm, and value for firm’s stakeholders. The operational aspect of
logistics is concerned with management of the movement and storage of materials and
finished goods. As such logistical operations are viewed as commencing with the initial
transportation of a material from suppliers and terminating with the final delivery of a
manufactured or processed product to a consumer. From the initial purchase of a
material, the logistical process adds value by placing inventory at the right time and place
required. At each step in the mfg process, a material gains greater potential value as it is
transformed in to finished inventory. = WIP inventory to FG. The ultimate value added
is achieved by the final ownership transfer of finished goods inventory to a customer at
specified time and place.
Logistical operations of an enterprise are divided in to three categories:
 Market distribution - (concerned with physical movement of finished
products to consumers)
 Manufacturing support- (concerns control over WIP inventory as it
flows b/n stages of MFG)
 Purchasing - (concerned with the procurement and movement of
materials, parts and finished inventory from supplier location to mfg or
assembly plants, warehouses or retail stores.)
 Requirements information flow Requirement information flow is concerned with the
identification of what specific inventory is needed at which locations within the logistical
system. The primary objective of developing requirements information is to establish a
plan to integrate logistical operations and maintain operational continuity.
1.6. Logistical System Components (the work of logistics)

The performance of value added inventory and requirements information flows is formulated in
to an integrated logistical process by the coordination of: Facility structure, Forecasting and
order management, Transportation, Inventory , and Warehousing and packaging
These system components provide a capacity to achieve the operating objectives of physical
distribution, manufacturing support, and purchasing.
1. Facility structure Classical economics neglected the importance of facility location and
overall network design to efficient business operations. In business operations, however, the
number, size, and geographical relationship of facilities used to perform logistical operations
directly impacts customer service capabilities and cost. The facility network of an enterprise
represents a series of locations to which and through which materials and products flow.
Such facilities include mfg plants, warehouses, and retail stores. The network of facilities
selected by an enterprise’s management is fundamental to logistical efficiency. All business
transactions must be developed within and between frameworks of facility locations.
Continuously modifying the facility network to accommodate change in demand and supply
infrastructures is very important because product assortments, customers, suppliers, and
manufacturing requirements are constantly changing in a dynamic competitive environment.
The selection of a superior location network can provide a significant step toward achieving
competitive advantage.
2. Order Processing Information is critical to logistics operations; the processing of orders is
of primary importance in the logistical process. Current information technology
(computerized system) is capable of handling the most demanding customer requirements.
When desired, order information can be obtained on a real time basis. Forecasting and
communication of customer requirements are the two areas of logistical work driven by
information. In most supply chains, customer requirements are transmitted in the form of
orders. The processing of these orders involves all aspects of managing customer
requirements from initial order receipt, delivery, invoicing, and collection. The logistics
capabilities of a firm can only be as good as its order processing competency.

3. Transportation Transportation is the operational area of logistics that geographically

moves and positions inventory Provides place utility. Firms have three alternative ways of
obtain transportation capacity.
1. A private fleet of equipment may be purchased or leased
2. Specific contracts may be arranged with transport specialists to provide movement
service
3. Engage the services of any legally authorized transport company that provides point to
point transfer at specified charged
From the logistical system viewpoint, three factors are fundamental to transportation
performance: Cost, Speed, and Consistency.
  Cost of transport is the payment for shipment between two geographical locations and
the expenses related to maintaining in-transit inventory. Logistical systems should utilize
transportation that minimizes total system cost. This may mean that the least expensive
method of transportation may not result in the lowest total cost of logistics.
 Speed of transportation is the time required to complete a specific movement. Speed and
cost of transportation are related in two ways. First, transport firms, capable of offering
faster service, typically charge higher rates. Second, the faster the transportation service
is the shorter the time interval during which inventory is in-transit. Thus, a critical aspect
of selecting the most desirable method of transportation is to balance speed and cost of
service.
 Consistency of transportation refers to variations in time required to perform a specific
movement over a number of shipments. Consistency reflects the dependability of
transportation and the most important attribute of quality transportation. When
transportation lacks consistency, inventory safety stocks are required to protect against
service breakdowns, impacting both the seller's and buyers overall inventory
commitment. Speed and consistency combine to create the quality aspect of
transportation. Note: in designing a logistical system, a balance must be maintained
between transportation cost and service quality. In some circumstances low-cost, slow
transportation is satisfactory. In other situations, faster service may be essential to
achieving operating goals. Finding and managing the desired transportation mix across
the supply chain is a primary responsibility of logistics.
4. Inventory The inventory requirements of a firm are directly linked to the facility network and
the desired level of customer service. Theoretically, a firm could stock every item sold in every
facility dedicated to servicing each customer. Few business operations can afford such a
luxurious inventory commitment because the risk and total cost are prohibitive. The objective
in inventory strategy is to achieve desired customer service with the minimum inventory
commitment. Excessive inventories may compensate for deficiencies in basic design of a
logistics system but will ultimately result in higher than- necessary total logistics cost. A firm's
degree of commitment to deliver products rapidly to meet a customer's inventory requirement is
a major competitive factor. If products and materials can be delivered quickly, it may not be
necessary for customers to maintain large inventories. Material and component inventories exist
in a logistical system for reasons other than finished product inventory. Each type of inventory
and the level of commitment must be viewed from a total cost perspective. Understanding the
interrelationship between order processing, inventory, transportation, and facility network
decisions is fundamental to integrated logistics.
5. Warehousing and packaging Warehousing, materials handling, and packaging are an integral
part of other logistics areas, cannot stand alone. For example, inventory typically needs to be
warehoused at selected times during the logistics process. Transportation vehicles require
materials handling for efficient loading and unloading. Finally, the individual products are most
efficiently handled when packaged together into shipping cartons or other unit loads. When
effectively integrated into an enterprise's logistical operations, warehousing, materials handling,
and packaging facilitate the speed and overall ease of product flow throughout the logistical
system.
1.5. Total Cost Concept

The logistical system should be viewed as a cost center and every effort must be made to hold
expenditure to a minimum. Central to the scope and design of logistics system is trade-off
analysis, which, in turn, leads to the total cost concept. The cost trade-off is the recognition that
cost pattern of various activities of the firm frequently is play characteristics that put them in
conflict with one another. The conflict is managed by balancing the activities so that they are
collectively optimized.
For example; when transportation service is selected, the direct cost of transport service and the
indirect cost effect on inventory level in the logistics channel due to different delivery
performance of carriers are said to be in cost conflict with each other.
The best economic choice occurs at the point where the sum of both costs is lowest. There are
also other tradeoffs such as setting customer service level, setting safety stock levels, and
determining number of warehouses.

Inventory flow
Enterprise

Customer s Suppliers

Logistical operation

Information flow

Fig 1.1: Logistics System

Discussion question

1. Define logistics
2. Describe the role and importance of logistics
3. Analyze the logistics system and
4. Identify the cost and components of logistics
 Chapter Two
Transportation Management

2.1. Transportation Economics and Pricing

Transportation economics and pricing are concerned with factors and characteristics that drive
cost. To develop effective logistics strategy, it is necessary to understand such factors and
characteristics. Successful negotiation requires a full understanding of transportation economics.
An overview of transportation economics and pricing builds upon four topics: (1) the factors that
drive transport costs, (2) the cost structures or classifications, (3) carrier pricing strategy, and (4)
transportation rates and ratings.
2.1.1. Economic Drivers

Transportation costs are driven by seven factors. While not direct components of transport
tariffs, each factor influences rates. The factors are: (I) distance, (2) volume, (3) density, (4)
stowability, (5) handling, (6) liability, and (7) market. In general, the discussion sequence
reflects the relative importance of each factor from the shipper's perspective. Keep in mind that
the precise impact of each factor varies based on specific product characteristics.

 Distance Distance is a major influence on transportation cost since it directly contributes

to variable expense, such as labor, fuel, and maintenance.
 Volume The second factor is load volume. Like many other logistics activities,
transportation scale economies exist for most transportation movements. Transport cost
per unit of weight decreases as load volume increases. This occurs because the fixed
costs of pickup, delivery, and administration can be spread over incremental volume.
This relationship is limited by the size of the transportation vehicle. Once the vehicle is
full, the relationship begins again for each additional vehicle. The management
implication is that small loads should be consolidated into larger loads to maximize scale
economies. The principles of economy of scale and economy of distance were introduced
in the previous section.
 Density A third factor is product density. Density is a combination of weight and volume.
Weight and volume are important since transportation cost for any movement is usually
quoted in dollars per unit of weight. Transport charges are commonly quoted as amount
per hundredweight (CWT). In terms of weight and volume, vehicles are constrained more
by cubic capacity than by weight. Since actual vehicle, labor, and fuel expenses are not
dramatically influenced by weight, higher-density products allow relatively fixed
transport costs to be spread across more weight. As a result, higher density products are
 typically assessed lower transport costs per unit of weight. In general, traffic managers
seek to improve product density so that trailer cubic capacity can be fully utilized. For
example, Kimberly-Clark was able to reduce transportation expense by reducing air
contained in paper products. Such compression increased product density.
 Stowability Stowability refers to how product case dimensions fit into transportation
equipment. Odd package sizes and shapes, as well as excessive weight or length, may not
fit well in transportation equipment; this results in wasted cubic capacity. Although
density and stowability are similar, it is possible to have items with similar densities that
stow very differently. Items having rectangular shapes are much easier to stow than odd
shaped items. For example, while steel blocks and rods may have the same physical
density, rods are more difficult to stow than blocks due to their length and shape.
Stowability is also influenced by other aspects of size, since large numbers of items may
be nested in shipments whereas they may be difficult to stow in small quantities. For
example, it is possible to accomplish significant nesting for a truckload of trashcans while
a single can is difficult to stow.
 Handling Special handling equipment may be required to load and unload trucks,
railcars, or ships. In addition to special handling equipment, the manner in which
products are physically grouped together in boxes or on pallets for transport and storage
will impact handling cost.
 Liability Liability includes product characteristics that can result in damage and potential
claims. Carriers must either have insurance to protect against possible claims or accept
financial responsibility for damage. Shippers can reduce their risk, and ultimately
transportation cost, by improved packaging or reducing susceptibility to loss or damage.
 Market Finally, market factors such as lane volume and balance influence transportation
cost. A transport lane refers to movements between origin and destination points. Since
transportation vehicles and drivers must return to their origin, either they must find a
back-huul load or the vehicle is returned or deadheaded empty. When empty return
movements occur, labor, fuel and maintenance costs must be charged against the original
front-haul movement. Thus, the ideal situation is to achieve two-way or balanced
movement where volume is equal in both directions. However, this is rarely the case due
to demand imbalances in manufacturing and consumption locations. For example, many
goods are manufactured and processed on the East Coast of the United States and then
shipped to consumer markets in the western portion of the country; this results in more
volume moving west than east. This imbalance causes rates to be generally lower for
eastbound moves. Movement balance is also influenced by seasonality, such as the
movement of fruits and vegetables to coincide with growing seasons. Demand location
and seasonality result in transport rates that change with direction and season. Logistics
system design must take such factors into account to achieved backhaul movement
whenever possible.


2.1.2. Cost Structure

The second dimension of transport economic and pricing concerns the criteria used to allocate
cost. Cost allocation is primarily the carrier's concern, but since cost structure influences
negotiating ability, the shipper's perspective is important as well. Transportation costs are
classified into a number of categories.
 Variable costs change in a predictable, direct manner in relation to some level of
activity. Variable costs can only be avoided by not operating the vehicle. Aside from
exceptional circumstances, transport rates must at least cover variable cost. The variable
category includes direct carrier cost associated with movement of each load. These
expenses are generally measured as a cost per mile or per unit of weight. Typical variable
cost components include labor, fuel, and maintenance. The variable cost of operations
represents the minimum amount a carrier must charge to pay its day-to-day bills. It is not
possible for any carrier to charge below its variable cost and expect to remain in business
long. In fact, rates should fully cover all costs.
 Fixed costs are expenses that do not change in the short run and must be serviced even
when a company is not operating, such as during a holiday or a strike. The fixed category
includes costs not directly influenced by shipment volume. For transportation firms, fixed
components include vehicles, terminals, rights-of-way, information systems, and support
equipment. In the short term, expenses associated with fixed assets must be covered by
contribution above variable costs on a per shipment basis.
 Joint costs are expenses unavoidably created by the decision to provide a particular
service. For example, when a carrier elects to haul a truckload from point A to point B,
there is an implicit decision to incur a joint cost for the back-haul from point B to point
A. Either the joint cost must be covered by the original shipper from A to B or a back-
haul shipper must be found. Joint costs have significant impact on transportation charges
because carrier quotations must include implied joint costs based on considerations
regarding an appropriate back-haul shipper and/or back-haul charges against the original
shipper.
 Common This category includes carrier costs that are incurred on behalf of all or
selected shippers. Common costs, such as terminal or management expenses, are
characterized as overhead. These are often allocated to a shipper according to a level of
activity like the number of shipments or delivery appointments handled. However,
allocating overhead in this manner may incorrectly assign costs. For example, a shipper
may be charged for delivery appointments when it doesn't actually use the service.
2.1.3. Carrier Pricing Strategies

When setting rates to charge shippers, carriers typically follow one or a combination of two
strategies. Although it is possible to employ a single strategy, the combination approach
considers trade-offs between cost of service incurred by the carrier and value of service to the
shipper.
 Cost-of-Service The cost-of-service strategy is a build up approach where the carrier
establishes a rate based on the cost of providing the service plus a profit margin. For
example, if the cost of providing a transportation service is 2000 Br and the profit markup
is 10%, the carrier would charge the shipper 2200. The cost-of-service approach, which
represents the base or minimum for transportation charges, is most commonly used as a
pricing approach for low-value goods or in highly competitive situations.
 Value-of-Service Value-of-service is an alternative strategy that charges a price based
on value as perceived by the shipper rather than the carrier's cost of actually providing the
service. For example, a shipper perceives transporting 1000Br of electronics equipment
as more critical or valuable than 1000 Br of coal since electronics are worth substantially
more than the coal. As such, a shipper is probably willing to pay more for transportation.
Carriers tend to utilize value-of-service pricing for high-value goods or when limited
competition exists. Value-of-service pricing is illustrated in the premium overnight
freight market. When FedEx first introduced overnight delivery, there were few
competitors that could provide comparable service, so it was perceived by shippers as a
high-value alternative. They were willing to pay more for overnight delivery of a single
package. Once competitors such as UPS and the United States Postal Service entered the
market, rates dropped to current discounted levels per package. This rate decrease more
accurately reflects the value and cost of this service.
 Combination Pricing The combination pricing strategy establishes the transport price
at an intermediate level between the cost-of-service minimum and the value-of-service
maximum. In practice, most transportation firms use such a middle value. Logistics
managers must understand the range of prices and the alternative strategies so they can
negotiate appropriately.
 Net-Rate Prices A number of common carriers are experimenting with a simplified
pricing format termed net-rate pricing. Carriers are now able to simplify pricing to fit an
individual customer's circumstances and needs. Specifically, carriers can replace
individual discount sheets and class tariffs with a simplified price sheet. The net-rate
pricing approach does away with the complex and administratively burdensome discount
pricing structure that has become common practice since deregulation.
 Established discounts and accessorial charges are built into the net rates. In other words,
the net rate is an all-inclusive price. The goal is to drastically reduce carriers'
administrative cost and directly respond to customer demand to simplify the rate-making
 process. Shippers are attracted to such simplification because it promotes billing accuracy
and provides a clear understanding of how to generate savings in transportation.

