9 – Managing Marketing Channels

Introduction

In this course, you will discover how commodities produced by a factory are delivered for the end customer’s use. Every marketing action begins and concludes with the client. A marketer’s ultimate goal is to reach the customer. The effectiveness of the distribution route determines the product’s market availability. As a result, the distribution route is crucial in marketing efforts. The success of a company’s marketing campaign is determined by its control over the distribution network. After developing and pricing the goods, the marketing manager should plan to build a distribution strategy and design a distribution route to reach customers.

Distribution management entails moving finished items from a manufacturer to a customer for final consumption and utilisation. This includes transferring goods and ownership from the manufacturer to the client. This section will also cover the fundamentals of distribution, such as logistics and supply chain, wholesaling, and retailing.

9.1 Marketing Channel

A marketing channel is a network of relationships between firms that participate in purchasing and selling goods and services.

Marketing channel decisions are frequently more difficult to alter than price, promotion, and product considerations. Legal contracts may restrict adjustments, and creating effective connections with channel members often takes longer and costs more. It may also be challenging to relocate retail stores and wholesale facilities after establishing them. In his book, E. Raymond Corey notes, “Normally, it takes years to construct (the distribution channel), and it is not readily changed… It signifies a huge corporate commitment to many independent distribution companies – as well as the markets they service.”

9.1.1 Channel Functions

The majority of producers do not sell directly to end consumers. Channel members provide a range of responsibilities between the end-user and the producer. Wholesalers and retailers, for example, buy from producers, assume ownership of the products, and then resell them to parties or consumers at the next level. They are known as merchants. On the other hand, brokers, agents, and producer salespeople locate and negotiate with purchasers on behalf of the producer but do not obtain ownership rights to items. Other channel members, such as transporters, privately held warehouses, banks, and others, act as facilitators in the distribution process and do not negotiate with buyers or sellers on behalf of the producer or take ownership of items.

Sometimes, a single channel member can perform all these roles. However, in the majority of cases, channel members at various levels collaborate to execute the following functions:

1. Channel Members Create Utility: Marketing channels generate utility in the form of time, place, and possession. Time utility is making things available to clients when they want them. Place utility is establishing things in locations where customers want to buy them. Possession utility refers to customers’ ability to obtain and the right to use or store them for future use. This can happen through ownership rental or lease agreements that give the customer the right to use the product.
2. Channel Members Facilitate Exchange Efficiencies: By providing certain functions or services, channel members facilitate exchange efficiencies and assist in lowering exchange costs. Assume that three buyers want to buy products from four different manufacturers. If no middlemen are used, the total number of transactions with three clients will be twelve. If these four producers sell to a single reseller, the total number of transactions for producers will be four (one for each producer), and the reseller will handle three client transactions. The costs of three transactions for each producer are likely more than those of a single transaction with a reseller for each producer. In this case, only one reseller services the producers and the customers. Cost is a crucial consideration when using channel intermediaries, along with more excellent service to client needs.
3. Channel Members May Reduce Disagreements and Separations: Most clients live far away from the producers and may require a varied product selection and quantity of the manufacturer’s production. Customers, too, may be unsure about their product choices, and channel members assist in bridging these gaps.

• The disparity between a corporation’s product lines and the assortment customers desire is called assortment discrepancy.
• For example, a company may specialise in making solely cricket balls. Still, a typical cricket lover would also be interested in cricket bats, gloves, and other complementary products and may prefer to shop for these items elsewhere.
• The resellers adjust these disparities.
• The disparity between what quantity is economical for the corporation to create, which is usually rather significant, is referred to as quantity discrepancy.
• For example, cricket ball producers may produce 10,000 or 15,000 balls in a specific period. The average shopper would purchase significantly fewer balls at a time.
• Members of the channel may be able to assist in resolving this difference. Middlemen acquire and store goods from numerous producers. Wholesalers purchase in bulk, separate the goods into different grades or quality sought by different consumer groups, and sell smaller numbers to retailers, who sell to customers one or a few units at a time.

4. Other Functions: Distribution channels share financial risk by financing goods moving through the pipeline and occasionally extending credit to next-level operators and consumers. They also handle personal selling by informing and recommending the product to consumers and partly handling physical distribution such as warehousing and transportation, providing merchandising support, and furnishing market intelligence.

The most significant criticism against using middlemen is that it raises prices. Customers seek reduced pricing and channels that are as short as possible. The notion is that the fewer intermediaries there are, the cheaper the pricing. This way of thinking means channel members fulfil specific duties, and producers cannot avoid these activities by avoiding intermediaries. The functions and costs are passed to the producer.

9.1.2 Role of Marketing Channels

A distribution channel transports commodities from the producer to the consumer. It bridges the significant time, place, and possession gaps between individuals using goods and services and those producing them. Marketing channel members do various tasks, including buying, carrying goods, selling, transporting, financing, promoting, negotiating, performing marketing research, and servicing. These functions are detailed in the table below, and their smooth execution will allow items to move from producers to consumers in a timely and efficient manner.

9.1.3 Channel Design Decisions

The most crucial task in channel management is to create an effective and efficient route for the seamless flow of products, titles, payments, information, and promotion activities. A systematic strategy should be used to build the distribution route by assessing client demands. This is because different market segments may have different requirements. The end-user analysis aids in the identification of an optimal flow, the removal of all obstacles, and the development of desired customer value. In addition, the organisation should assess the efficiency and effectiveness of its existing channel alternatives for sales, delivery, and customer service. This analysis should be conducted with the company’s objectives and product and service positioning decisions.

