Distribution Channels

Related Terms: Transportation

Goods produced in factories and/or commodities produced in agriculture must reach consumers. The systems by means of which goods reach the consumer are known as distribution channels. These are organizations that facilitate the sale and movement of products. The totality of all distribution channels forms a distribution network. Distribution is a very complex system but can be conceptually divided into four major categories: 1) market makers, 2) sellers, 3) transporters, and 4) hybrids.

PARTICIPANTS IN DISTRIBUTION

Market Makers

Market makers are organizations that provide either a real or virtual place where goods may be bought and sold. Classical example are the farmer's market, considered as the entity that actually rents space to farmers for their stalls, a stock market that controls who may or may not trade by selling seats on its exchange, a shopping mall that makes its money by leasing space to stores at the mall, convention centers like McCormick Place in Chicago that hosts trade fairs, and a franchiser who, in effect, sells a method, a name, and an image. Markets need not be "places." Therefore catalog publishers and web-based sellers are also "market makers." A pure form of a web-based market maker is the auction house e-bay: e-bay itself does not sell anything; it hosts a selling/buying community. The distribution function fulfilled by market makers is the aggregation in a real or virtual place of diverse and competing sellers. Thus market makers provide a convenience to the customer who likes to compare many competing products with the least amount of trouble.

Sellers and Resellers

Selling organizations either purchase and own the goods they sell or they fulfill a selling function without ownership. If they are in the first category, they will be called distributors, wholesalers, jobbers, retailers, or dealers. If sellers are in the second category, they will be called brokers, traders, rep organizations, and agents. The distinction between these categories is all important from the producer's point of view. "Purchasing and owning" sellers are the most desirable because they take possession and cannot return the merchandise. Sales agents just represent: they take no ownership risk.

Transporters

Central to every distribution system, but usually least talked about, is the community of organizations that physically store and move the goods. These elements may be owned by sellers or producers; most often they are independently owned. The Post Office and commercial freight carriers, or instance, are important players. Transporters operate warehouses and provide ground, water, and air transport services.

Hybrids

Some of the functions described above are mutually exclusive. A seller either owns merchandise or does not. Other roles, however, are more easily combined and traditionally have been. A grocery store is thus the merging of an old farmers market and a dry goods market into a single enterprise that now "makes its own market" and also owns all the merchandise it sells. Major grocery chains also tend to own all or part of the transportation system they use. In the modern environment a large shopping mall is a market of markets, each store within it being itself an assembly of many types of merchandise that, once, were sold in separate markets. A restaurant is the best example of a small "hybrid." It creates its own market by offering a diversity of foods; it combines the production function by cooking the food and the selling function by offering it for sale on site. Most diverse stores such a grocery chains, drug stores, department stores, and major discounters are hybrids in that they make a market but also own and sell the merchandise. The ice cream vendors selling in the city from a little truck combines seller and transporter roles in a hybrid distribution mode.

STRUCTURAL FEATURES OF CHANNELS

Economic activity viewed functionally consists of aggregating valuable commodities into centers of production where value is added to the commodities by labor. The products of many suppliers are centralized into manufactories. The structural function of a distribution channel is to invert this movement, causing the transformed commodities to reach end-users again. (At the end of this systems comes another aggregation function, namely waste disposal, which now moves residues to their final resting place in landfills.) Distribution is therefore a logistical function at the physical level modulated by communications activities. Channels have evolved over time—and continue to change as participants attempt to take advantage of change as it occurs. A good example of a recent impact on distribution is the communications revolution introduced by the Internet. Thus many books once purchased in stores are bought online and delivered by UPS, FedEx, and DHL. Many airline tickets once sold by travel agents and picked up by customers are purchased online and picked up at the airport.

Tiers

Distribution systems are said to have tiers or levels, the number of tiers being defined by the middleman between the original seller and the ultimate buyer. A single-tier system involves a single intermediary seller, namely the retailer. A two-tier system will have a distributor/wholesaler plus a retailer. More tiers may be present. Imported goods, for instance, may be channeled first through an importer. In some industries smaller wholesalers (jobbers) may be involved as secondary distributors between a major wholesaler and a large number of retailers. Some manufacturers sell directly to customers. This may be viewed as a "tier-less" distribution channel; more correctly the manufacturer simply acts as its own retailer: the retail function is simply kept in-house. Competitive pressures limit the number of tiers possible because every level must be compensated and has its own margin (in effect its own "tax") on the transaction. Hierarchical distribution may be necessitated by capital intensity (manufacturers needing to share the burden of capitalizing the distribution system), by remoteness and distance (producers cannot reach every corner of their market), by technical service requirements (manufacturers need dealers to service technical goods and do not wish to establish hundreds of wholly-owned operations), and other factors.

Differentiation by Customer

Distribution channels typically service either the consumer or an industrial/institutional client. Industrial/institutional distribution is frequently highly adapted to specific branches. On the whole industrial distribution activity is less marked by hype and much more technical and price-oriented; the impulse buying element is eliminated by professional purchasing functions; at the same time, occasionally industrial sales produce corruption and kickback scandals because very large transactions are frequently the rule.

 1 | 2  NEXT