2.1.4. Rates and Rating

The previous discussion reviewed key strategies used by carriers to set prices. Building on this
foundation, this section presents the pricing mechanics used by carriers. This discussion applies
specifically to common carriers, although contract carriers utilize a similar approach.

Class Rates
In transportation terminology, the price in dollars and cents per hundredweight to move a
specific product between two locations is referred to as the rate. The rate is listed on pricing
sheets or on computer files known as tariffs. 'The term class rate evolved from the fact that all
products transported by common carriers are classified for pricing purposes. All product legally
transported in interstate commerce can be shipped via class rates.
Determination of common carrier class rates is a two-step process. The first step is the
classification or grouping of the product being transported. The second step is the
determination of the precise rate or price based on the classification of the product and the
original destination points of the shipment.
 Classification All products transported are typically grouped together into uniform
classifications. The classification takes into consideration the characteristics of a product
or commodity that will influence the cost of handling or transport. Products with similar
density, stowability, handling, liability, and value characteristics are grouped together
into a class, thereby reducing the need to deal with each product on an individual basis.
The particular class that a given product or commodity receives is its rating, which is
used to determine the freight rate. It is important to understand that the classification does
not identify the price charged for movement of a product. It refers to a product's
transportation characteristics in comparison to other commodities.
Products are also assigned different ratings on the basis of packaging. Glass may be rated
differently when shipped loose, in crates, or in boxes than when shipped in wrapped
protective packing. It should be noted that packaging differences influence product
density, stowability, and damage, illustrating that cost factors discussed earlier enter into
the rate-determined process. Thus, a number of different classifications may apply to the
same product depending on where it is being shipped, shipment size, transport mode, and
product packaging.
One of the major responsibilities of transportation managers is to obtain the best possible
rating for all goods shipped, so it is useful for members of a traffic department to have a
thorough understanding of the classification systems. Although there are differences in
rail and motor classifications, each system is guided by similar rules; however, rail rules
are more comprehensive and detailed than those for motor freight.
 It is possible to have a product reclassified by written application to the appropriate
classification board. The classification board reviews proposals for change or additions
with respect to minimum weights, commodity descriptions, packaging requirements, and
general rules and regulations. An alert traffic department will take an active role in
classification. Significant savings may be realized by finding the correct classification for
a product or by recommending a change in packaging or shipment quantity that will
reduce a product's rating.
 Rate Administration Once a classification rating is obtained for a product, rate must be
determined. The rate per hundred weight is usually based on the shipment origin and
destination, although the actual price charged for a particular shipment is normally
subject to a minimum charge and may also be subject to surcharge assessments.
Historically, the origin and destination rates were manually maintained in notebooks that
had to be updated and revised regularly. Today, rates are provided in diskette form by
carriers and the administration process is typically computerized.
Class rates, minimum charges, arbitrary charges, and surcharges form a pricing structure
that, in various combinations, is applicable within the continental United States. The
tariff indicates the class rate for any rating group between specified origins and
destinations. In combination, the classification scheme and class rate structure form a
generalized pricing mechanism for rail and motor carriers. Each mode has specific
characteristics applicable to its tariffs. In water, specific tariff provisions are made for
cargo location within the ship or on the deck. In addition, provisions are made to charter
entire vessels. Similar specialized provisions are found in air cargo and pipeline tariffs.
Non operating intermediaries and package services also publish tariffs specialized to their
service.

Commodity Rates
When a large quantity of a product moves between two locations on a regular basis, it is
common practice for carriers to publish a commodity rate. Commodity rates are special
or specific rates published without regard to classification. The terms and conditions of a
commodity rate are usually indicated in a contract between the carrier and shipper.
Commodity rates are usually published on a point-to-point basis and apply only on
specified products. Today, most rail freight moves under commodity rates. They are less
prevalent in motor carriage. Whenever a commodity rate exists, it supersedes the
corresponding class or exception rate.

Exception Rates
exception rates, or exceptions to the classification, are special rates published to provide
shippers lower rates than the prevailing class rate. The original purpose of the exception
rate was to provide a special rate for a specific area, original destination, or commodity
when either competitive or high-volume movements justified it. Rather than publish a
new tariff, an exception to the classification or class rate was established.
Just as the name implies, when an exception rate is published, the classification that
normally applies to the product is changed. Such changes may involve assignment of a
new class or may be based on a percentage of the original class. Technically, exceptions
may be higher or lower, although most are less than original class rates. Unless otherwise
noted, all services provided under the class rate remain under an exception rate.
Since deregulation, several new types of exception rates have gained popularity. For
example, an aggregate tender rate is utilized when a shipper agrees to provide multiple
shipments to a carrier in exchange for a discount or exception from the prevailing class
rate. The primary objective is to reduce carrier cost by permitting multiple shipment
pickup during one stop at a shipper's facility or to reduce the rate for the shipper because
of the carrier's decreased operations or marketing expenses. To illustrate, UPS offers
customers that require multiple small package shipments a discount based on aggregate
weight and/or cubic volume. Since 1980, numerous pricing innovations have been
introduced by common carriers based on various aggregation principles.
A limited service rate is utilized when a shipper agrees to perform selected services
typically performed by the carrier, such as trailer loading, in exchange for a discount. A
common example is a shipper load and count rate, where the shipper takes responsibility
for loading and counting the cases. Not only does this remove the responsibility for
loading the shipment from the carrier, but it also implies that the carrier is not responsible
for guaranteeing case count. Another example of limited service is a released value rate,
which limits carrier liability in case of loss or damage. Normally, the carrier is
responsible for full product value if loss or damage occurs in transit.
The quoted rate must include adequate insurance to cover the risk. Often it is more
effective for manufacturers of high-value product to self-insure to realize the lowest
possible rate. Limited service is used when shippers have confidence in the carrier's
capability. Cost can be reduced by eliminating duplication of effort or responsibility.
Under aggregate tender and limited service rates, as well as other innovative exception
rates, the basic economic justification is the reduction of carrier cost and subsequent
sharing of benefits based on shipper/carrier cooperation.
Special Rates and Services
A number of special rates and services provided by for-hire carriers are available for
logistical operations. Several important examples are discussed.
 Freight-All-Kind Rates- As indicated earlier, Freight-All-Kind (FAK) rates are
important to logistics operations. Under FAK rates, a mixture of different
products is transported under a generic rating. Rather than determine the
classification and applicable rate of each product, an average rate is applied for
the total shipment. In essence, FAK rates are line-haul rates since they replace
class, exception, or commodity rates. Their purpose is to simplify the paperwork
 associated with the movement of mixed commodities to lower the costs, so they
are of particular importance in physical distribution.
 Local, Joint, Proportional, and Combination Rates - Numerous special rates
exist that may offer transportation savings on specific freight movements. When a
commodity moves under the tariff of a single carrier, it is referred to as a local
rate or single-line rate. If more than one carrier is involved in the freight
movement, a joint rate may be applicable even though multiple carriers are
involved in the actual transportation process. Because some motor and rail
carriers operate in restricted temtory, it may be necessary to utilize the services of
more than one carrier to complete a shipment. Utilization of a joint rate can offer
substantial savings over the use of two or more local rates.
 Proportional rates offer special price incentives to utilize a published tariff that
applies to only part of the desired route. Proportional provisions of a tariff are
most often applicable to origin or destination points outside the normal
geographical area of a single-line tariff. If a joint rate does not exist and
proportional provisions do, the strategy of moving a shipment under proportional
rates provides a discount on the single-line part of the movement, thereby
resulting in a lower overall freight charge.
 Combination rates are similar to proportional rates in that a shopper may
combine two or more rates when no single-line or joint rate exists between an
origin and a destination. The rates may be any combination of class, exception,
and commodity rates. The utilization of combination rates often involves several
technicalities that are beyond the scope of this discussion. Their use substantially
reduces the cost of an individual shipment. In situations involving regular freight
movement, the need to utilize combination rates is eliminated by publication of a
through rate. A through rate is a standardized rate that applies from origin to
destination for a shipment.
 Transit Services- Transit services permits a shipment to be stopped at an
intermediate point between initial origin and destination for unloading, storage,
and/or processing. The shipment is then reloaded for delivery to the destination.
Typical examples of transit services are milling for grain products and processing
for sugar beets. When transit privileges exist, the shipment is charged a through
rate from origin to destination plus a transit privilege charge. Transit services are
most typical in rail tariffs. From the viewpoint of the shipper, the use of this
specialized service is restricted to routings and destinations. Therefore, a degree of
flexibility is lost when the product is placed in transit because the final destination can be
altered only at significant added expense or, at the least, with loss of the through rate
privilege. The added cost of administration must be carefully weighed in evaluating the
true benefits gained from utilizing a transit privilege. During the last decade railroads
have generally reduced the availability of such transit services.
2.2. Transport Decisions

The selection of mode of transportation or service offering within a mode of transportation

depends on a variety of service characteristics. The six key factors include:
1. Freight rate
2. Reliability
3. Transit time
4. Loss, damage, claim processing, and tracing
5. Shipper market consideration and
6. Carrier consideration
 Chapter Three
Traffic Management

Chapter Objectives
At the end of this chapter students will be able to
 Familiarize with traffic management
 Identify the goal conflicts between transport and traffic
 Identify the responsibilities of traffic manager

3.1 Traffic management

Traffic is a special area of macro logistics. Traffic scientists investigate the traffic flows of
goods, persons and transport means between anonymous sources and sinks in a region, of a
country or around the globe, which are the sum of all single transport flows between households,
companies and other actors of an economy. Topics of traffic technique are development,
planning, construction and realization of traffic routes, traffic networks and public transport
systems, traffic control, and traffic safety.

Traffic management and traffic politics plan and initiate the building of new traffic networks.
They care for safe, fast and efficient traffic flows through existing networks. Their goal is to
enable and secure the disturbance-free and environmentally safe fulfillment of the transport
demand of a region or a country at lowest costs.
Traffic economics deals with the economic aspects of public transport systems and traffic
networks. Traffic economists investigate the structure of traffic networks, routes and nodes and
the crossings between different transport modes. They study costs, prices and pricing-models
and the competitors on transport markets. Further topics are the structure and directions of traffic
flows, the development of traffic within and between regions and countries, the causes of traffic
emergence and the possibilities of traffic restriction.
Goal Conflicts between Transport and Traffic
Transport and traffic are interdependent:
 Prerequisites for efficient transports between the actors of an economy are safe traffic
networks and public transport systems with sufficient capacities, demand driven
traffic control, and cost-based and use-related pricing.
 Prerequisites for investments in traffic networks and public transport systems and for
their economic operation are adequate traffic flows respectively sufficient user
frequencies.
 From the different tasks and the partially deviating interests of the participants result
the following goal conflicts between transport and traffic:
  Transport business cares for the goals of single companies and traffic participants,
even if they are inconsistent with the goals of the society.
 Traffic economy aims at safe and economic utilization of traffic networks and public
transport in the interest of all companies, traffic participants and society, even if some
individuals or groups are put at a disadvantage.
These conflicts lead to challenging tasks for logistic research:
 Analysis of the organizational, technical and economic options of action to achieve the
different goals of transport and traffic.
 Development of methods to solve current and future tasks and problems of transport and
freight
 Investigation of the transport markets and freight markets, the competitors and the
pricing for transport and networks.
 Conception of strategies to accomplish or to restrain excessive transport demand and
traffic volume.
 Proposals for the legislature to regulate goal conflicts between transport and traffic A fair
solution of these tasks requires independency of logistic research from the particular
interests of business and daily policy.
While traffic managers administer many different activities, they are fundamentally responsible
for: (1) operations management, (2) Freight consolidation, (3) Rate negotiation, (4) Freight
control, (5) Auditing and claims, and (6) Logistical integration.

1. Operations Management
The fundamental responsibility of a traffic department is to oversee day-to-day shipping. In
large-scale organizations, traffic operations management involves a wide variety of
administrative responsibilities. From an operational perspective, key elements of transportation
management are equipment scheduling, load planning, routing, and carrier administration.
 Equipment Scheduling One major responsibility of the traffic department is equipment
scheduling. Scheduling is an important process in both common carrier and private
transportation. A serious and costly operational bottleneck can result from transportation
equipment waiting to be loaded or unloaded. Proper scheduling requires careful load
planning, equipment utilization, and driver scheduling. Additionally, equipment
preventative maintenance must be planned, coordinated, and monitored. Finally, any
specialized equipment requirements must be planned and implemented. Closely related to
equipment scheduling is the arrangement of delivery and pickup appointments. To avoid
extensive waiting time and improve equipment utilization, it is important to pre schedule
dock positions or slots. It is becoming common practice to establish regular or standing
appointments to facilitate loading and unloading. Some firms are implementing the
practice of establishing appointments at the time of purchase or sale commitment.
Increasingly, the effective scheduling of equipment is key to implementing time-based
logistical arrangements. For example, cross-dock arrangements are totally dependent on
precise scheduling of equipment arrival and departure.
 Load PlanningHow loads are planned directly impacts transportation efficiency. In the
case of motor carriers, capacity is limited in terms of weight and cube. Planning the load
sequence of a trailer must consider product physical characteristics, the size of individual
shipments, and delivery sequence if multiple shipments are loaded on a single trailer. As
noted earlier, TMS software is available to help facilitate load planning. How effectively
load planning is performed will directly impact overall logistical efficiency. For example,
the load plan drives timing of product selection and the work sequence at warehouses.
Transportation equipment must be available to maintain an orderly flow of product and
material from warehouse or factory to shipment destination.
 Routing An important part of achieving transportation efficiency is shipment routing.
Routing plans the geographical path a vehicle will travel to complete transportation
requirements. Once again, routing software is an integral part of TMS. From an
administrative viewpoint, the traffic department is responsible for assuring that routing is
performed in an efficient manner while meeting key customer service requirements. How
routes are implemented must take into consideration special requirements of customers in
terms of delivery time, location, and special unloading services.
 Carrier Administration Traffic managers have the basic responsibility of administering
the performance of for-hire and private transportation. Effective administration requires
continuous carrier performance measurement and evaluation. Until recently, efforts to
measure actual carrier service were sporadic and unreliable. A typical procedure was to
include postcards with shipments requesting consignees to record time and condition of
arrival. The development of information technology has significantly improved shipment
information reliability. The fact that most shippers have reduced their carrier base has
greatly simplified administration. Effective administration requires carrier selection,
integration, and evaluation.
 Carrier Selection - A basic responsibility of the traffic department is to select
carriers to perform for-hire transport. To some degree all firms use the services of
for-hire carriers. Even those with commitment to private fleets regularly require
the supplemented services of common, contract, and specialized carriers to
complete transportation requirements. Most firms that use for-hire transportation
have implemented what is commonly called a core carrier strategy. The concept
of a core carrier is to build a working relationship with a small number of transportation
providers. Historically, shippers followed the practice of spreading their transportation
requirements across a wide variety of carriers to assure equipment supply. During the
regulated era, few differences in price existed between carriers. As a result, shippers often
conducted business with hundreds of different carriers.
 Carrier Integration-Carrier integration is similar to introducing new product and
service capabilities into logistics operations. The two challenges of carrier
integration are long-term trends and carrier services. These two types of
integration are critical for shippers to achieve their functional and strategic
performance in the marketplace. Monitoring long-term market trends requires
 assessment of trailer or railcar capacity that will be needed to meet shipping
requirements on a seasonal or yearly basis. Related is planning the supply of
equipment type to satisfy operational requirements.
 Carrier Evaluation - Prior to deregulation, purchasers of transportation services
had a relatively easy task. Shippers selected a carrier for a specific shipment from
a long list, knowing that each offered essentially standardized service for the same
price. Due to economic regulation, there wasn't much room to negotiate price or service. 