A constraint analysis should be performed to establish the limits that must be incorporated into any proposed channel configuration. These include assessing the extent of consumer loyalty, the company’s sales target, and so on. After completing these evaluations, the organisation can identify gaps and plan for the optimum channel design by assessing viable alternatives.

In the case of a new business, as the organisation expands its distribution reach, the distribution channel architecture evolves in response to market demands and the firm’s coverage plan. In a local market, the firm favours self-distribution through its sales force or a few intermediaries. However, as the company grows, it expands into new geographical boundaries and decides to use different distribution channels with variable levels, as previously mentioned. As a result, an optimal channel system changes in response to the evolving demands and product market coverage decisions. The following are the steps in a typical channel design choice.

Let us go through each of these processes in detail and explore the difficulties surrounding the design of distribution channels. A typical channel design entails determining the customer’s service output level, creating objectives and restrictions, and identifying and assessing significant channel choices.

Analyse Customer’s Desired Service Output Levels

Analyzing the customer’s service output level is problematic for two reasons: first, the expectations of each market segment will differ, and second, the product-market condition will differ for each segment. The marketer must comprehend the level of service production desired by the target clients. Each channel generates five distinct types of service output levels.

The first difficulty with service output is the lot size that the channel allows a customer to purchase on each occasion. Many wholesalers purchase larger lots, whereas retail buyers prefer single-unit lots. The average customer waiting time is the second service output level. It is the amount of time that the consumer must wait for the desired product to arrive from the channel.

Establishing Objectives and Constraints

Following an analysis of consumer service output level expectations, the next stage is to create objectives and restrictions. The channel objectives should be described in terms of expected service output from each channel participant. The channel members should be evaluated based on the cost structure of channel maintenance. A low-cost channel is always favoured. Before determining which segment to serve and which channel will best serve the segment, the marketing manager can research each market segment accessible and service expectations in each segment. The goals of channel design are highly influenced by marketing and business goals. The broad objectives are as follows:

1. Product availability in the target market
2. Effortless transportation of the product from the manufacturer to the client
3. Economical and cost-effective distribution
4. Information is transferred from the producer to the consumer.

Identification of Major Channel Alternatives

Once the desired level of service output is determined, as well as the objectives and restrictions of channel design, the marketing manager should find alternate channels. As previously said, channels are classified into three types: sales, distribution, and service channels. When analysing channel alternatives, three considerations must be made: the overall business environment, the types and quantity of intermediaries required, and the terms and duties of each channel member.

Types of Intermediaries

To carry out channel work, the marketing manager needs to identify several intermediaries. We provide a list of the most frequent types of intermediaries.

1. Company Sales Force: The company employs its sales force for direct marketing. The manager can set sales quotas for each zone and sell products to customers directly.
2. Middlemen: A middleman acts as an intermediary between production and the consumer.
3. Agent/Broker: Agents or brokers are intermediaries with legal authorization to promote goods and services and perform other activities on behalf of the producer. Agents work with producers constantly, whereas brokers may be hired for any contract. Agents may sell to another middleman, such as industrial distributors, in some instances. Furthermore, an agent or broker can work for the buyer instead of the seller. This is becoming more widespread in the real estate industry.
4. Wholesaler: Wholesalers buy from producers and sell to retailers and other businesses. Wholesalers typically trade in bulk and sell to retailers or other intermediaries.
5. Retailer: As the final connection in many marketing channels, retailers sell to final customers directly. They buy goods through wholesalers or, in some situations, from the manufacturer.
6. Distributor: A distributor is a broad term that refers to several intermediaries. These individuals and businesses carry out a variety of tasks, including inventory management, personal selling, and financing. The primary distinction between an agent and a distributor is that agents work on commission, whereas distributors work on their accounts. Distributors are more typical in organised markets, while wholesalers can also occasionally act as distributors.
7. Dealer: A dealer is a broad term for any intermediary. A distributor is essentially the same type of intermediary, although some individuals distinguish dealers as those who sell just to ultimate customers and not to other intermediaries.
8. Value-Added Resellers (VARs): These intermediaries buy the primary product from producers, add value to it, or change it based on its nature, and then resell it to final buyers.
9. Merchants are middlemen who own what they sell to clients or other intermediaries. Typically, merchants take physical custody of the products they sell.
10. Carrying and Forwarding Agents (C&F): These individuals and organisations facilitate the flow of products and information through marketing channels, including banking and insurance functions. Transportation and storage (C&F Agent), risk coverage (insurance), and financial services require assistance.

Number of Intermediaries

The marketing manager must determine how many intermediaries will distribute his items. The firm’s distribution strategy should heavily influence the number of intermediaries used. After selecting the most appropriate channel for a producer’s items, the following stage decides the distribution intensity level, specifying the number of marketing intermediaries that will carry the products. The intensity levels may vary depending on a firm’s product, aims, and clients. Distribution intensity is regularly changed as a product progresses through its life cycle. Exclusive, selective, and intensive distribution are the three types of distribution tactics.

1. Intensive Distribution is a channel strategy for making things available in as many appropriate locations as feasible. This method is utilised for fast-moving consumer goods and products in high and regular demand, such as food and personal care products. Companies that use intense distribution include HUL, P&G, ITC, and Nirma. HUL’s goal for its Lifebuoy bathing soap is to make it available in 80% of Indian rural markets.
2. Selective Distribution: This channel approach restricts product availability to a few carefully chosen retailers in a particular market area. Existing companies and new products on the market use this distribution technique. The corporation would instead make the product available in select shops and promote it with proper marketing resources and market control. Selective distribution is used for high-involvement products such as televisions, washing machines, refrigerators, stereo systems, PCs for home and personal use, branded clothes and sportswear, etc.
3. Exclusive Distribution: This type of selective distribution in which only one outlet in a market territory can carry a product or product range. The corporation wishes to retain control of the market and channel. In many cases, such relationships are exclusive, and corporations do not allow intermediaries to carry competitors’ products (s). Exclusive dealers sell brands such as Porsche, Christian Dior items, Rolex watches, Professional Nikon cameras, and French perfumes.