2. Freight Consolidation
The fact that freight costs are directly related to size of shipment and length of haul places a
premium upon freight consolidation. To control transportation cost when using a time-based
strategy, managerial attention must be directed to the development of ingenious ways to realize
benefits of transportation consolidation. To plan freight consolidation, it is necessary to have
reliable information concerning both current and planned inventory status. It is also desirable to
be able to reserve or promise scheduled production to complete planned consolidations.
To the extent practical, consolidations should be planned prior to order processing and
warehouse order selection to avoid delays. All aspects of consolidation require timely and
relevant information concerning planned activity. From an operational viewpoint, freight
consolidation techniques can be grouped as reactive and proactive. Each type of consolidation is
important to achieving transportation efficiency.
 Reactive Consolidation A reactive approach to consolidation does not attempt to
influence the composition and timing of transportation movements. The consolidation
effort takes shipments as they come and seeks to combine freight into larger shipments
for line-haul movement. From an operational viewpoint, there are three ways to achieve
effective reactive freight consolidation: (1) market area, (2) scheduled delivery, and (3)
pooled delivery.
 Market Area - The most basic method of consolidation is to combine small
shipments going to different customers within a geographical market area. This
procedure does not interrupt the natural freight flow by changing the timing of
shipments. Rather, the overall quantity of shipments to a market area provides the
consolidation basis. The difficulty of developing either inbound or outbound
market area consolidations is the variation in daily volume. To offset the volume
deficiency, three operating arrangements are commonly used. First, consolidated
shipments may be sent to an intermediate break-bulk point for purposes of line-
haul transportation savings. There, individual shipments are separated and
forwarded to their destination. Second, firms may elect to hold consolidated
shipments for scheduled delivery on specific days to given destination markets.
Third, f i s may achieve consolidation of small shipments by utilizing the services
of a third-party logistics f i to pool delivery. The last two methods require special
arrangements, which are discussed in greater detail below.
  Scheduled Delivery- Scheduled delivery consists of limiting shipments to
specific markets to selected days each week. The scheduled delivery plan is
normally communicated to customers in a way that highlights the mutual benefits
of consolidation. The shipping firm commits to the customer that all orders
received prior to a specified cutoff time will be guaranteed for delivery on the
scheduled day. Scheduled delivery may conflict with the trend toward customer-
specified delivery appointments. Specified delivery time means that an order is
expected to be delivered within a narrow time window. In today's world, a
requirement to provide l-hour delivery of a component or part may be written into
the purchase contract. Pushed to the limit, customer-specified delivery requires
the capability to deliver any size shipment at any time specified by a customer.
The objective of scheduled delivery is to offer a solution that the customer can
depend upon while also achieving consolidation benefits.
 Pooled Delivery- Participation in a pooled delivery plan typically means that a
freight forwarder, public warehouse, or transportation company arranges
consolidation for multiple shippers serving the same geographical market area.
Integrated source providers that arrange pooled consolidation services typically
have standing delivery appointments at high-volume delivery destinations. It is
common, under such arrangements, for the consolidation company to perform
value-added service such as sorting, sequencing, or segregation of inbound freight
to accommodate customer requirements.
 Proactive Consolidation While reactive efforts to develop transportation consolidations
have been successful, firms are becoming more innovative concerning pre-transaction
planning. Two forces are driving a more proactive approach to consolidation. First, the
impact of time-based responsive logistical systems is creating a larger number of small
shipments. This trend towards increased smaller shipments has been intensified by
increased e-commerce fulfillment. Second, proactive consolidation has increased the
desire for shippers, carriers, and consignees to participate in consolidation savings.
Traditional consolidation programs typically favored one of the three to the exclusion of
one or both of the others. A willingness to share benefits can provide incentive for all
members of the supply chain to achieve freight consolidation.

3. Rate Negotiation
For any given shipment it is the responsibility of the traffic department to obtain the lowest
possible rate consistent with service requirements. The prevailing price for each transport
alternative-rail, air, motor, pipeline, water, and so on-is found by reference to tariffs.

4. Freight Control
Other important responsibilities of transportation management are tracing and expediting.
Tracing is a procedure to locate lost or late shipments. Shipments committed across a
transportation network are bound to be misplaced or delayed from time to time. Most large
carriers maintain online tracing to aid shippers in locating a shipment. The tracing action must be
initiated by the shipper's traffic department, but once initiated, it is the carrier's responsibility to
provide the desired information. Expediting involves the shipper notifying a carrier that it needs to
have a specific shipment move through the carrier's system as quickly as possible and with no delays.

5. Auditing and Claim Administration

When transportation service or charges are not performed as promised, shippers can make claims
for restitution. Claims are typically classified as loss and damage or over charged undercharge.
Loss and damage claims occur when a shipper demands the carrier pay for partial or total
financial loss resulting from poor performance. As the name implies, loss and damage claims
usually occur when product is lost or damaged while in transit. Over charge /under charge claims
result when the amount billed is different from that expected and are typically resolved through
freight bill audit procedures.

6. Logistical Integration
For any given operating period, traffic management is expected to provide the required
transportation services at budgeted cost. It is also traffic management's responsibility to search
for alternative ways to deploy transportation to reduce total logistics cost.
For example, a slight change in packaging may create an opportunity for negotiation of a lower
freight classification rating for a product. Although packaging costs may increase, this added
expense may be offset by a substantial reduction in transportation cost. Unless such proposals
originate from the traffic department, they will likely go undetected in the average firm. As
indicated earlier, transportation is the highest single cost area in most logistical systems. This
expenditure level combined with the dependence of logistical operations on effective
transportation means that the traffic departments must play an active role in strategic planning.
Self assessment questions
1. Define traffic management using your own words
2. Identify the goal conflicts between transport and traffic
3. Identify the responsibilities of traffic manager
 CHAPTER FOUR
MARKETING CHANNEL MANAGEMENT

Chapter Objectives
At the end of this chapter students will be able to
 Identify Marketing channels
 Discuss the importance of channel
 Identify the role of channel
 Identify the channel function
 Discuss channel management decision
4.1 Marketing Channels

Most producers do not sell their goods directly to the final users; between them stands a set of
intermediaries performing a variety of functions. These intermediaries constitute a marketing
channel (also called a trade channel or distribution channel). Formally, marketing channels are
sets of interdependent organizations involved in the process of making a product or service
available for use or consumption. They are the set of pathways a product or service follows after
production, culminating in purchase and use by the final end user.
Some intermediaries—such as wholesalers and retailers—buy, take title to, and resell the
merchandise; they are called merchants. Others—brokers, manufacturers' representatives, sales
agents—search for customers and may negotiate on the producer's behalf but do not take title to
the goods; they are called agents. Still others—transportation companies, independent
warehouses, banks, advertising agencies—assist in the distribution process but neither take title
to goods nor negotiate purchases or sales; they are called facilitators.

4.1.1 The Importance of Channels

A marketing channel system is the particular set of marketing channels employed by a firm.
Decisions about the marketing channel system are among the most critical facing management.
In the United States, channel members collectively earn margins that account for 30 to 50
percent of the ultimate selling price. In contrast, advertising typically accounts for less than 5 to
7 percent of the final price. Marketing channels also represent a substantial opportunity cost.
One of the chief roles of marketing channels is to convert potential buyers into profitable orders.
Marketing channels must not just serve markets, they must also make markets.
The channels chosen affect all other marketing decisions. The company's pricing depends on
whether it uses mass merchandisers or high-quality boutiques. The firm's sales force and
advertising decisions depend on how much training and motivation dealers need. In addition,
channel decisions involve relatively long-term commitments to other firms as well as a set of
policies and procedures. When an automaker signs up independent dealers to sell its
automobiles, the automaker cannot buy them out the next day and replace them with company-
owned outlets.
In managing its intermediaries, the firm must decide how much effort to devote to push versus
pull marketing. A push strategy involves the manufacturer using its sales force and trade
promotion money to induce intermediaries to carry, promote, and sell the product to end users.
Push strategy is appropriate where there is low brand loyalty in a category, brand choice is made
in the store, the product is an impulse item, and product benefits are well understood. A pull
strategy involves the manufacturer using advertising and promotion to persuade consumers to
ask intermediaries for the product, thus inducing the intermediaries to order it. Pull strategy is
appropriate when there is high brand loyalty and high involvement in the category, when people
perceive differences between brands, and when people choose the brand before they go to the
store. Top marketing companies such as Nike, Intel, and Coca-Cola skillfully employ both push
and pull strategies.

4.1.2 Channel Development

A new firm typically starts as a local operation selling in a limited market, using existing
intermediaries. The number of such intermediaries is apt to be limited: a few manufacturers'
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 the available intermediaries to handle the firm's line.
If the firm is successful, it might branch into new markets and use different channels in different
markets. In smaller markets, the firm might sell directly to retailers; in larger markets, it might
sell through distributors. In rural areas, it might work with general-goods merchants; in urban
areas, with limited-line merchants. In one part of the country, it might grant exclusive franchises;
in another, it might sell through all outlets willing to handle the merchandise. In one country it
might use international sales agents; in another, it might partner with a local firm. In short, the
channel system evolves in response to local opportunities and conditions.
4.1.3 The Role of Marketing Channels

Why would a producer delegate some of the selling job to intermediaries? Delegation means
relinquishing some control over how and to whom the products are sold. Producers do gain
several advantages by using intermediaries:
 Many producers lack the financial resources to carry out direct marketing. For example,
General Motors sells its cars through more than 8,000 dealer outlets in North America
alone. Even General Motors would be hard-pressed to raise the cash to buy out its
dealers.
 Producers who do establish their own channels can often earn a greater return by
increasing investment in their main business. If a company earns a 20 percent rate of
 return on manufacturing and a 10 percent return on retailing, it does not make sense to do
its own retailing.
 In some cases direct marketing simply is not feasible. The William Wrigley Jr. Company
would not find it practical to establish small retail gum shops throughout the world or to
sell gum by mail order. It would have to sell gum along with many other small products
and would end up in the drugstore and grocery store business. Wrigley finds it easier to
work through the extensive network of privately owned distribution organizations.
 Intermediaries normally achieve superior efficiency in making goods widely available
and accessible to target markets. Through their contacts, experience, specialization, and
scale of operation, intermediaries usually offer the firm more than it can achieve on its
own. According to Stern and his colleagues:
 Intermediaries smooth the flow of goods and services.... This procedure is necessary in
order to bridge the discrepancy between the assortment of goods and services generated
by the producer and the assortment demanded by the consumer. The discrepancy results
from the fact that manufacturers typically produce a large quantity of a limited variety of
goods, whereas consumers usually desire only a limited quantity of a wide variety of
goods.
4.1.4 Channel 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
need or want them.
 Members of the marketing channel perform a number of key functions some functions
(physical, title, promotion) constitute a forward flow of activity from the company to the
customer; other functions (ordering and payment) constitute a backward flow from
customers to the company. Still others (information, negotiation, finance, and risk taking)
occur in both directions. If these flows were superimposed in one diagram, the
tremendous complexity of even simple marketing channels would be apparent.
 A manufacturer selling a physical product and services might require three channels: a
sales channel, a delivery channel, and a service channel. To sell its Bovvflex fitness
equipment, the Nautilus Group has used television infomercials, the telephone, and the
Internet as sales channels; UPS ground service as the delivery channel; and local repair
people as the service channel. When sales failed to meet goals, Nautilus added retail
stores to its sales channels in 2003. When a competitor infringed on the Bowflex patent
by placing an imitation product into retail stores, Nautilus began selling Bovvflex home
gyms through the retail channel.
 The question is not whether various channel functions need to be performed—they must
be—but rather, who is to perform them. All channel functions have three things in
common: They use up scarce resources; they can often be performed better through
specialization; and they can be shifted among channel members. When the manufacturer
 shifts some functions to intermediaries, the producer's costs and prices are lower, but the
intermediary must add a charge to cover its work. If the intermediaries are more efficient
than the manufacturer, prices to consumers should be lower. If consumers perform some
functions themselves, they should enjoy even lower prices.
Marketing functions, then, are more basic than the institutions that perform them at any given
time. Changes in channel institutions largely reflect the discovery of more efficient ways to
combine or separate the economic functions that provide assortments of goods to target
customers.

Channel Member Functions

 Gather information about potential and current customers, competitors, and other actors
and forces in theˇ marketing environment.ˇ
 Develop and disseminate persuasive communications to stimulate purchasing.
 Reach agreements on price and other terms so that transfer of ownership or possession
can be effected.
 Place orders with manufacturers.
 Acquire the funds to finance inventories at different levels in the marketing channel
 Assume risks connected with carrying out channel work.
 Provide for the successive storage and movement of physical products
 Provide for buyers' payment of their bills through banks and other financial institutions.
 Oversee actual transfer of ownership from one organization or person to another.
4.1.5 Channel Levels

The producer and the final customer 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 examples are door-to-
door sales, home parties, mail order, telemarketing, TV selling, Internet 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, these are
typically a wholesaler and a retailer.
 A three-level channel contains three intermediaries. In the meatpacking industry,
wholesalers sell to jobbers, who sell to small retailers.
Channels normally describe a forward movement of products from source to user. One can also
talk about reverse-flow channels. They are important in the following cases: (1) to reuse products
or containers (such as refillable chemical-carrying drums); (2) to refurbish products (such as
circuit boards or computers) for resale; (3) to recycle products (such as paper); and (4) to dispose
of products and packaging (waste products). Several intermediaries play a role in reverse-flow
channels, including manufacturers' redemption centers, community groups, traditional
intermediaries such as soft-drink intermediaries, trash-collection specialists, recycling centers,
trash-recycling brokers, and central-processing warehousing.

4.3. Marketing Channel Structure

A channel structure is a means of reaching your customer with your products and services. This
is essentially a high level view of your sales and distribution channels that outlines the
architecture of your business.

It is common for organizations to have many channel structures for different products and
regions. For example, a fashion brand that sells direct in Germany but uses agents, wholesalers
and retailers in other countries.

Whenever designing a distribution channel, there are many factors in consideration. One of them
is how close the company is to its target market. The other is the expansion plans of the company
and how expansion will require a deeper distribution network. Thus, to establish a distribution
plan, a company needs to decide on a channel structure.

There are two types of Channel structures – The Industrial channel structure and the Consumer
channel structure. Both of these are discussed in this article.
1) THE CONSUMER CHANNEL STRUCTURE.

The consumer channel structure is generally used in FMCG markets or consumer durable
markets. This channel structure is known for the various kinds of elements it has in its
distribution network. Let us look at each player in the distribution network and their role in the
channel structure.

From top to bottom, these are the players while deciding the channel structure.

A. The manufacturer – This is the parent company which wants to distribute its products to
the end customer and wants to set up a distribution channel.
B. The retailer – This is the last point of contact between the manufacturer and the
customer. To sell the product and to show its features to a customer, a company needs to
have a retail outlet. In case of companies like Bose, there are many company owned
outlets which directly sell the product to the end customer.
C. The Wholesaler – The wholesalers are people who purchase inventory in huge bulk from
the manufacturer and then sell it forward to a retailer. Wholesalers are responsible for
breaking the bulk in case of FMCG products and in case of consumer durables, will be
responsible for a complete territory.
D. The Agent or Broker – The agent or the broker is the one who does the deal between the
end retailer and the company or the wholesaler and the company. He receives a small
commission for setting up the deal. A broker can also be a C&F – A carrying and
forwarding agent which might be the third level of the channel structure.
E. Consumer – The one who buys the end product from the retailer.
Thus, based on these players, the consumer channel structure may consist of different flow of
material.
  Flow 1 – Where the Manufacturer sells to a retailer or opens its own retail outlets.
 Flow 2 – Where the manufacturer sells to a wholesaler who in turn sells to retailers.
 Flow 3 – Where the manufacturer has a middle man in the form of an agent or a broker.
The Agent or the broker sells directly to large retailers.
 Flow 4 – Wherein the agent or broker may sell to wholesalers who in turn sell to retailers.
The consumer Channel structure has some unique points.

There are 4 different types of distribution types in the consumer channel structure

 In no scenario, the manufacturer sells directly to the customer. There is always a

middleman in between.
 Breaking the bulk plays a big role in the channel structure of FMCG and Consumer
durable industry.
 The Consumer channel structure generally too many transactions on a per day basis as
compared to industrial channel.
 In industrial channel the volume may be bulk but transactions are lesser.
2) THE INDUSTRIAL CHANNEL STRUCTURE

Almost the same players as the consumer channel structure exist in the industrial channel. Here
the manufacturer is producing industrial goods and is dealing in B2B sales (such as ball bearings
or lubricants or metal parts & equipments)

The one player who is different in the industrial channel structure is

F. The Industrial Distributor – The Industrial distributor is like the wholesaler in the
consumer channel. The distributor takes care of sales, stocking and providing the product
to the end customer. Mostly in the Industrial channel, the distributor also takes care of
service and is known to be technically sound about the product. Her
4.4. Channel management

Channel management is the process of reaching the customer with your products and services. A
channel can be a method of selling, a method of delivering your obligations to the customer or
both. The following are common elements of channel management.

 Channel Strategy Planning your sales and distribution channels. For example,
developing plans to improve your ecommerce presence or expand sales into new regions.
 Channel Architecture The basic structure of your channels
 Channel Design The detailed planning and implementation of new channels. For
example, developing a partnership program for value added resellers.
 Sales Management The process of managing sales teams and partners such as incentives
and performance management.
 Sales & Operations Planning Matching what you are producing to sales forecasts and
demand generation efforts such as promotional campaigns. For example, scheduling
increased production at your factories to support a sales event in your retail and
ecommerce channels.
 Partner Relationship Management Developing, motivating, monitoring and managing
the performance of partners.
 Channel Conflict Channel conflict is competition between channels that is perceived as
counterproductive or unfair. For example, ecommerce that undercuts your retail partners
such that they become unprofitable. Channel management involves careful design of
channels to avoid such conflicts such as a fashion brand that allows retail locations to
have new items weeks before they are available on ecommerce to compensate for their
higher cost base.
 Brand Experience Developing a valuable brand experience across channels. This
includes customer service and the design of locations both physical and digital.
 Promotion Coordinating promotional campaigns across channels such as pricing and
advertising for a sales event.
 Pricing Channel based pricing strategies. For example, a fashion retailer with premium
shops in luxury shopping areas and outlet shops in suburban locations as a means of price
discrimination.
 Revenue Management The process of optimizing your revenue for available inventory
such as an airline that sells full priced tickets online and gives bulk discounts to tour
operators when they need to fill seats.
 Distribution The process of delivering your obligations to customers and channel
partners. This includes reaching the end-customer with your products, services, brand
experience and customer service. It also includes logistics such as product returns.
I

4.5 Channel-Management Decisions

After a company has chosen a channel alternative, individual intermediaries must be selected,
trained, motivated, and evaluated. Channel arrangements must be modified over time.
 Selecting Channel Members Companies need to select their channel members
carefully. To customers, the channels are the company. To facilitate channel member
selection, producers should determine what characteristics distinguish the better
intermediaries. They should evaluate the number of years in business, other lines carried,
growth and profit record, financial strength, cooperativeness, and service reputation. If
the intermediaries are sales agents, producers should evaluate the number and character
of other lines carried and the size and quality of the sales force. If the intermediaries are
department stores that want exclusive distribution, the producer should evaluate
locations, future growth potential, and type of clientele.
 Training Channel Members Companies need to plan and implement careful training
programs for their intermediaries
 Motivating Channel Members A company needs to view its intermediaries in the same
way it views its end users. It needs to determine intermediaries' needs and construct a
channel positioning such that its channel offering is tailored to provide superior value to
these intermediaries. Being able to stimulate channel members to top performance starts
with understanding their needs and wants. The company should provide training
programs, market research programs, and other capability-building programs to improve
intermediaries' performance. The company must constantly communicate its view that
the intermediaries are partners in a joint effort to satisfy end users of the product.
Producers vary greatly in skill in managing distributors. Channel power can be defined as
the ability to alter channel members' behavior so that they take actions they would not have taken
otherwise. Manufacturers can draw on the following types of power to elicit cooperation:
 Coercive power. A manufacturer threatens to withdraw a resource or terminate a
relationship if intermediaries fail to cooperate. This power can be effective, but
its exercise produces resentment and can generate conflict and lead the
intermediaries to organize countervailing power.
 Reward power. The manufacturer offers intermediaries an extra benefit for
performing specific acts or functions. Reward power typically produces better
results than coercive power, but can be overrated. The intermediaries may come to
expect a reward every time the manufacturer wants a certain behavior to occur.
 Legitimate power. The manufacturer requests a behavior that is warranted under
the contract. As long as the intermediaries view the manufacturer as a legitimate
leader, legitimate power works.
 Expert power. The manufacturer has special knowledge that the intermediaries
value. Once the expertise is passed on to the intermediaries, however, this power
I

weakens. The manufacturer must continue to develop new expertise so that the
intermediaries will want to continue cooperating.
 Referent power. The manufacturer is so highly respected that intermediaries are
proud to be associated with it. Companies such as IBM, Caterpillar, and Hewlett-
Packard have high referent power.
Coercive and reward power are objectively observable; legitimate, expert, and referent
power are more subjective and dependent on the ability and willingness of parties to
recognize them. Most producers see gaining intermediaries' cooperation as a huge
challenge. They often use positive motivators, such as higher margins, special deals,
premiums, cooperative advertising allowances, display allowances, and sales contests. At
times they will apply negative sanctions, such as threatening to reduce margins, slow
down delivery, or terminate the relationship. The weakness of this approach is that the
producer is using crude, stimulus-response thinking.
More sophisticated companies try to forge a long-term partnership with distributors. The
manufacturer clearly communicates what it wants from its distributors in the way of
market coverage, inventory levels, marketing development, account solicitation,
technical advice and services, and marketing information. The manufacturer seeks
distributor agreement with these policies and may introduce a compensation plan for
adhering to the policies. Here are three examples of successful partner-building practices:
 Evaluating Channel Members Producers must periodically evaluate intermediaries'
performance against such standards as sales-quota attainment, average inventory levels,
customer delivery time, treatment of damaged and lost goods, and cooperation in
promotional and training programs. A producer will occasionally discover that it is
paying too much to particular intermediaries for what they are actually doing. One
manufacturer that was compensating a distributor for holding inventories found that the
inventories were actually held in a public warehouse at its expense. Producers should set
up functional discounts in which they pay specified amounts for the trade channel's
performance of each agreed-upon service. Underperformers need to be counseled,
retrained, motivated, or terminated.
 Modifying Channel Arrangements A producer must periodically review and modify
its channel arrangements. Modification becomes necessary when the distribution channel
is not working as planned, consumer buying patterns change, the market expands, new
competition arises, innovative distribution channels emerge, and the product moves into
later stages in the product life cycle. Consider Apple.
No marketing channel will remain effective over the whole product life cycle. Early buyers might
be willing to pay for high value-added channels, but later buyers will switch to lower-cost
channels. Small office copiers were first sold by manufacturers' direct sales forces, later through
office equipment dealers, still later through mass merchandisers, and now by mail-order firms
and Internet marketers.
I

In competitive markets with low entry barriers, the optimal channel structure will inevitably
change over time. The change could involve adding or dropping individual channel members,
adding or dropping particular market channels, or developing a totally new way to sell goods.
Adding or dropping individual channel members requires an incremental analysis. What would
the firm's profits look like with and without this intermediary? An automobile manufacturer's
decision to drop a dealer requires subtracting the dealer's sales and estimating the possible sales
loss or gain to the manufacturer's other dealers.
The most difficult decision involves revising the overall channel strategy. Distribution
channels clearly become outmoded, and a gap arises between the existing distribution
system and the ideal system that would satisfy target customers' needs and desires (see
"Marketing Memo: Designing a Customer-Driven Distribution System"). Examples
abound: Avon's door-to-door system for selling cosmetics had to be modified as more
women entered the workforce; IBM's exclusive reliance on a field sales force had to be
modified with the introduction of low-priced personal computers; and in retail banking
the trend toward opening branches has now come full circle within just a decade.
I

CHAPTER FIVE:-
CHANNEL PARTICIPANTS

Learning Objectives After reading this chapter you should:

 Be familiar with the classification of the major participants in marketing channels.
 Understand why producers and manufacturers often find it necessary to shift many of the
distribution tasks to intermediaries.
 Identify the major types of wholesalers as reflected in the Census of Wholesale Trade.
 Recognize and explain the value of distribution tasks performed by the major types of
wholesalers.
 Have an overview of classifications and the distribution tasks performed by retailers.
 Appreciate the role played by facilitating agencies in marketing channels.

5.1. INTRODUCTION

The marketing channel was defined in the previous chapter as the external contractual
organization that management operates to achieve its distribution objectives. We noted that the
channel manager should use intermediaries in the channel, based on the principles of
specialization and division of labor as well as contactual efficiency. If the channel manager does
a good job of allocating the distribution tasks among a well-chosen group of channel
participants, the resulting channel structure should achieve the firm’s distribution objectives with
a high level of effectiveness and efficiency.
In the present chapter we build on these concepts by discussing the various types of channel
participants and the distribution tasks they perform. The information provided should help the
channel manager to recognize the contributions that various intermediaries can make to
marketing channels. Armed with this knowledge, the channel manager can then make better
decisions about who should participate in the firm’s marketing channels.

5.2. AN OVERVIEW OF THE CHANNEL PARTICIPANTS

Figure below illustrates the basic dichotomy between channel membership based on performance
or nonperformance of the negotiatory functions (buying, selling, and transferring title).
Participants who engage in these functions are linked together by the flows of negotiation or
ownership and are therefore members of the contractual organization (the marketing channel).
The three basic divisions of the marketing channel depicted in Figure above are (1) producers
and manufacturers, (2) intermediaries, and (3) final users. The latter two are broken down further
into wholesale and retail intermediaries and consumer and industrial users, respectively.
The final users, though technically members of the marketing channel because they are involved
in negotiatory functions, from this point on will not be viewed as channel members in this text.
In the context of the management perspective we are using, it is more appropriate to view final
I

users as target markets that are served by the commercial subsystem of the channel. The
commercial channel, then, by definition excludes final users. Thus, whenever the term
marketing channel is mentioned in the remainder of the text, it is understood that we are
referring to the commercial channel.
Since facilitating agencies do not perform negotiatory functions, they are not members of the
channel. They do, however, participate in the operation of the channel by performing other
functions. Six of the more common types of facilitating agencies are shown in Figure above The
structure of this chapter is derived from the diagram shown in Figure above. We begin by
discussing the commercial channel: producers/manufacturers and intermediaries. We then move
to a discussion of the facilitating agencies.
I

5.3. PRODUCER & MANUFACTURER

For the purpose of this text, producers and manufacturers consist of firms that are involved in
extracting, growing, or making products. This category includes those firms that the U.S. Bureau
of the Census classifies under agriculture, forestry and fishing, mining, construction,
manufacturing, and some service industries. The range of producing and manufacturing firms is
enormous, both in terms of the diversity of goods and services produced and the size of the
firms. It includes firms that make everything from straight pins to jet planes and that vary in size
from one-person operations to giant multinational corporations with many thousands of
employees and multibillion-dollar sales volumes. But even with all this diversity, a thread of
commonality runs through producing and manufacturing firms: All exist to offer products that
satisfy the needs of customers.
For the needs of those customers to be satisfied, products must be made available to customers
when, where, and how they want them. Thus, producing and manufacturing firms must somehow
see that their products are distributed to their intended markets. Most producing and
manufacturing firms, both large and small, however, are not in a favorable position to distribute
their products directly to their final user markets.1 Quite often, they lack the requisite expertise
and the economies of scale (and/or scope) to perform all of the distribution tasks necessary to
distribute their products effectively and efficiently to their final users.
With respect to expertise, many producers and manufacturers do not have nearly the level of
expertise in distribution that they have attained in production or manufacturing. An electronics
manufacturer may be operating at the leading edge of electronics technology and yet know very
little about the best way to distribute its sophisticated products to its markets. A drill bit
manufacturer may make the finest products using the most advanced alloys and yet be quite
naive when it comes to performing the tasks necessary to distribute those products. A
West Coast farm that grows the finest produce based on the latest developments in agricultural
technology may know very little about how to make that produce available, in good condition
and at low cost, to consumers on the East Coast. In short, expertise in production or
manufacturing processes does not automatically translate into expertise in distribution.
But even for those producing and manufacturing firms that do have (or are capable of
developing) expertise in distribution, the economies of scale that are necessary for efficient
production do not necessarily make for efficient distribution.
5.4. INTERMEDIARIES

Intermediaries (or middlemen) are independent businesses that assist producers and
manufacturers (and final users) in the performance of negotiatory functions and other distribution
tasks. Intermediaries thus participate in the negotiation and/or ownership flows They operate
basically at two levels: wholesale and retail.
5.4.1. Wholesale Intermediaries

Wholesalers consist of businesses that are engaged in selling goods for resale or business use to
retail, industrial, commercial, institutional, professional, or agricultural firms, as well as to other
wholesalers. Also included are firms acting as agents or brokers in either buying goods for or
selling them to such customers.