Terms and Responsibilities of Channel Members

The next step is to identify the rights and duties of channel participants. The marketing manager is responsible for ensuring that the channel members become profitable. The marketing manager should oversee each channel member’s pricing policy, territorial rights, sales and credit conditions, and service specifications. The pricing issue necessitates establishing a list price, a discount schedule, and a decision on an equitable and suitable compensation pattern. Payment patterns and the producer’s guarantee are called terms of sale.

Many corporations offer cash discounts to intermediaries, replacements for defective products, and price drop assurances to encourage channel members to purchase more goods. In addition, the producer guarantees geographical rights through exclusive distribution to a few channel members. Mutual services and obligations include brand and shop promotion, marketing research, and data collection. The producer must create a channel promotion and development programme to encourage channel members to commit to more significant sales commitments.

9.1.4 Channel Management Decisions

After carefully evaluating the channels, the channel manager should establish a channel management strategy for the channels that have been chosen. Channel management decisions include channel member selection, training, motivation, evaluation, and modification.

Selection of Channel Members

The ability to recruit and use intermediaries differs by producer. Some prominent brand owners can always seek more robust distributors and broader distribution. New producers frequently struggle to integrate their product assortments with existing stores. Marketing executives should determine what traits separate excellent middlemen. Choosing marketing channels can be difficult, especially if a portion of the channel is beyond the producer’s direct control. Furthermore, there aren’t infinite accessible intermediates sitting around waiting for manufacturers to call them. Managers can divide the aspects they consider when developing channel strategies into three categories: market considerations, product factors, and producer factors.

Market Factors

The first stage in picking marketing channels is to analyse and comprehend the target market. A market study should examine various elements, from customers to competitor presence.

1. Customer Preferences: The preferred channel among customers.
2. Organizational Customers: Organizational customers usually have different purchasing habits than ordinary consumers.
3. Geography: Another essential consideration when deciding which channel to utilise is the customer’s location.
4. Competitors: Often, a good channel choice is one that competitors have overlooked or avoided. In some circumstances, the marketer may imitate his competitors’ route so that his products end up on store shelves designated for competitors’ products.

Product Factors

Even though two items end up in the exact retail location, they may require different intermediates earlier in the channel. The product-related elements that influence channel selection are listed below.

1. Life Cycle: The stage of a product category’s life cycle can be an essential element in channel selection, and channels may need to be altered over time. Once the product has become established, customers require less assistance.
2. Product Complexity: Some items are so sophisticated and require so much support that makers must always remain involved. This suggests a direct sales force or a small number of highly qualified intermediates. Scientific instruments, jet aircraft, nuclear reactors, medications, and computers are products whose intricacy influences how they are sold.
3. Product Value: The price of a product influences distribution channel selection. Extensive, well-established distribution networks, such as supermarket wholesalers, typically distribute low-cost, high-volume items.
4. Product Size and Weight: A product with a large size and weight may have limited distribution channel possibilities, especially if it is of poor value.
5. Consumer Perceptions: Customers’ perceptions of products and manufacturers also play a part in channel choosing.
6. Other Considerations: Depending on the product, other factors may play a role in the decision. Some of these factors include whether a product is fragile or perishable and whether it requires extensive customization.

Producer/Manufacturer Factor

Finally, there are various selection variables in which the producers themselves are involved. The producer criteria determining channel selection are as follows:

1. Company Objective: A company’s overall objective influences its marketing channel selection.
2. Company Resources: Different distribution methods necessitate varying degrees of resources and investment.
3. Desire for Control: A producer’s choice of channel system is influenced by the desire to control various facets of the marketing process. Pricing, positioning, brand image, customer service, and competitive presence are under your control.
4. Breadth of Product Line: A producer with multiple items in a connected field has a different channel situation than those with one or two products.

Training of Channel Members

The next critical step is to train the channel members. Once appointed, middlemen become internal customers of the firm. Second, middlemen frequently represent the corporation and its products to consumers. Training programmes on selling abilities, business processes, and other soft skills required to serve the end consumer can be provided. Customer contact and interaction management, selling abilities, relationship-building skills, and company growth skills should all be covered in the training programmes. The organisation should continuously implement a training calendar for its personnel.

Motivation Channel Members

Channel motivation includes implementing pay management plans and providing non-fringe advantages to foster long-term loyalty. Creating a channel motivational programme aims to increase their ability to perform better and take on more responsibility. It should also improve its channel offering to give consumers and channel members better value. The marketing manager should assess his needs and create incentive programmes to encourage peak performance. Cooperation, trust, and scientific distribution programming should underpin the relationship’s development. The most challenging component is winning the cooperation of intermediaries, which requires employing positive, motivating techniques such as increased margins, cash discounts, quantity discounts, cooperative advertising, advertising allowances, and point-of-purchase displays. Many marketing managers also use harmful tools such as distribution slowdowns, cash allowance reductions, and credit period extensions to threaten them into committing to higher sales.

A corporation should use the following tactics to motivate intermediaries.