Types and Kinds of Wholesalers

The most comprehensive and commonly used classification of wholesalers is that used by the
Census of Wholesale Trade, published by the U.S. Department of Commerce every five years,
which breaks them down into three major types:
 Merchant wholesalers
 Agents, brokers, and commission merchants
 Manufacturers’ sales branches and offices
Figure below provides a schematic diagram of these three types of wholesalers.
 • Merchant wholesalers are firms engaged primarily in buying, taking title to, usually
storing, and physically handling products in relatively large quantities and then reselling
the products in smaller quantities to retailers; to industrial, commercial, or institutional
concerns; and to other wholesalers. They go under many different names, such as
wholesaler, jobber, distributor, industrial distributor, supply house, assembler, importer,
exporter, and others.
• Agents, brokers, and commission merchants are also independent middlemen who do
not, for all or most of their business, take title to the goods in which they deal, but who
are actively involved in negotiatory functions of buying and selling while acting on
behalf of their clients. They are usually compensated in the form of commissions on sales
or purchases. Some of the more common types are known in their industries as
manufacturers’ agents, commission merchants, brokers, selling agents, and import and
export agents.
• Manufacturers’ sales branches and offices are owned and operated by manufacturers
but are physically separated from manufacturing plants. They are used primarily for the
purpose of distributing the manufacturer’s own products at wholesale. Some have
warehousing facilities where inventories are maintained, while others are merely sales
offices. Some of them also wholesale allied and supplementary products purchased from
other manufacturers.

Distribution Tasks Performed by Merchant Wholesalers

Merchant wholesalers serve manufacturers as well as retailers and other customers. They have
survived as intermediaries in the marketing channel because, as specialists in the performance of
distribution tasks, they can operate at high levels of effectiveness and efficiency. well-managed
merchant wholesalers are especially well suited for performing the following types of
distribution tasks for producers and manufacturers.
1. Providing market coverage
2. Making sales contacts
3. Holding inventory
4. Processing orders
5. Gathering market information
6. Offering customer support
• Market coverage is provided by merchant wholesalers to manufacturers because the
markets for the products of most manufacturers consist of many customers spread over
large geographical areas. To have good market coverage so that their products are readily
available to customers when needed, manufacturers often rely on merchant wholesalers to
secure the necessary market coverage at reasonable cost.
• Sales contact is a valuable service provided by merchant wholesalers. For manufacturers,
the cost of maintaining an outside sales force is high. If a manufacturer’s product is sold
to many customers over a large geographical area, the cost of covering the territory with
 its sales force can be prohibitive. By using wholesalers to reach all or a significant
portion of their customers, manufacturers may be able to reduce substantially the costs of
outside sales contacts because their sales force would be calling on a relatively small
number of wholesalers rather than the much larger number of customers. The value of
wholesalers in providing sales contact becomes even more apparent for manufacturers
entering foreign markets.
• Holding inventory is another crucial task performed by wholesalers for manufacturers.
Merchant wholesalers take title to, and usually stock, the products of the manufacturers
whom they represent. By doing so, they can reduce the manufacturers’ financial burden
and reduce some of the manufacturers’ risk associated with holding large inventories.
Moreover, by providing a ready outlet for manufacturers’ products, wholesalers help
manufacturers to better plan their production schedules.
• Order processing performed by wholesalers is very helpful to manufacturers because
many customers buy in small quantities. Yet manufacturers both large and small find it
extremely inefficient to attempt to fill large numbers of small orders from thousands of
customers. Many of the original dot-com firms engaged in E-commerce were undermined
by the high fulfillment costs associated with thousands of small orders. For most of them,
order processing costs were a major cause of their demise because the costs were very
high relative to the value of the products being sold. Wholesalers, on the other hand, are
specifically geared to handle small orders from many customers. By carrying the
products of many manufacturers, wholesalers’ order processing costs can be absorbed by
the sale of a broader array of products than that of the typical manufacturer.
• Gathering market information is another task of substantial benefit to manufacturers.
Wholesalers are usually quite close to their customers geographically and in many cases
have continuous contact through frequent sales calls on their customers. Hence, they are
in a good position to learn about customers’ product and service requirements. Such
information, if passed on to manufacturers, can be valuable for product planning, pricing,
and the development of competitive marketing strategy. Some wholesalers are using the
Internet to provide information to link suppliers and customers together.
• Customer support is the final distribution task that wholesalers provide for
manufacturers. Products may need to be exchanged or returned, or a customer may
require setup, adjustment, repairs, or technical assistance. For manufacturers to provide
such services directly to large numbers of customers can be very costly. Instead,
manufacturers can use wholesalers to assist them in providing these services to
customers. This extra support by wholesalers, often referred to as value added services,
plays a crucial role in making wholesalers vital members of the marketing channel from
the standpoints of both the manufacturers who supply them and the customers to whom
they sell.
In addition to performing the six distribution tasks for manufacturers, as discussed in the
preceding paragraphs, merchant wholesalers are equally well suited to perform the following
distribution tasks for their customers:
1. Assuring product availability
2. Providing customer service
3. Extending credit and financial assistance
4. Offering assortment convenience
5. Breaking bulk
6. Helping customers with advice and technical support
 Product availability, providing for the ready availability of products, is probably the
most basic distribution task performed by wholesalers for customers. Because of the
closeness of wholesalers to their customers and/or their sensitivity to customers’ needs,
they can provide a level of product availability that many manufacturers could not easily
match. Consider what happened to Doug’s TV, a retailer of television sets located in
Beverly Hills, Florida. Doug’s TV had been buying RCA brand television sets from
Raybro Electric Supplies, Inc., a local wholesaler. When RCA decided to drop Raybro
and sell direct to retailers, Doug’s TV found it faced serious product availability
problems. Instead of two-day truck delivery, it now took a month to get TVs. To partially
alleviate this problem, Doug’s now has to place larger orders, thus tying up more money
in inventory.
 Customer service is another valuable distribution task performed by wholesalers.
Customers often require services such as delivery, repairs, or warranty work. By making
these services available to their customers, wholesalers save their customers effort and
expense. Alco Standard Corporation, for instance, the largest wholesaler of paper and
office products in North America, provides repair services to its customers for their
Ricoh, Canon, and Sharp copy machines, something that customers have found to be
extremely convenient and helpful.
 Credit and financial assistance are provided by wholesalers in two ways. First, by
extending open account credit to customers on products sold, wholesalers allow
customers to use products in their business before having to pay for them. Second, by
stocking and providing ready availability for many of the items needed by their
customers, wholesalers significantly reduce the financial inventory burden their
customers would bear if they had to stock all the products themselves. The case of
Doug’s TV, cited earlier in relation to product availability, also underscores the
importance of wholesalers in providing credit and financial assistance. The wholesaler
had let Doug’s use favorable floor-plan financing terms on any size order, no matter how
small. The manufacturer, on the other hand, allows such terms only on orders of at least
$2,000.
 Assortment convenience refers to the wholesaler’s ability to bring together from a
variety of manufacturers an assortment of products, greatly simplifying customers’
 ordering tasks. Instead of having to order separately from dozens or even hundreds of
manufacturers, customers can turn to one or a few general line or specialist wholesalers
who can provide them with all or most of the products they need. For example, Alco
Standard Corporation, the giant paper products wholesaler cited earlier, fills literally
thousands of orders for thousands of different products every day. In the process of doing
so, it saves its customers enormous amounts of time and expense.24
 Breaking bulk is important because often customers do not need large quantities of
products, or they may prefer to order only a small quantity at a time. Many manufacturers
find it uneconomical to fill small orders and will establish minimum order requirements
to discourage them. By buying large quantities from manufacturers and breaking down
these ―bulk‖ orders into smaller quantities, wholesalers provide customers with the ability
to buy only the quantity they need. Alco Standard Corporation can also be cited as an
outstanding example of the wholesaler’s ability to perform this task. Many, if not most,
of the orders it receives from customers would be too small to be ordered directly from
manufacturers because of minimum order requirements. Alco, however, buys in huge
quantities and then breaks them down into whatever amounts its customers wish to order.
 Advice and technical support is the final distribution task wholesalers are called on to
perform for their customers. Many products, even those that are not considered technical,
may still require a certain amount of technical advice and assistance for proper use, as
well as advice on how they should be sold. Wholesalers, especially through a well-trained
outside sales force, are able to provide this kind of technical and business assistance to
customers.

Distribution Tasks Performed by Agent Wholesalers

As mentioned earlier in the chapter, agent wholesalers—defined by the Census of Wholesale
Trade as agents, brokers, and commission merchants—do not take title to the products they sell.
Also, as a rule, they do not perform as many distribution tasks as a typical merchant wholesaler.
 Manufacturers’ agents (also referred to as manufacturers’ representatives or ―reps‖), for
example, specialize mainly in performing the market coverage and sales contact
distribution tasks for manufacturers. In effect, the manufacturers’ agents substitute for the
manufacturer’s outside sales force. Thus, they are especially valuable to manufacturers
who are not capable of fielding their own sales forces, or to supplement the selling efforts
of those manufacturers who do have their own sales forces but who find it uneconomical
to use them for certain product categories or territories. Manufacturers’ agents generally
represent several manufacturers at the same time and operate in a wide range of product
and service categories such as housewares, hardware, paint, chemicals, food-processing
equipment, electronics and electrical components, steel, and packaging. Services sold by
manufacturers’ agents include painting, plating services, machinery rebuilding, cleaning,
and a variety of business services.
 Selling agents, another type of agent wholesaler, usually perform more distribution tasks
than manufacturers’ representatives. In fact, they may handle virtually the entire
marketing and sales effort for the manufacturers they represent. Thus, although selling
agents usually do not physically hold inventory or take title to it, they may perform many
if not most of the other distribution tasks, such as providing market coverage, sales
contact, order processing, marketing information, product availability, and customer
services. Although the basic marketing literature discusses manufacturers’ agents and
selling agents as though a clear and precise distinction exists between them, in practice
such a distinction is not usually made. In fact, it is quite common to use terms such as
sales agent, selling agent, manufacturers’ agent, manufacturers’ representatives, reps, or
export/import agents interchangeably to refer to all types of agent wholesalers without
any strict distinctions made about the degree to which they perform distribution tasks.
Historical patterns of usage of terms in various trades is the actual basis for referring to
various types of agent wholesalers, rather than conceptual clarity or logic.
 Brokers, the second major category of non-title-taking wholesalers defined in the Census
of Wholesale Trade, offer another example of the wide deviation between definitions
based on the performance of distribution tasks presented in the marketing literature and
performance in actual practice. In the marketing literature the broker is usually defined as
a go-between, or a party who brings buyers and sellers together so that a transaction can
be consummated. In the strictest definition sense, then, a broker would perform only one
distribution task providing market information. Yet, in practice, some brokers may
perform many if not most of the distribution tasks, so that for all practical purposes there
is little to distinguish them from manufacturers’ representatives or selling agents.
Consider the case of food brokers. A study by the National Food Brokers Association
(NFBA) found that the overwhelming majority of food brokers perform a wide range of
distribution tasks in marketing channels, which places them on a par with manufacturers’
representatives or selling agents. For example, many food brokers help manage
marketing funds, recommend and execute trade promotions, and even help create
consumer promotion plans. Many are also involved with developing and executing the
marketing programs of the manufacturers they represent. In so doing, they provide (in
addition to market information) market coverage, sales contact, order processing, and
customer support and advice, as well as product availability.26 Figure 2.9 provides a
further description of the services provided by food brokers. Clearly, as Figure 2.9
indicates, the range of distribution tasks performed by food brokers places them well
beyond the limited scope specified in the marketing textbook definition of brokers. Here
again, the terminology used is more a function of historical accident than strict adherence
to terminology. In fact, the term food broker is something of a misnomer because food
brokers actually deal in many products besides food.27 While food brokers are not
indicative of all brokers in other product categories, the role of brokers in performing
 distribution tasks is generally expanding to the point that use of the word broker may
understate the range of activities involved.
 Finally, the third major category of agent wholesalers in the Census of Wholesale Trade
is the commission merchant, of significance mainly in agricultural markets.
Commission merchants actually perform a wide range of distribution tasks, including
physically holding inventory (though not taking title), providing market coverage, sales
contact, breaking bulk, credit, and order processing. These distribution tasks are
performed in the course of the commission merchant’s acting on behalf of his or her
principals (producers or manufacturers). Essentially the commission merchant receives
and warehouses products, helps locate buyers, makes sales, extends personal credit,
processes orders, and may arrange for delivery. After completing the sale and collecting
the money from the buyers, the commission merchant remits it (less the commission for
services supplied) to the principals, who sometimes remain anonymous to buyers.

 What should be apparent from this discussion of distribution tasks performed by the
various types of agent wholesalers is that generalizations about their roles in performing
distribution tasks based on their ―official‖ definitions can be misleading. A more
meaningful way of determining just which distribution tasks are performed by which type
of agent wholesaler is to look at the line of trade they are in or, better yet, the particular
agent wholesaler in question. It might well turn out that a broker in one line of trade
performs a much wider array of distribution tasks than a manufacturers’ representative in
another, or that a given selling agent does the same set of distribution tasks as a particular
―rep,‖ broker, or commission merchant.
Finally, regardless of whether the wholesaler in question is a merchant wholesaler or a
socalled agent, broker, or commission merchant, the wholesaler’s participation in
 marketing channels is predicated on the performance of distribution tasks (services) that
are desired by manufacturers and customers. Moreover, any of these wholesalers must be
able to perform these distribution tasks more efficiently than either manufacturers or
customers. With so many manufacturers and customers aggressively seeking ways to
increase their productivity and reduce costs, they are taking a very hard look at the
wholesaler’s role in their marketing channels. Only those wholesalers who do an
especially good job of performing distribution tasks at a very high level of efficiency are
likely to remain in, let alone improve, their positions as viable members of the marketing
channel.
5.4.2. Retail Intermediaries

Retailers consist of business firms engaged primarily in selling merchandise for personal or
household consumption and rendering services incidental to the sale of goods.

Types of Retailers
Consumers today can shop for goods and services at store retailers, nonstore retailers, and retail
organizations. Perhaps the best-known type of retailer is the department store. The most
important retail-store types are
 Specialty store: Narrow product line. Athlete's Foot, The Limited, The Body Shop.
 Department store: Several product lines. Sears, JCPenney, Nordstrom,
Bloomingdale's.
 Supermarket: Large, low-cost, low-margin, high-volume, self-service store designed to
meet total needs for food and household products. Kroger, Safeway, Food Emporium.
 Convenience store: Small store in residential area, often open 24/7, limited line of high-
turnover convenience products plus takeout. 7-Eleven, Circle K.
 Discount store: Standard or specialty merchandise; low-price, low-margin, high-volume
stores. Wal-Mart, .1(.wa.'1, D\rCi~j.t .cj.t}~
 Off-price retailer: Leftover goods, overruns, irregular merchandise sold at less than
retail. Factory outlets;ˇ independent off-price retailers Filene's Basement, TJ Maxx;
warehouse clubs Sam's Club, Costco, BJ'sˇ Wholesale.ˇ
 Superstore: Huge selling space, routinely purchased food and household items, plus
services (laundry, shoeˇ repair, dry cleaning, check cashing). Category killer (deep
assortment in one category) such as Petsmart,ˇ Staples, Home Depot; combination store
such as Jewel-Osco; hypermarket (huge stores that combineˇ supermarket, discount, and
warehouse retailing) such as Carrefour in France and Meijer's in the Netherlands.ˇ
 Catalog showroom: Broad selection of high-markUp, fast-mOVing, brand-name goods
sold by catalog atˇ discount. Customers pick up merchandise at the store. Inside Edge Ski
and Bike.ˇ
Kinds of Retailers
A. By Ownership of Establishment B. By Kind of Business (Merchandise
1. Single-unit independent stores Handled)
2. Multiunit retail organizations 1. General merchandise group
a. chain stores a. department stores
b. branch stores b. dry goods, general merchandise stores
3. Manufacturer-owned retail outlets c. general stores
4. Consumers’ cooperative stores d. variety stores
5. Farmer-owned establishments 2. Single-line stores (e.g., grocery, apparel,
6. Company-owned stores (industrial stores) or furniture)
commissaries 3. Specialty stores (e.g., meat markets, lingerie
7. Government-operated stores (post shops, floor-covering stores)
exchanges, state liquor stores)
8. Public utility company stores (for sale of
major appliances)
C. By Size of Establishment E. By Type of Relationship with Other
1. By number of employees Business
2. By annual sales volume Organizations
D. By Degree of Vertical Integration 1. Unaffiliated
1. Nonintegrated (retailing functions only) 2. Voluntarily affiliated with other retailers
2. Integrated with wholesaling functions a. through wholesaler-sponsored voluntary
3. Integrated with manufacturing or other chains
form-utility creation b. through retailer cooperation
3. Affiliated with manufacturers by dealer
franchises
F. By Method of Consumer Contact G. By Type of Location
1. Regular store 1. Urban
a. leased department a. central business district
2. Mail order b. secondary business district
a. by catalog selling c. string street location
b. by advertising in regular media d. neighborhood location
c. by membership club plans e. controlled (planned) shopping center
3. Household contacts f. public market stalls
a. by house-to-house canvassing 2. Small city
b. by regular delivery route service a. downtown
c. by party plan selling b. neighborhood
3. Rural stores
4. Roadside stands
H. By Type of Service Rendered I. By Legal Form of Organization
1. Full service 1. Proprietorship
2. Limited service (cash-and-carry) 2. Partnership
3. Self service 3. Corporate
4. Special types
J. By Management Organizations or
Operational Technique
1. Undifferentiated 2. Departmentalized
Distribution Tasks Performed by Retailers
The role of the retailer in the distribution channel, regardless of his size or type, is to interpret the
demands of his customers and to find and stock the goods these customers want, when they want
them, and in the way they want them. This adds up to having the right assortments at the time
customers are ready to buy.
Elaborating on Lazarus’s list, we may specify the distribution tasks for which retailers are
especially well suited, as follows:
 Offering manpower and physical facilities that enable producers/ manufacturers and
wholesalers to have many points of contact with consumers close to their places of
residence
 Providing personal selling, advertising, and display to aid in selling suppliers’ products
 Interpreting consumer demand and relaying this information back through the channel
 Dividing large quantities into consumer-sized lots, thereby providing economies for
suppliers (by accepting relatively large shipments) and convenience for consumers
 Offering storage, so that suppliers can have widely dispersed inventories of their products
at low cost and enabling consumers to have close access to the products of producers/
manufacturers and wholesalers
 Removing substantial risk from the producer/manufacturer (or wholesaler) by ordering
and accepting delivery in advance of the season
5.4.3. Facilitating Agencies

Facilitating agencies are business firms that assist in the performance of distribution tasks other
than buying, selling, and transferring title. From the standpoint of the channel manager, they may
be viewed as subcontractors to whom various distribution tasks can be ―farmed out,‖ based on
the principle of specialization and division of labor. By properly allocating distribution tasks to
facilitating agencies, the channel manager will have an ancillary structure that is an efficient
mechanism for carrying out the firm’s distribution objectives. Here are some of the more
common types of facilitating agencies:
 Transportation agencies include all firms offering transportation service on a public
basis, such as United Parcel Service (UPS) and Federal Express. Because of great
economies of scale and scope, these and other common carriers are able to perform
transportation services far more efficiently and cost-effectively than manufacturers,
wholesalers, or retailers.
 Storage agencies consist mainly of public warehouses that specialize in the storage of
goods on a fee basis. Many of these firms provide great flexibility in performing the
storage tasks. For example, in some instances the goods of a channel member (producers/
manufacturers, wholesalers, or retailers) are not physically stored in the warehousing
firm’s facilities, but rather in the channel member’s own facilities. Under this so-called
field warehousing arrangement, the warehousing agency locks up the goods and issues a
receipt, which often serves as collateral on a loan taken by the channel member.
  Order processing agencies are firms that specialize in order fulfillment tasks. They
relieve manufacturers, wholesalers, or retailers from some or all of the tasks of
processing orders for shipment to customers. For example, Catalog Resources Inc., based
in Dover, Delaware, handles the order processing for the catalog sales of Laura Ashley,
Caswell-Massey, Winterthur, and Hallmark Cards, thus relieving these firms of the ―nuts
and bolts‖ involved in processing customers’ orders themselves.
 Advertising agencies offer the channel member expertise in developing promotion
strategy. This can range from providing a small amount of assistance in writing an ad to
complete design and execution of the advertising campaign.
 Financial agencies consist of firms such as banks, finance companies, and factors that
specialize in discounting accounts receivable. Common to all of these firms is that they
possess the financial resources and expertise that the channel manager often lacks.
 Insurance companies provide the channel manager with a means for shifting some of
the risks inherent in any business venture, such as fire and theft losses, damage in transit
of goods, and in some cases even inclement weather.
 Marketing research firms have grown substantially in the past 20 years. Most large
cities now have a number of marketing research firms offering a wide range of skills.
The channel manager can call on these firms to provide information when his or her own firm
lacks the necessary skills to obtain marketing information relevant to distribution.
Some facilitating agencies have become especially innovative in helping channel members with
various distribution tasks. A case in point is Distribution Centers Inc. (DCI), a public
warehousing firm that helped Lever Brothers, one of the world’s largest manufacturers of soaps
and detergents, solve a serious distribution problem. Lever Brothers had a problem common to
all manufacturers of laundry soaps and detergents—large numbers of boxes of these products
became torn or dented in transit. These boxes could not be sold in supermarkets, and the cost and
effort to return them for repackaging was not economically feasible.
DCI solved Lever Brothers’ problem by offering its facility in St. Louis to serve as a collecting
point for damaged boxes from all over the country. When the St. Louis warehouse receives
damaged boxes, they are transferred into large drums that are shipped back to a Lever Brothers
manufacturing facility on a regular basis. These recovered products are not sold for household
use, but Lever Brothers is able to sell them profitably for industrial applications.
As this example suggests, the potential of facilitating agencies for going beyond their traditional
or routine role in the performance of distribution tasks to provide new kinds of services can
significantly enhance their value to members at all levels of the marketing channel.
 CHAPTER SIX :-
DEVELOPING THE CHANNEL DESIGN

Learning objectives After reading this chapter you should:

 Understand the definition of channel design
 Realize that channel design is a complex process.
 Know the sequence of the channel design paradigm and understand the underlying logic
of the sequence.
 Recognize a variety of situations that might call for a channel design decision.
 Delineate and define the six basic categories of variables affecting channel structure.
 Understand the concept of a heuristic in terms of its benefits and limitations in channel
design.
 Be familiar with the major approaches for choosing a channel structure.

6.1. introduction

Channel design refers to those decisions involving the development of new marketing channels
where none had existed before or to the modification of existing channels. Channel design consists
six-step process of which is covered in this chapter.

6.2. CHANNEL DESIGN:

Channel design: Those decisions involving the development of new marketing channels where
none had existed before, or the modification of existing channels. Channel design is presented as
a decision faced by the marketer, and it includes either setting up channels from scratch or
modifying existing channels. This is sometimes referred to as reengineering the channel and in
practice is more common than setting up channels from scratch. The term design implies that the
marketer is consciously and actively allocating the distribution tasks to develop an efficient
channel, and the term selection means the actual selection of channel members. Finally, channel
design has a strategic connotation, as it will be used as a strategic tool for gaining a differential
advantage.
Who Engages in Channel Design? Producers and manufacturers, wholesalers, and retailers all
face channel design decisions. Producers and manufacturers ―look down‖ the channel. Retailers
―look up‖ the channel while wholesaler intermediaries face channel design from both
perspectives. In this chapter, we will be concerned only from the perspective of producers and
manufacturers.
6.2. A PARADIGM OF THE CHANNEL DESIGN DECISION

The channel design decision can be broken down into seven phases or steps. These are:
1. Recognizing the need for a channel design decision
2. Setting and coordinating distribution objectives
3. Specifying the distribution tasks
4. Developing possible alternative channel structures
5. Evaluating the variable affecting channel structure
6. Choosing the ―best‖ channel structure
7. Selecting the channel members

Phase 1: Recognizing the Need for a Channel Design Decision

Many situations can indicate the need for a channel design decision. Among them are:
 Developing a new product or product line
 Aiming an existing product to a new target market
 Making a major change in some other component of the marketing mix
 Establishing a new firm
 Adapting to changing intermediary policies
 Dealing with changes in availability of particular kinds of intermediaries
 Opening up new geographic marketing areas
 Facing the occurrence of major environmental changes
 Meeting the challenge of conflict or other behavioral problems
 Reviewing and evaluating

Phase 2: Setting and Coordinating Distribution Objectives

Channel objectives should be stated in terms of targeted service output levels. Under
competitive conditions, channel institutions should arrange their functional tasks to minimize
19
total channel costs and still provide desired levels of service outputs. Usually, planners can
identify several market segments that want different service levels. Effective planning requires
determining which market segments to serve and the best channels for each.
Channel objectives vary with product characteristics. Perishable products require more direct
marketing. Bulky products, such as building materials, require channels that minimize the
shipping distance and the amount of handling. Nonstandard products, such as custom-built
machinery and specialized business forms, are sold directly by company sales representatives.
Products requiring installation or maintenance services, such as heating and cooling systems,
are usually sold and maintained by the company or by franchised dealers. Iligh-unit-value
products such as generators and turbines are often sold through a company sales force rather
than intermediaries.
Channel design must take into account the strengths and weaknesses of different types of
intermediaries. For example, manufacturers' reps arc 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 company sales reps did the selling. Channel design is also influenced by
competitors' channels.
Channel design must adapt to the larger environment. When economic conditions are
depressed, producers want to move their goods to market using shorter channels and without
services that add to the final price of the goods. Legal regulations and restrictions also affect
channel design. U.S. law looks unfavorably on channel arrangements that may tend to
substantially lessen competition or create a monopoly.

In order to set distribution objectives that are well coordinated with other marketing and firm
objectives and strategies, the channel manager needs to perform three tasks:

 Become Familiar with Objectives and Strategies Whoever is responsible for setting
distribution objectives should also make an effort to learn which existing objectives and
strategies in the firm may impinge of the distribution objectives. In practice, often the
same individual(s) who set(s) objectives for other components of the marketing mix will
do so for distribution.
 Setting Explicit Distribution Objectives Distribution objectives are essentially
statements describing the part that distribution in expected to play in achieving the
firm’s overall marketing objectives.
 Checking for Congruency A congruency check verifies that the distribution objectives
do not conflict with the other areas of the marketing mix.

Phase 3: Specifying the Distribution Tasks

The job of the channel manager in outlining distribution functions or tasks is a much more
specific and situationally dependent one. The kinds of tasks required to meet specific distribution
objectives must be precisely stated. In specifying distribution tasks, it is especially important not
to underestimate what is involved in making products and services conveniently available to
final consumers.