1. Relationship Marketing: Relationship Marketing is based on the concept that mass marketing has run its course in various items and that traditional means of promotion are not achieving the expected outcomes. Companies such as Tupperware, Avon, Amway, and Modi Care do not distribute their products through the traditional distribution system in this country. Relationship marketing emphasises the company’s relationship with its distributor. A positive relationship with the distributor will result in long-term relationships and increased sales.

2. Benefits and Costs Provided to Intermediaries: The company should provide a distributor with various perks. These, along with expenditure reimbursement, will have a favourable impact on the distributor. A distributor can receive the following benefits from the company:

• A reduction in the distributor’s capital employed.
• Lower operating costs
• Access to specialised services
• Lower overall risk
• Customer financing schemes
• Increased sales promotion

3. Collaborative Programs: The cooperative approach is a time-honoured strategy of motivating intermediates. Allowances for cooperative approaches, training salespeople, payment for displays, free goods, commission on extra sales, etc. These programmes will assist middlemen in increasing their sales.

4. Distributor Advisory Councils (DAC): In this strategy, a council of distributors is formed to provide the company with distributor feedback. Typically, high management discusses its difficulties with channel members in these councils. DAC improves overall channel communication and allows the manufacturer to learn more about the requirements and concerns of his channel members.

Evaluating Channel Members

The following task will be to review the performance of channel members regularly. The marketing manager may establish standard evaluation benchmarks such as sales quotas, market share, average inventory carrying level, customer response and delivery time, usage and management of unused, unusable, and damaged goods, and participation in the company’s sales promotion and channel employee training programmes. While the organisation should reward the outliers, it should coach, chastise, re-motivate, and fire the underperformers. It should ensure that the intermediaries can meet the company’s Economic Order Quantity (EOQ) in their transactions. The company should ensure that the inventory level, accounts receivable, and cash management are proper and that the intermediaries consistently commit to the organization’s products and services.

Modifying Channel Arrangements

Distribution channel management is a constant and dynamic process. We indicated at the outset that channel structure and levels arise as the organisation grows over time. The shape and nature of the distribution channel will alter as it shifts from exclusive distribution to selective distribution and then to intensive distribution. This modification will address market expansion, new product launches, brand extensions, and adding new products to the company’s existing product line. The modification of the channel structure is also linked to the product’s life cycle stage.

In the event of a new product with no close substitute, the marketing manager attempts to obtain exclusive distribution during the initial stage. However, as the market grows, the manager may cover more territories by implementing an intensive distribution strategy during the growth stage of the product life cycle. As a product matures, many managers shift the product to low-cost channels and follow mass merchandising. Lower-cost channels such as mail orders and off-price discounts are used when a product declines. In markets with little product differentiation between the new product and its close replacements, the marketing manager will want early adoption and cover a more profound and broader market through low-cost channels before competitors begin aggressive marketing.

In many cases, the entire channel strategy becomes outmoded due to the advent of new paradigms and game-changing commercial strategies. In these circumstances, gaining top management support for a significant shift in distribution strategy is difficult. Because of the rise of e-commerce, many businesses have struggled to devise an optimal distribution plan that meets their customers’ service expectations. To keep their distribution strategy perfect at all times, the marketing manager should follow a six-step process.

1. The marketing manager should research customers’ value perceptions, demands, and aspirations regarding the service they expect from channel members.
2. Compare the company’s present distribution system with that of its competitors regarding consumer requirements.
3. Determine which service output gaps require immediate attention and correction.
4. Determine the organisational and market constraints that will limit potential remedial efforts.
5. Create a new/improved channel solution
6. Put the modified distribution channel into action and monitor it.

9.2 Types of Channels

Several distinct distribution path options have been devised because one channel type may be suitable for one product but not another. Various channel types can be broadly classed as channels used for consumer or industrial items.

9.2.1 Consumer Product Channels

Companies that manufacture consumer goods may employ a variety of channels. Producers can select a zero-level channel (also called a direct marketing channel). This strategy entails delivering items directly from the manufacturer to the client. There are no resellers in a zero-channel system. Company-owned storefronts, telemarketing, mail order, and door-to-door selling are a few examples.

Zero-channel is used by Sara Lee, Amway, Avon Cosmetics, Eureka Forbes, and Amazon.

This is a simple setup, but it may not be the most efficient or cost-effective way of distributing things to consumers. Sumit K. Majumdar and Venkatram Ramaswamy argue that while deciding whether to go straight to the consumer or use channel partners, a corporation should measure the advantages to consumers against the transaction costs associated with utilising intermediaries before going direct to consumers.

Consumer Product Channels

(A) one-level channel

(B) transports goods from the manufacturer to the merchant. These products are made available to customers through retailers. Large retailers like supermarkets and chain stores prefer bulk buying from producers. Two-level channel

(C) has long been popular among consumer product companies. There are two sorts of channel intermediates between a producer and a consumer: wholesalers and retailers. The items are transferred from the producer to the wholesalers, then to the retailers, and lastly to the customers. This channel structure is a viable alternative for companies that sell to millions of consumers across multiple geographies via a few thousand to lakhs of retail outlets, including neighbourhood Kirana stores.

Wholesalers of all shapes and sizes serve various retail outlets, including rural markets. Tobacco, tea, and laundry products are typical instances of how wholesalers and merchants act as intermediaries between manufacturers and consumers.

A three-level channel architecture includes three levels of intermediaries. The manufacturer handles no distribution functions and hires single agents with significant resources or C&F agents. They have their own wholesaler and retailer network that spans the entire country. This type of structure could also be based on territory. C&F agents only handle distribution tasks. In addition to distribution, sole selling agents may perform personal selling on behalf of the producer. This is a frequent strategy among pharmaceutical producers in India who cannot conduct personal selling and distribution operations.