Phase 4: Developing Possible Alternative Channel Structures

The channel manager should consider alternative ways of allocating distribution objectives to
achieve their distribution tasks. Often, the channel manager will choose more than one channel
structure in order to reach the target markets effectively and efficiently. Whether single – or
multiple – channel structures are chosen, the allocation alternatives (possible channel structures)
should be evaluated in terms of the following three dimensions: (1) number of levels in the
channel, (2) intensity at the various levels, (3) type of intermediaries at each level.
1. Number of Levels The number of levels in a channel can range from two levels –
which is the most direct – up to five levels and occasionally even higher.
2. Intensity at the Various Levels Intensity refers to the number of intermediaries at
each level of the marketing channel. The intensity of distribution dimension is a very
important aspect of channel structure because it is often a key factor in the firm’s basic
marketing strategy and will reflect the firm’s overall corporate objectives and
strategies.
 Exclusive distribution means severely limiting the number of intermediaries. It
is used when the producer wants to maintain control over the service level and
outputs offered by the resellers. Often it involves exclusive dealing
arrangements. By granting exclusive distribution, the producer hopes to obtain
more dedicated and knowledgeable selling. It requires greater partnership
between seller and reseller and is used in the distribution of new automobiles,
some major appliances, and some women's apparel brands.
 Selective distribution involves the use of more than a few but less than all of
the intermediaries who are willing to carry a particular product. It is used by
established companies and by new companies seeking distributors. The
company does not have to worry about too many outlets; it can gain adequate
market coverage with more control and less cost than intensive distribution.
 Intensive distribution sometimes called saturation means that as many outlets
as possible are used at each level of the channel. consists of the manufacturer
placing the goods or services in as many outlets as possible. This strategy is
generally used for items such as tobacco products, soap, snack foods, and gum,
products for which the consumer requires a great deal of location convenience.
Manufacturers are constantly tempted to move from exclusive or selective distribution
to more intensive distribution to increase coverage and sales. This strategy may help in
the short term, but often hurts long-term performance. Intensive distribution increases
product and service availability but may also result in retailers competing aggressively.
If price wars ensue, retailer profitability may also decline, potentially dampening
retailer interest in supporting the product.
3. Types of Intermediaries The third dimension of channel structure deals with the
particular types of intermediaries to be used (if any) at the various levels of the channel.
The channel manager should not overlook new types of intermediaries that are
emerging such as Internet companies.
4. Number of Possible Channel Structure Alternatives Given that the channel manager
should consider all three structural dimensions (level, intensity, and type of
intermediaries) in developing channel structures, there are, in theory, a high number of
possibilities. Fortunately, in practice, the number of feasible alternatives for each
dimension is often limited due to industry or the number of current channel members.
Phase 5: Evaluating the Variables Affecting Channel Structure
Having laid out alternative channel structures, the channel manager should then evaluate a
number of variables to determine how they are likely to influence various channel structures.
These six basic categories are most important: Market variables, Product variables, Company
variables, Intermediary variables, Environmental variables and Behavioral variables

1. Market Variables Market variables are the most fundamental variables to consider when
designing a marketing channel. Four basic subcategories of market variables are
particularly important in influencing channel structure. They are (A) market geography, (B)
market size, (C) market density, and (D) market behavior.
 Market Geography Market geography refers to the geographical size of the
markets and their physical location and distance from the producer and
manufacturer. A popular heuristic (rule of thumb) for relating market geography
to channel design is: ―The greater the distance between the manufacturer and its
markets, the higher the probability that the use of intermediaries will be less
expensive than direct distribution.‖
 Market Size The number of customers making up a market (consumer or
industrial) determines the market size. From a channel design standpoint, the larger
the number of individual customers, the larger the market size. A heuristic about
market size relative to channel structure is: ―If the market is large, the use of
intermediaries is more likely to be needed because of the high transaction costs of
serving large numbers of individual customers. Conversely, if the market is small,
a firm is more likely to be able to avoid the use of intermediaries.‖
 Market Density The number of buying units per unit of land area determines the
density of the market. In general, the less dense the market, the more difficult and
expensive is distribution. A heuristic for market density and channel structure is as
follows: ―The less dense the market, the more likely it is that intermediaries will
be used. Stated conversely, the greater the density of the market, the higher the
likelihood of eliminating intermediaries.‖
 Market Behavior Market behavior refers to the following four types of buying
behaviors:
 How customers buy
 When customers buy
 Where customers buy
 Who does the buying
Each of these patterns of buying behavior may have a significant effect on channel
structure.
2. Product Variables Product variables such as bulk and weight, perishability, unit value,
degree of standardization (custom-made versus standardized), technical versus
nontechnical, and newness affect alternative channel structures.
  Bulk and Weight Heavy and bulky products have very high handling and
shipping costs relative to their value. Therefore, a producer should attempt to
minimize these costs by shipping only in large lots to the fewest possible points.
Consequently, the channel structure should be as short as possible usually from
producer to user.
 Perishability Products subject to rapid physical deterioration and those of rapid
fashion obsolescence require rapid movement from production to consumption.
The following heuristic is appropriate in these situations: ― When products are
highly perishable, channel structures should be designed to provide for rapid
delivery from producers to consumers.‖
 Unit Value The lower the unit value of the product, the longer the channel should
be. This is because low unit value leaves a small margin for distribution costs.
When the unit value is high relative to its size and weight, direct distribution is
feasible because the handling and transportation costs are low relative to the
product’s value.
 Degree of Standardization Custom-made products should go from producer to
consumer while more standardized products allow opportunity to lengthen the
channel.
 Technical versus Nontechnical In the industrial market, a highly technical
product will generally be distributed through a direct channel. This is because the
manufacturer may need sales and service people capable of communicating the
product’s technical features to the user. In the consumer market, relatively
technical products are usually distributed through short channels for the same
reasons.
 Newness New products, both industrial and consumer, require extensive and
aggressive promotion in the introductory stage to build demand. Usually, the
longer the channel of distribution the more difficult it is to achieve this kind of
promotional effort from all channel members. Therefore, a shorter channel is
generally viewed as an advantage for new products as a carefully selected group of
intermediaries is more likely to provide aggressive promotion.
3. Company Variables The most important company variables affecting channel design are (A)
size, (B) financial capacity, (C) managerial expertise, and (D) objectives and strategies.
 Size In general, the range of options for different channel structures is a positive
function of a firm’s size. Larger firms have more options available to them than
smaller firms do.
 Financial Capacity Generally, the greater the capital available to a company, the
lower its dependence on intermediaries.
 Managerial Expertise For firms lacking in the managerial skills necessary to
perform distribution tasks, channel design must of necessity include the services of
intermediaries who have this expertise. Over time, as the firm’s management gains
 experience, it may be feasible to change the structure to reduce the amount of
reliance on intermediaries.
 Objectives and Strategies The firm’s marketing and general objectives and
strategies, such as the desire to exercise a high degree of control over the product,
may limit the use of intermediaries. Strategies emphasizing aggressive promotion
and rapid reaction to changing markets will constrain the types of channel
structures available to those firms employing such strategies.
4. Intermediary Variables The key intermediary variables related to channel structure are (A)
availability, (B) costs, and (C) the services offered.
 Availability The availability (number of and competencies of) adequate
intermediaries will influence channel structure.
 Cost The cost of using intermediaries is always a consideration in choosing a
channel structure. If the cost of using intermediaries is too high for the services
performed, then the channel structure is likely to minimize the use of
intermediaries.
 Services This involves evaluating the services offered by particular intermediaries
to see which ones can perform them most effectively at the lowest cost.
5. Environmental Variables Economic, sociocultural, competitive, technological, and legal
environmental forces can have a significant impact on channel structure.
6. Behavioral Variables The channel manager should review the behavioral variables

Phase 6: Choosing the “Best” Channel Structure

In theory, the channel manager should choose an optimal structure that would offer the desired
level of effectiveness in performing the distribution tasks at the lowest possible cost. In reality,
choosing an optimal structure is not possible. Why? One management is not capable of knowing
all of the possible alternatives available to them. Second, even it were possible to specify all
possible channel structures, precise methods do not exist for calculating the exact payoffs
associated with each alternative. Some pioneering attempts at developing methods that are more
exacting do appear in literature and we will discuss these in brief.
A) “Characteristics of Goods and Parallel Systems” Approach First laid out in the
1950s by Aspinwall, the main emphasis for choosing a channel structure should be
based upon product variables. Each product characteristic is identified with a particular
color on the spectrum. These variables are: Replacement rate, Gross margin,
Adjustment, Time of consumption and Searching time. This approach offers the
channel manager a neat way of describing and relating a number of heuristics about
how product characteristics might affect channel structure. The major problem with
this method is that it puts too much emphasis on product characteristics as the
determinant of channel structure.
B) Financial Approach Lambert offers another approach, which argues that the most
important variables for choosing a channel structure are financial. Basically, this
 decision involves comparing estimated earnings on capital resulting from alternative
channel structures in light of the cost of capital to determine the most profitable
channel. By viewing the channel as a long-term investment that must more than cover
the cost of capital invested in it and provide a better return than other alternative uses
for capital, the criteria for choosing a channel structure is more rigorous. The major
problem with Lambert’s approach lies in the difficulty of making it operational in a
channel decision-making context.
C) Transaction Cost Analysis (TCA) Approach Based on the work of Williamson, TCA
addresses the choice of marketing channel structure only in the most general case
situation of choosing between the manufacturer performing all of the distribution tasks
itself through vertical integration versus using independent intermediaries to perform
some or most of the distribution tasks. It is based upon opportunistic behaviors of
channel members. The main focus of TCA is on the cost of conducting the transactions
necessary for a firm to accomplish its distribution tasks. In order for transactions to
take place, transaction-specific assets are needed. These are the set of unique assets,
both tangible and intangible, required to perform the distribution tasks. TCA has some
substantial limitations from the standpoint of managerial usefulness. First, it deals only
with the most general channel structure dichotomy of vertical integration versus use of
independent channel members. Second, the assumption of opportunistic behavior may
not be an accurate reflection of behavior in marketing channels. Third, no real
distinction is made between long-term and short-term issues in channel structure
relationships. Fourth, the concept of asset specificity (transaction-specific assets) is
very difficult to operationalize. Finally, TCA is one-dimensional, overly simplistic and
neglects other relevant variables in channel choice.
D) Management Science Approaches It would certainly be desirable if the channel
manager could take all possible channel structures, along with all the relevant variables,
and ―plug‖ these into a set of equations, which would then yield the optimal channel
structure. The work of Balderston and Hoggatt, Artle and Berglund, Alderson and
Green, Baligh, Rangan, Moorthy, Menezes, Maier, and Atwong and Rosenbloom have
pioneered some quantitative work in this area. These approaches still need much more
development before they are likely to find widespread application to channel choice.
E) Judgmental-Heuristic Approaches These approaches rely heavily on managerial
judgment and heuristics for decisions. Some attempt to formalize the decision-making
process whereas others attempt to incorporate cost and revenue data.
Straight Qualitative Judgment Approach The qualitative approach is the crudest but,
in practice, the most commonly used approach for choosing channel structures. The
various alternative channel structures that have been generated are evaluated by
management in terms of decision factors that are thought to be important. These factors
may include short- and long-run cost and profit considerations, channel control issues,
long-term growth potential, and many others.
Weighted Factor Score Approach A more refined version of the straight qualitative
approach to choosing among channel alternatives is the weighted factor approach
suggested by Kotler. This approach forces management to structure and quantify its
judgments in choosing a channel alternative and consists of four basic steps:
1. The decision factors must be stated explicitly.
2. Weights are assigned to each of the decision factors to reflect relative importance
precisely in percentage terms.
3. Each channel alternative is rated on each decision factor, on a scale of 1 to 10.
4. The overall weighted factor score (total score) is computed for each channel
alternative by multiplying the factor weight (A) by the factor score (B).
Distribution Costing Approach Under this approach, estimates of costs and revenues
for different channel alternatives are made, and the figures are compared to see how
each alternative compares to another. Regardless of how elaborate or detailed the
analysis, the basic theme of this approach stresses managerial judgment and estimations
about what the costs and revenues of various channel structure alternatives are likely to
be.
Using Judgmental-Heuristic Approaches Regardless of which judgmental-heuristic
approach is used, large doses of judgment, estimation, and even ―guesstimation‖ are
virtually unavoidable.
This is not to say that the so-called judgmental-heuristic approaches are totally
subjective. Coupled with good empirical data, highly satisfactory (though not optimal)
channel choice decisions may be made using these approaches. Judgmental-heuristic
approaches also enable the channel manager to readily incorporate nonfinancial
criteria into channel choices. Such nonfinancial criteria as goodwill or the degree of
control over the channel members may be of real importance to a firm.
 CHAPTER SEVEN:-
CONFLICT IN THE MARKETING CHANNEL

LEARNING OBJECTIVES

After completion of this chapter you will be able to know

 How conflict emerges in marketing channels.
 What are the major causes of channel conflict?
 Recognize the major issues involved in managing channel conflicts.

7.1. INTRODUCTION

No matter how well channels are designed and managed, there will be some conflict, if for no
other reason than that the interests of independent business entities do not always coincide.
Channel conflict is generated when one channel member's actions prevent the channel from
achieving its goal. Channel coordination occurs when channel members are brought together to
38
advance the goals of the channel, as opposed to their own potentially incompatible goals. Here
we examine three questions: What types of conflict arise in channels? What causes channel
conflict? What can be done to resolve conflict situations?

7.2. CONFLICT VS COMPETITION

No matter how well channels are designed and managed, there will be some conflict, if lor no
other reason than that the interests of independent business entities do not always coincide.
Channel conflict is generated when one channel member's actions prevent another channel from
achieving its goal. Software giant Oracle Corp., plagued by channel conflict between its sales
force and its vendor partners, decided to roll out new "All Partner Territories" where all deals
except for specific strategic accounts would go through select Oracle partners. Channel
coordination occurs when channel members are brought together to advance the goals of the
49
channel, as opposed to their own potentially incompatible goals. Here we examine three
questions: vVhat types of conflict arise in channels? What causes channel confiict?What can
marketers do to resolve conflict situations?
Conflict in the marketing channel should not be confused with competition. Competition is
behavior that is object-centered, indirect, and impersonal. Conflict, on the other-hand, is direct,
personal, and opponent-centered behavior.
7.3. TYPES OF CONFLICT AND COMPETITION

Suppose a manufacturer sets up a vertical channel consisting of wholesalers and retailers. The
manufacturer hopes for channel cooperation that will produce greater profits for each channel
member. Yet vertical, horizontal, and multichannel conflict can occur.
 Vertical channel conflict means conflict between different levels within the same
channel. General Motors came into conflict with its dealers in trying to enforce policies
on service, pricing, and advertising. Coca-Cola came into conflict with bottlers who also
agreed to bottle Dr. Pepper.
 Horizontal channel conflict involves conflict between members at the same level
within the channel. Some Ford car dealers in Chicago complained about other Chicago
Ford dealers advertising and pricing too aggressively. Some Pizza Inn franchisees
complained about other Pizza Inn franchisees cheating on ingredients, providing poor
service, and hurting the overall Pizza Inn image.
 Multichannel conflict exists when the manufacturer has established two or more
channels that sell to the same market. Multichannel conflict is likely to be especially
intense when the members of one channel get a lower price (based on larger volume
purchases) or work with a lower margin. When Goodyear began selling its popular tire
brands through Sears, Wal-Mart, and Discount Tire, it angered its independent dealers.
It eventually placated them by offering exclusive tire models that would not be sold in
other retail outlets. Such a strategy does not always work. When Pacific Cycles
purchased Schwinn, it decided to supplement the brand's higher-end 2,700-dealer
network with some of its own channels where it sold its own mid-tier bikes through
large retail chains such as Toys "R" Us, Target, and Wal-Mart. Even though Pacific
Cycles offered exclusive models to the existing Schwinn network, over 1,700 dealers
pedaled away. A key question was whether the sales gains from the big retail chains
39
would offset the loss from the dealer defections.
7.4. CAUSES OF CHANNEL CONFLICT

It is important to identify the causes of channel conflict. Some are easy to resolve, others are
not.
Analysis and research have pointed to many possible causes of channel conflict. These are:
a. Misunderstood communications
b. Divergent functional specializations and goals of channel members
c. Failings in joint decision-making
d. Differing economic objectives
e. Ideological differences of channel members
f. Inappropriate channel structure
Although there are many causes of channel conflict most can be placed into one or more of the
following seven categories:
 Role incongruities
 Resource scarcities
 Perceptual differences
 Expectational differences
 Decision domain disagreements
 Goal incompatibilities
 Communication difficulties
1. Role incongruities: Members of the marketing channel have a series of roles they are expected to
fulfill. If a member deviates from the given role, a conflict situation may result. Sometimes
conflict arises from unclear roles and rights. HP may sell personal computers to large
accounts through its own sales force, but its licensed dealers may also be trying to sell to large
accounts. Territory boundaries and credit for sales often produce conflict.
2. Resource scarcities: Sometimes conflict stems from a disagreement between channel members
over the allocation of some valuable resources needed to achieve their respective goals. A
common example is between manufacturers and retailers over ―house accounts‖. Another example
involves site selection in franchised channels.
3. Perceptual differences: Perception refers to the way an individual selects and interprets
environmental stimuli. The way such stimuli are perceived are often quite different from objective
reality. Conflict can also stem from differences in perception. The manufacturer may be
optimistic about the short-term economic outlook and want dealers to carry higher inventory.
Dealers may be pessimistic. In the beverage category it is not uncommon for disputes to arise
between manufacturers and their distributors about the optimal advertising strategy.
4. Expectation differences: Various channel members have expectations about the behavior of other
channel members. These expectations are predictions or forecasts concerning the future behavior
of other channel members. Sometimes these forecasts turn out inaccurate, but the channel member
who makes the forecast will take action based upon the predicted outcomes thus channel conflict.
5. Decision domain disagreements: Channel members explicitly or implicitly carve out for
themselves an area of decision-making that they feel is exclusively theirs. Hence, conflicts arise
over which member has the right to make what decisions. The area of pricing decision has
traditionally been a pervasive example of such conflict.
6. Goal incompatibilities: Each member of the marketing channel has his or her own goals. The
opening vignette of the chapter concerning Amazon.com is an example of such incompatible
goals. Amazon is trying to sell as much merchandise as possible from whatever sources provide
the most revenue and profits to them. The CD, book or electronics firm who advertises through
Amazon.com wants Amazon.com to sell their new products. One major cause is goal
incompatibility. For example, the manufacturer may want to achieve rapid market penetration
through a low-price policy. Dealers, in contrast, may prefer to work with high margins and
pursue short-run profitability.
 7. Communication difficulties: Communication is the vehicle for all interactions among channel
members, whether such interactions are cooperative or conflicting. Any foul-up or breakdown
in communications can quickly turn cooperation into conflict.
8. Conflict might also arise because of the intermediaries' dependence on the manufacturer.
The fortunes of exclusive dealers, such as auto dealers, are profoundly affected by the
manufacturer's product and pricing decisions. This situation creates a high potential for
conflict.

7.5. MANAGING CHANNEL CONFLICT

As companies add channels to grow sales, they run the risk of creating channel conflict. Some
channel conflict can be constructive and lead to better adaptation to a changing environment,
but too much is dysfunctional.

There are four generalizations regarding channel conflict:

1. Conflict is an inherent behavioral dimension in the marketing channel.
2. Given the numerous causes from which conflict may stem, it is a pervasive phenomenon in
marketing channels.
3. Conflict can affect channel efficiency.
4. Various levels of conflict may have both negative and positive effects on channel efficiency,
or possibly no effect.
One is the adoption of superordinate goals. Channel members come to an agreement on the
fundamental goal they are jointly seeking, whether it is survival, market share, high quality, or
customer satisfaction. They usually do this when the channel faces an outside threat, such as a
more efficient competing channel, an adverse piece of legislation, or a shift in consumer desires.
A useful step is to exchange persons between two or more channel levels. General Motors
executives might agree to work for a short time in some dealerships, and some dealership
owners might work in GM's dealer policy department. Hopefully, the participants will grow to
appreciate the other's point of view.

Channel managers must:

1. Detect conflicts or potential conflicts
2. Appraise the possible effects of conflicts
3. Resolve channel conflict
1. Detect channel conflict: Channel managers can detect potential conflict areas by surveying other
channel members’ perceptions of his or her performance. Such surveys can be conducted by
outside research firms, or trade associations. The marketing channel audit is another possible
approach of uncovering potential conflict between channel members. The term channel audit
suggests a periodic and regular evaluation of key areas of the relationship of a given channel
member with other members. Distributors’ advisory councils or channel members’ committees
offer another approach to early conflict detection. These groups consist of top management
representatives from each level of the channel distribution system. The common theme of early
 detection of channel conflict is this: channel managers need to make a conscious effort to detect
conflict or its potential if they expect to deal with it before it develops.
2. Appraising the effect of conflict: A growing body of literature has been emerging to assist the
channel manager in developing methods for measuring conflict and its effect on channel
efficiency. For the present, most attempts to measure conflict and appraise its effects on channel
efficiency will still be made at a conceptual level that relies on the manager’s subjective
judgment.
3. Resolving conflict: When conflict exists in the channel, the channel manager should take action
to resolve the conflict if it appears to be adversely affecting channel efficiency.
Three techniques are suggested:
 A channelwide committee, a sort of ―crisis management team‖
 Joint goal setting by committee
 A distribution executive position created for each major firm in the channel. The
individual(s) filling this position would be responsible for exploring the firm’s
distribution-related problems.
Another approach to resolving channel conflict is by arbitration. What is more important than the
specifics of any of these particular approaches is the underlying principle common in all of them:
creative action on the part of some party to the conflict is needed if the conflict is to be successfully
resolved. Conversely, if conflict is simply “left alone” it is not likely to be successfully resolved and
may get worse.
 Co-optation is an effort by one organization to win the support of the leaders of another
organization by including them in advisory councils, boards of directors, and the like.
As long as the initiating organization treats the leaders seriously and listens to their
opinions, co-optation can reduce conflict, but the initiating organization may have to
compromise its policies and plans to win their support.
 Much can be accomplished by encouraging joint membership in and between trade
associations. For example, there is good cooperation between the Grocery
Manufacturers of America and the Food Marketing Institute, which represents most of
the food chains; this cooperation led to the-development of the universal product code
(UPC). Presumably, the associations can consider issues between food manufacturers
and retailers and resolve them in an orderly way.
 When conflict is chronic or acute, the parties may have to resort to diplomacy,
mediation, or arbitration. Diplomacy takes place when each side sends a person or group
to meet with its counterpart to resolve the conflict. Mediation means resorting to a
neutral third party who is skilled in conciliating the two parties' interests. Arbitration
occurs when the two parties agree to present their arguments to one or more arbitrators
and accept the arbitration decision. Sometimes, when none of these methods proves
effective, a company or a channel partner may choose to file a lawsuit. Levi Strauss and
U.K. retailer Tesco became locked in a legal battle beginning in 1999.


7.6. COMMUNICATION PROCESSES IN THE MARKETING CHANNEL

Communication has been described as ―the glue that holds together a channel of distribution‖.
Communication activities undertaken by channel members create a flow of information within the
channel, which is necessary for an efficient flow of products or services throughout the channel.
Consequently, the channel manager must work to create and foster an effective flow of information
within the channel.
1. Behavioral Problems in Channel Communications
A) Differences in goals between channel members
B) Differences in the kinds of language used to convey information
A. Differing Goals Corporate management in large manufacturing firms is characterized by
a growth psychology, which translates into aggressive effort to build sales volume. This
growth goal may not be shared by small to medium size retailers and/or wholesalers who
might be more static orientated in their approach to sales volume. Channel members
should attempt to understand the goals of their channel members to learn whether they
are much different from those of their own firms.
B. Language Differences The other basic communication problem between the
manufacturer and channel members stems from the terminology or jargon used by
professional corporate management. The channel manager has to ensure that the
language used in channel communications is well understood by all channel members.
2. Other Behavioral Problems in Channel Communications Three other behavioral problems that
can inhibit effective channel communications are:
A) Perceptual differences among channel members
B) Secretive behavior
C) Inadequate frequency of communication
A. Perceptual Differences Perceptual differences may occur among channel members on a
wide variety of issues. It is therefore important that channel managers spell out such
issues as delivery time, margin and discounts, return privilege, warranty provisions and
so forth, so that channel members have the same understanding as the channel manager.
Avoiding such phrases as: ―everybody knows‖ or ―standard industry practice‖ will
enhance channel communications and minimize potential conflicts.
B. Secretive Behavior By not divulging information, such as an upcoming promotional
plan, manufacturers fail to get potentially valuable feedback from channel members
(middlemen) on whether or not the plan will be effective. A certain amount of secrecy is
often necessary because a firm needs the element of surprise or members of the channel
are also members of competing channels or stock competing items. A channel manager
must decide these issues on an individual basis.
C. Inadequate Frequency of Communication The association of infrequent
communication with lower quality communications applies. A channel manager must
ensure that they communicate as frequently as necessary with all channel members to
ensure that quality of communication is not compromised.
 CHAPTER EIGHT:-
MOTIVATING THE CHANNEL MEMBERS

LEARNING OBJECTIVES

After completion of this chapter you will be able to know

 Be familiar with the basic framework for motivating channel members.
 Know the major means for learning about channel member needs and problems.
 Understand the basic approaches for providing support for channel members.
 Be cognizant of the need to provide leadership in channels through the effective use of
power.

8.1 INTRODUCTION

Motivation: Refers to the actions taken by the manufacturer to foster channel member
cooperation in implementing the manufacturer’s distribution objectives.

There are three basic facets involved in motivation management:

1. Finding out the needs and problems of channel members
2. Offering support to the channel members that is consistent with their needs and problems
3. Providing leadership through the effective use of power

8.2. FINDING OUT THE NEEDS AND PROBLEMS OF CHANNEL MEMBERS

Before the channel manager can successfully motivate channel members, an attempt must be
made to learn what the members want for the channel relationship. Manufacturers are often
unaware of or insensitive to the needs and problems of their channel members.

Approaches for Learning about Channel Member Needs and Problems

All marketing channels have a flow of information running through them as part of the formal
and informal communications systems that exist in the channel. Ideally, such systems would
provide the manufacturer with all of the information needed on channel member needs and
problems. However, most marketing channel communication systems have not been formally
planned and carefully constructed to provide a comprehensive flow of timely information.
Consequently, the channel manager should not rely solely on the regular flow of information
coming from the existing channel communication system for accurate and timely information on
channel member needs and problems. There is a need to go beyond the regular system and make
use of one or all of the following four additional approaches.
  Research Studies of Channel Members Most manufacturers never conduct research
of channel member needs and problems. Estimates indicate that less than one percent of
manufacturers’ research budgets are spent on channel member research.

 Research Studies by Outside Parties Research designed and executed by a third

party is sometimes necessary if complete and unbiased data on channel member needs
and problems are to be obtained. The use of outside parties to conduct research on
channel member needs and problems provides higher assurance of objectivity.

 Marketing Channel Audits The basic thrust of this approach should be to gather data
on how channel members perceive the manufacturer’s marketing program and its
component parts, where the relationships are strong and weak, and what is expected of
the manufacturer to make the channel relationship viable and optimal. For example, a
manufacturer may want to gather data from channel members on what their needs and
problems are in areas such as:
 Pricing policies, margins, and allowances
 Extent and nature of the product line
 New products and their marketing development through promotion
 Servicing policies and procedures such as invoicing, order dating, shipping,
warehousing and others
 Sales force performance in servicing the accounts
Further, the marketing channel audit should identify and define in detail the issues
relevant to the manufacturer–wholesaler and/or manufacturer–retailer relationship.
Motivating the Channel Members Whatever areas and issues are chosen, they should be
cross-tabulated or correlated as to kind of channel members, geographical location of
channel members, sales volume levels achieved, and any other variables that might be
relevant. Finally, for the marketing channel audit to work effectively, it must be done on
a periodic and regular basis so as to capture trends and patterns. Emerging issues are
more likely to be spotted if the audit is performed on a regular basis.

 Distributor Advisory Councils Three significant benefits emerge from the use of a
distributor advisory council. First, it provides recognition for the channel members.
Second, it provides a vehicle for identifying and discussing mutual needs and problems
that are not transmitted through regular channel information flows. And third, it results in
an overall improvement of channel communications, which in turn helps the manufacturer
to learn more about the needs and problems of channel members, and vice versa.
8.3. OFFERING SUPPORT TO CHANNEL MEMBERS

Support for channel members refers to the manufacturer’s efforts in helping channel members to
meet their needs and solve their problems. Such support for channel members is all too often
offered on a disorganized and ad hoc basis. The attainment of a highly motivated cooperating
―team‖ of channel members in an interorganizational setting requires carefully planned
programs. Such programs can generally be grouped into one of the following three categories:
(1) cooperative, (2) partnership or strategic alliance, and (3) distribution programming.
 Cooperative Arrangements Cooperative arrangements between the manufacturer and
channel members at the wholesale and retail levels have traditionally been used as the
most common means of motivating channel members in conventional, loosely aligned
channels. The underlying rationale of all such cooperative programs, from the
manufacturer’s point of view, is to provide incentives for getting extra effort from
channel members in the promotion of the products.
 Partnerships and Strategic Alliances Partnerships or strategic alliances stress a
continuing and mutually supportive relationship between the manufacturer and its
channel members in an effort to provide a more highly motivated team, network, or
alliance of channel partners. Webster points to three basic phases in the development of a
―partnership‖ arrangement between channel members. Marketing Channels 7e
 An explicit statement of policies should be made by the manufacturer in such
areas as product availability, technical support, pricing and any other relevant areas.
 An assessment should be done of all existing distributors as to their capabilities
for fulfilling their roles.
 The manufacturer should continually appraise the appropriateness of the policies
that guide his or her relationship with channel members.

Webster’s basic guidelines can be used for establishing partnerships or strategic alliances
in marketing channels.
 Distribution Programming Distribution programming: ―A comprehensive set of
policies for the promotion of a product through the channel.‖ The essence of this
approach is the development of a planned, professionally managed channel. The first
step in developing a comprehensive distribution program is an analysis by the
manufacturer of marketing objectives and the kinds and levels of support needed from
channel members to achieve these objectives. Further, the manufacturer must ascertain
the needs and problem areas of channel members. Nevertheless, virtually all of the
policy options available can be categorized into three major groups:
 Those offering price concessions to channel members
 Those offering financial assistance
 Those offering some kind of protection for channel members
8.4. PROVIDING LEADERSHIP TO MOTIVATE CHANNEL MEMBERS

Control must still be exercised through effective leadership on a continuing basis to attain a well-
motivated team of channel members. Seldom is it possible for the channel manager to achieve
total control, no matter how much power underlies his or her leadership attempts. For the most
part, a theoretical state, where the channel manager were able to predict all events related to the
channel with perfect accuracy, and achieve the desired outcomes at all times, does not exist or is
not achievable in the reality of an interorganizational system such as the marketing channel.
Motivating the Channel Members Little explained succinctly the problems of achieving very
high levels of control and leadership in this interorganizational setting when he said: ―Because
firms are loosely arranged, the advantages of central direction are in large measure missing. The
absence of single ownership, or close contractual agreements, means that the benefits of a formal
power (superior, subordinate) base are not realized. The reward and penalty system is not as
precise and is less easily affected. Similarly, overall planning for the entire system is
uncoordinated and the perspective necessary to maximize total system effort is diffused. Less
recognition of common goals by various member firms in the channel, as compared to a formally
structured organization, is also probable.‖