Another channel option is strategic channel alliance. This is an agreement in which another firm distributes the products of one producer through its marketing channels. A soft drink firm, for example, may distribute another manufacturer’s bottled water, or a domestic company may distribute a foreign company’s product.

The term “traditional channels” refers to the transfer of goods from producer to consumer. Some manufacturers must additionally plan for channel intermediaries to act as reverse-flow channels to reclaim things 0buyers no longer want.

For example, automakers, pharmaceutical businesses, toy manufacturers, and others may be required to recall products owing to flaws, breakage, safety concerns, or repairs during the warranty period. They, including producers, aid in reversing the flow of certain types of containers for reuse, computer circuit boards for refurbishment and resale, paper, cardboard, and metals, among other things, for recycling.

9.2.2 Industrial Product Channels

Any company that manufactures or offers a product or service not intended only for mass consumer marketing is considered an industrial product manufacturer. The manufacturer or marketer of the product is regarded as the product source, regardless of whether the product is manufactured in-house or under contract. Manufacturers of industrial items and companies that advertise their products must cultivate particular relationships with each channel member, recognising their needs and facilitating their capabilities.

Industrial products are typically researched and manufactured to meet the specific needs of their markets. Products are not made for markets; instead, markets are explored and built for products. This link is less typical in industries that manufacture goods for the nonindustrial sector. Various users of manufactured products are also producers or manufacturers in many industrial product businesses. These users purchase things from the marketing channel not for personal use but to run their business. This relationship to the items utilised has a different impact on the development and administration of the marketing channel structure than on users who are not producers but actual customers. The main distinction is centred on the quantitative worth of the industrial product whose use is motivated by necessity rather than desire. These items are bought for their functionality. Product value and intrinsic worth determine whether a need has been met.

State and federal governments heavily control industries that manufacture and sell industrial products. Members and participants in the channel who serve these businesses are frequently required to perform services prescribed by government legislation. The ability of channel members to satisfy these rules substantially impacts manufacturers’ ability to manage their marketing channels for compliance and effectiveness. State and federal laws also govern many consumer products. The critical difference for the channel member is that regulatory compliance for consumer items is frequently accomplished during processing or packing. Still, compliance for industrial products follows each step in the marketing channel.

Channels for Industrial Products

Many industrial items, particularly those produced by manufacturers of costly and technically sophisticated equipment, are sold directly to industrial buyers.

IBM, for example, sells its mainframe computers directly to businesses. Standard industrial items, such as hand tools and minor operational equipment, are typically distributed by industrial distributors (Q).

Industrial distributors may carry a wide range of product lines and commodities from several manufacturers or specialise, handling only a few lines. According to James D. Hlavecek and Tommy J. McCuistion, this distribution channel is ideal for companies that make products with broad market appeal that are quickly supplied, sold in small amounts, and required on demand to minimise excessive losses.

Industrial distributors provide benefits such as offering services at a low cost, extending credit to consumers, developing tight relationships, and providing market knowledge to producers. They also reduce the manufacturer’s financial burden by maintaining adequate supplies in the market. The downsides include a lack of control because industrial distributors are independent businesses that carry competing brands and cannot be relied on to advocate a single brand. They often avoid stocking pricey and slow-moving commodities and may seek extra incentives. In the case of industrial channel three (R), an independent firm works on commission as a producer’s representative or agent, typically selling complementary products from many companies in a particular territory. The agent does not obtain ownership of the merchandise.

Agents benefit from extensive technical and market knowledge and a well-established customer base. They can be highly useful for seasonal industrial products because agents are only paid on sales commission. An agent can be a valuable asset when a company cannot afford to hire a full-time sales crew.

The issues include a lack of control over agents, who frequently focus on major purchasers due to the commission system and may not effectively follow up with consumers, which limits productive selling time.

When manufacturers want to operate in vast geographic areas but do not want to employ sales personnel, when product demand is seasonal, or when starting coverage of a new geographic area without expanding the sales team, using two intermediaries, a selling agency and industrial distributor(s), is beneficial.

9.3 Channel – Terms and Conditions

To improve mutual understanding, the producer specifies channel partners’ terms and conditions and obligations, which often include price policy and trade margins, payment terms and territory demarcation, guarantee and returns policy, and shared responsibilities.

Price policy and trade margins should be equitable, and manufacturers should be required to produce a price list, trade margins, and allowances. Intermediaries’ margins should be sufficient to earn a decent profit for their work while providing a solid return on investment. Simplicity and clarity aid in the avoidance of strained relationships between producers and intermediaries.

Payment conditions include any quantity discounts and early payments. This may also include warranties offered by the producer against defective items or breakages during shipment, price decreases, and the company’s policy on accepting back-dated expired products.

Territorial demarcation sets the territorial boundaries and the rights of the company’s appointed distributors or dealers. This helps avoid disagreements and strained relationships between dealers in different territories and between the producer and the dealers. In the event of exclusive dealerships or if the producer has a franchise agreement, mutual obligations and services should be clearly defined. The producer should also specify what sort of promotional assistance, standards, services, and records the dealers or franchisees must keep and what the dealers and franchisees should expect from the producer regarding training and other mutually beneficial activities.

9.4 Evaluation of Channel Alternatives

The following variables or criteria are used to assess each channel alternative:

• economic performance,
• degree of control, and
• adaptability to changing market conditions.

Economic Factor: The economic performance of each channel alternative should be compared. The industrial marketer must evaluate each channel alternative’s sales revenue and selling costs to do so. Different sales revenue levels can be optimistic, reasonable, or pessimistic. Similarly, total selling costs at the three levels of sales income can be determined. These projections are then plotted on a graph.

Comparison of Channel Alternatives by Economic Factor

Control Factor: An essential factor is the degree of control that the industrial marketer has over the channels. The company sales force channel provides the most power to the marketer, followed by the manufacturer’s representative (or agent) and broker channels. The industrial distributor/dealer channel allows for the least amount of control. For example, suppose a marketer advises a distributor to focus on the company’s underperforming items. In that case, the distributor may disregard the suggestion because it is an independent firm looking to maximise profits. Similarly, agents or brokers are motivated to execute the selling role since they are compensated based on the amount of money sold. Agents or brokers often avoid non-selling duties such as market research, new product creation, and payment collection.

Adaptive Factor: The industrial marketer must be able to control and modify the channel structure in a fast-changing market environment. At the same time, the channel members should reach an agreement or make a promise to one another. The degree of adaptation of the channel to changes in the market must be considered while evaluating channels.

9.5 Logistics and Supply Chains Management

Logistics has always been a critical component of all economic activity. Logistics as an integrated business activity has evolved within the last twenty years. Logistics management strategically manages the movement and storage of supplies, parts, and finished inventory from the supplier to the company and the client.

Thus, logistics is concerned with the physical distribution of materials. It starts with the sources of supply and finishes with the point of consumption. As a result, it has a far broader scope than being concerned with the movement of finished items – a generally believed notion of physical distribution. Logistics encompasses all operations that promote product flow from the point of raw material acquisition to the end of ultimate consumption, as well as information flow that initiates production to provide acceptable levels of customer service at a fair cost. Logistics management is concerned with two issues: the transportation of raw materials to the plant, known as physical supply or material management, and the flow of finished goods from the plant to customers, known as physical distribution.

Supply chain management begins with the supplier of raw materials, then proceeds to the conversion of finished products at the plant, storage at warehouses, and supply to distribution channels to fulfil end-user demand for a finished product at an acceptable cost and service level. Physical distribution begins with the forward movement of commodities from the company’s manufacturing site to the end user, whereas supply chain management starts before physical distribution.

Some authors define logistics as moving, sorting, and processing items to match target customers’ needs with a company’s marketing mix within individual companies and a distribution channel. Thus, logistics reflects a company’s value chain, with procurement at the beginning and the customer at the finish. Materials management and physical distribution are both part of logistics management. Companies increasingly recognise the need to manage the complete supply chain rather than make transportation and warehousing decisions. The goal of supply chain management is to eliminate inefficiencies and barriers to meeting consumer demand as it occurs.

Organizational, physical distribution begins with production and finishes with the customer. Supply Chain Management (SCM) is a larger concept that begins before physical distribution. It entails acquiring the right inputs, efficiently transforming them into finished products, and delivering them to the ultimate clients. A business operates through a value network that includes suppliers, suppliers of suppliers, immediate customers, and end customers. Market logistics entails planning the infrastructure to fulfil demand, then implementing and controlling the physical movements of commodities and finished goods from the point of origin to the end of sale while generating a surplus.

Market logistics planning consists of four steps:

1. Choosing the value proposition for the company’s customers.
2. Choosing the optimum channel design and network strategy to reach customers.
3. Increasing operational excellence in sales forecasting, warehouse, transportation, and material management.
4. Putting the solution into action using the best information systems, equipment, rules, and processes.

Decisions on Market Logistics: The following are four key decisions:

1. Order processing: What should be done with orders?
2. Warehousing: Where should inventory be kept?
3. Inventory: How much stock should be kept on hand?
4. Transportation: Where should the stocks be delivered?

The notion of physical distribution is based on a highly regarded study conducted by Harvard University’s Howard T. Lewis, James W. Culliton, and Jack D. Steele in 1956. It states that a company’s entire transportation, storage, and product handling activities, as well as its total channel setup, should be coordinated as a single system with the goal of minimising distribution costs for a specific customer service level because lower costs and better service contribute to increased customer value. One channel member frequently manages physical distribution for all other channel members. According to Tom Richman, there is a trend toward centralisation, in which one supply chain channel member obtains responsibility and authority for physical distribution for the whole channel.

Complying with Customer Service Requirements: The marketing strategy aims to meet customers’ requirements and desires. Most consumers are unaware of physical distribution. They only pay attention to it when something goes wrong, and it may be too late for the company to console them. It is not uncommon in India for service providers to fail to satisfy consumer service delivery standards.

Physical distribution systems must suit the factory’s needs, the supply chain, and customers. First and foremost, it is vital to determine what clients demand and what competitors offer. Customers expect quick delivery, effective order processing, willing suppliers to satisfy emergency needs, a progress report, proper product handling, after-sales services, prompt replacement of damaged goods, and warranties. The projected level of physical distribution service is affected by customers’ inventory requirements. The company must assess the relative importance of these factors. It is essential to pay attention to consumer wants and preferences to increase sales and earn repeat purchases. For example, an automaker with a low inventory of replacement components demands timely, consistent supply from part suppliers. The availability of repair services and time for car buyers are critical considerations. Anne G. Perkins discovered that even though product demand is uncertain, suppliers must be prepared to respond quickly to inventory needs. Distribution costs may be a secondary issue in many cases, given the importance of service, dependability, and timeliness.

Most customers are concerned with getting what they want quickly and reliably, and they don’t care how a product gets from a manufacturer to the point of delivery where they get it.

Total Distribution Costs Should Be Reduced: Companies try to reduce distribution expenses, such as in order processing, inventory management, materials handling, warehousing, and transportation. However, lowering expenditures in one area frequently raises them in another. To do this, the organisation must build an inexpensive system without compromising the minimum promised service delivery level, and trade-offs between service level and prices are essential. When using a systems approach to distribution, the emphasis switches from minimising individual activity costs to lowering overall distribution costs. Adopting a whole cost strategy necessitates analysing expenses related to distribution possibilities, such as inventory levels versus warehousing prices, materials costs versus expenses associated with various modes of transportation, and all distribution costs versus customer service requirements. The company’s minimum desired customer service objectives should match the lowest overall distribution system cost. This necessitates cost trade-offs since higher expenses in one section of the distribution system may be required to attain lower prices in another. Accounting processes, such as asking customers to rank their preferences and applying statistical procedures and computer simulations, are frequently utilised to calculate overall expenses.

Curtailing Time Cycle: The time it takes to complete a process is called its time cycle. Physical distribution aims to shorten the time cycle to minimise costs and improve customer service. Many firms, such as overnight delivery services and big news organisations, attempt to reduce the time cycle to obtain a competitive advantage.

FedEx, for example, undertakes research and implements new techniques and procedures to be the fastest overnight delivery service. FedEx also provides its customers with package tracking software so that they can track the movement of their packages. In such cases, quickness is more crucial than cost.

The Wheel of Retailing

9.6 Retailing

‘Retail’ derives from the French word retailer, which means ‘to cut a piece’ or ‘to break mass’. Retailing encompasses all operations selling products to ultimate consumers for personal, family, and household use, as opposed to commercial usage. These operations include anticipating client desires, generating product assortments, gathering market intelligence, and funding. A retailer is a business that connects the producers and the final consumer. It can be an individual, a chain store, a department store, a supermarket, a speciality store, a small locality shop, a paan-bidi kiosk, or a service retailer. Retailing is in charge of matching final consumer demand with the supplies of various marketers. Manufacturers who sell directly to end users are engaging in retailing activities. In the case of service retailing, the retailer is also the service provider, such as a dry cleaner, beauty salon, or fast-food restaurant.

Retailing is the primary source of revenue for retailers. Retailers’ value addition is vital for both final consumers and marketers. Retailers add value, provide service, and assist customers in making product choices. However, a retailer’s image can boost product value by improving consumers’ experience, availability, or convenience. Retailers offer technical assistance, display products, distribute them, extend financing, and provide after-sales maintenance services, among other things. Retailing is not limited to storefronts; it also occurs door-to-door, by mail, the Internet, and so on.

Retail is a fiercely competitive industry and the world’s second-largest. Its appeal stems from its capacity to give consumers easier access to a wide range of items, freedom of choice, and services. The typical retail store size varies by country, and it is determined mainly by the country’s level of economic development.

The Indian market is littered with traditional marketplaces known as bazaars or haats, comprising numerous small and large stores offering various or similar goods. In India, a bazaar is a lengthy street in a city or town that serves as a commercial hub. These bazaars, which take place on scheduled weekdays in Indian rural regions and attract customers and merchants from other adjacent villages, sometimes appear to be joyful occasions. Small merchants have traditionally played a significant role in all sectors in India, and unorganised retailers outnumber organised retailers.

Significant changes have occurred in the general retailing landscape over the previous 10-12 years. For example, the ready-to-wear garments business has significantly impacted what was once a made-to-order apparel sector. Almost every other retail industry is changing with time.

According to a more well-known retailing theory—the wheel of retailing described by Malcomb McNair—new retailers frequently join the market with cheap pricing, margins, and status. Low prices are usually the product of some novel cost-cutting strategies, and they quickly attract competition. With time, many companies attempt to expand their consumer base and boost their sales. Their operations and facilities grow in size and cost. They may relocate to more upscale locations, begin carrying higher-quality products, or add services, eventually emerging as a high-cost-price-service business. By this time, newer competitors with low prices, low margins, and low status have emerged, and these competitors will go through the same evolutionary process. The wheel continues to turn, and department stores, supermarkets, and mass merchandisers have all been through this cycle.

9.6.1 Functions of Retailer

Retailers play an essential role in the growing market landscape. Large brands are racing to enter the desired retail formats to cater to India’s increasing middle class. Retailers undertake a variety of responsibilities, such as supplying assortments, sorting, breaking the bulk, delivering services, risk bearing, the channel of communication, transportation, advertising, and inventory holding. They substantially contribute to boosting the product’s value and pleasing customers.

Providing Assortments: Providing an assortment allows clients to select from a wide range of brand designs, sizes, colours, and pricing all in one place. Manufacturers specialise in a particular type of product.

For instance, Kellogg’s manufactures breakfast cereals and Campbell’s manufactures soups.

If each of these manufacturers had a store that exclusively offered its items, customers would have to visit many supermarkets to buy groceries for a single meal. Retailers, on the other hand, provide a diverse range of products and brands for the convenience of their customers.

Sorting: Manufacturers may produce single or numerous product lines and will always prefer to sell their whole output to a few buyers to save expenses. Finally, consumers will like to buy from a wide range of goods and services and typically buy in lesser quantities. Retailers must balance the wants of both parties by gathering various items from various producers, purchasing them in large amounts and selling them to individual consumers in smaller quantities. Sorting is the process described above in which the merchant engages in activities and performs functions that add value to the products and services sold to consumers.

For example, Future Group’s ‘Big Bazaar’ shopping supermarket sells 20,000 assortments from 900 brands. Customers can select from such a basket from a single location. Some speciality merchants, such as Nilgiris or Barista, provide specialised assortments of a single product line.

Breaking Bulk: Retailers sell smaller products targeted to individual consumers and household consumption habits, lowering shipping, warehouse, and inventory costs. The term ‘retailing’ is derived from French and means ‘taking a piece off,’ revealing the proper role of a store.

For instance, a shop may sell wheat flour in packets of 2kg, 5kg, and 10kg to meet the demands of various clients.

Rendering Services: Retailers provide services that make buying and using things more accessible for customers. Customers can obtain credit from them. They display things that are appealing to customers. Retailers maintain ready information on hand to answer customer questions. They offer services that facilitate the transfer of ownership from the manufacturer to the end user. They also provide product guarantees from the owner’s perspective, after-sales service, and customer service. Retailers also credit customers and design hire purchase programmes to allow them to acquire a product immediately and pay the amount at their leisure. Retailers also fill orders, process them quickly, deliver the product, and install it at the customer’s location.

For example, electronic goods dealers transport devices to clients’ homes, frequently assist with installation, and educate clients about the product’s capabilities and features.

Retail salespeople respond to client concerns and demonstrate products for the customer to examine before purchasing. They also aid in completing a transaction and realising a sale.

Risk Bearing: Unlike manufacturers and distributors, retailers bear a particular type of risk. Customers can also return items to the retail location, so the risk of product ownership frequently falls on the retailers. Many corporations have buy-back and return programmes, where shops can always return unsold merchandise.

Holding Inventory: One of the merchants’ most essential functions is keeping inventory to make things available to customers. Because consumers can immediately acquire things from neighbouring merchants, they can retain a significantly smaller inventory of products at home. Thanks to a retailer’s inventory, customers can get products and services immediately.

Channel of Communication: Retailers link the manufacturer, his representative, and the end user. They function as a two-way communication channel. The manufacturer collects customer preference and choice data through merchants and gives information about existing and future items. Point-of-purchase displays provide information on new products, and shops frequently advise customers about the expected product availability date or the introduction of variants into the market. Shoppers can learn about items and services from retailers and even develop trial habits by observing others purchasing a product or service. From retail points, the manufacturer collects consumer data, data on gaps in demand and supply cycles, and customer satisfaction.

Transport and Advertising Function: Retailers also assist with transportation and advertising. The more extensive assortments are transported from the wholesaler’s point to the retailer’s point via the retailer’s arrangements, and the goods are frequently delivered to the ultimate consumer’s point. As a result, stores assist with storage, transportation, advertising, and pre-payment items. The percentage of the sale price a retailer receives is determined by the number of functions the store performs for the manufacturer.

9.6.2 Strategic Issues in Retailing

It is simple to enter the retail industry and more straightforward to fail. Customers must be catered to for a retailer to exist and thrive. Their costs and earnings are determined by the sort of operation, product lines, and degree of service they provide. Personal customers buy for a variety of reasons. Sometimes, the reasons appear evident, but other times, they seem irrational and hazy. They may be purely social or psychological, such as to avoid boredom, socialise, kill time, or learn whether anything is fascinating or new. Retailers pay close attention to the target market and location, merchandise variety and assortment, store image and atmosphere, services, price level, and advertising.

9.7 Wholesaling

Wholesaling refers to the operations of individuals and businesses that sell to retailers and other merchants, as well as industrial, institutional, and commercial users, but do not sell in significant quantities to end users. Producers, farmers growing agricultural products, and retailers are not included in wholesale. Wholesalers, unlike retailers, are less concerned with promotional activities, store atmosphere, and location because they typically deal with business buyers rather than end users. Wholesalers typically handle large transactions and cover a greater geographic area. Wholesaling activities include acquiring and giving information, purchasing and selling, grading, storing, transporting, financing, and risk sharing, among other things. Wholesalers provide value to both customers and suppliers.

Wholesalers have always dominated marketing channels in developing, developing, and developed countries. Factors favouring their importance in distribution channels include producers’ remote positions from final customers; most products are made before particular orders, and intermediates and ultimate consumers want varied quantities in packages and forms. According to Harry G. Miller, the proper operation of wholesalers as a marketing channel, particularly in emerging nations, directly adds to economic potential and growth by providing access to a more extensive market base. It is widely assumed that items flow from the producer to a wholesaler and then to shops where consumers purchase them. In actuality, the process is more complicated. Products may pass through the hands of multiple producers and wholesalers before arriving at a retail store since the end customer may be a business rather than a consumer.

Wholesaler Functions of Producers and Customers

Functions for Producers	Functions for Customers
Market Coverage	Product Availability
Sales Contacts	Assortment Convenience
Inventory Holding	Bulk-breaking
Order Processing	Credit Facility and Finance
Market Information	Customer Service
Customer Support	Technical Support

As producers grow in size, many of them bypass wholesalers. The sales force of a producer is thought to be more effective at selling. However, the expenses of keeping a sales force and executing activities traditionally done by wholesalers are frequently higher than the benefits of the firm’s sales employees. Wholesalers often handle multiple product lines from various manufacturers and can distribute sales costs across more items than most. Wholesalers also assist retail dealers in inventory selection. They frequently have a superior understanding of market conditions and are skilled negotiators. They typically offer a broader selection of products from several producers to shops, whereas most producers’ salespeople only sell a few products. As noted in the preceding unit, Wholesalers acquire in bulk, deliver to clients in smaller portions, and perform physical distribution tasks such as transportation, materials handling, inventory planning, warehousing, and communication.

Large retail chains frequently take over duties previously handled by distributors. The expanding trend of e-commerce is making life easier for customers and producers as more enterprises in industrialised and rapidly developing countries adopt this new-age marketing credo.