Channels of Distribution in Marketing: 3 Channels

This article throws light upon the three channels of distribution in marketing. The channels are: 1. Consumer Goods 2. Industrial Goods: Marketing Channels 3. Exportable Products. 

Marketing: Distribution Channel # 1.

Consumer Goods:

Let us consider the types of channels that exist in our country:

Type A: Manufacturer → Consumer

Type B: Manufacturer → Retailer → Consumer

Type C: Manufacturer → Wholesaler Retailer → Consumer

Type D: Manufacturer → Agents → Wholesaler → Retailer → Consumer

A major portion of consumer goods is sold through the traditional channel—type C. In some cases, however, goods are sold through retailers bypassing the wholesaler.

Channel-type Features vis-a-vis Evaluation/Audit Criteria:

Channel Type A:

Certain manufacturers like Bata Company sell their products to the consumers direct through their own shops.

Channel Type B:

It is undertaken by those firms which have efficient sales force to assume the marketing functions of the wholesalers.

Evaluation/Audit Criteria:

(a) Is the sales force properly trained and sufficient to meet the distribution outlets? Are they technically qualified? How are they motivated?

(b) Does the existing system meet the needs of each geographic area, product, market segment? Own systems and abilities vs. Competitors’ systems and abilities (to measure performance gap)?

(c) How is the extent of liaison between the company’s sales force and the supermarkets/departmental stores? Increasing or diminishing sales?

(d) How and what are the costs with respect to—physical distribution operating costs? Inventory levels? Investment in distribution activities? Return on investment? Return on sales? Marketing costs to sales value?

(e) How does the company identify and balance the following factors for optimisation of distribution services—

Existing and potential distribution centre location?

Inventory stocking levels at each distribution centre?

Distribution centre capacity limits?

Optimum number of distribution centres based on total freight and warehousing costs, service, and inventory investments?

(f) Does this marketing/distribution channel indicate an integrated character to meet the requirements of:

key groups of customers?

key product-market segments?

realistic distribution goals?

marketing—sales policy, etc. ?

Channel Type C:

It is the most traditional one. The whole-sellers and retailers dominate the channel wherein the former purchase the stocks from the manufacturers and sell them to the retailers for ultimate piece-meal sales to the consumers.

Channel Type D:

It involves distribution through an agent that stands between the manufacturer and whole-seller. The agents may be a broker, commission merchant, or an export merchant. This channel is suitable to those firms who cannot afford to maintain a sales force of their own.

Evaluation/Audit Criteria:

(a) Similar to (a) and (b) under channel type C.

(b) Agents’ commission—is it made attractive keeping in view the cost-benefit analysis?

(c) Is the management sensitive to the market requirements?

(d) Does the management make periodic review to ascertain that its products are reaching the masses without delay (this criterion is important as this channel type is longest)?

Before determining an appropriate marketing channel, a manufacturer of consumer goods must weigh the advantages derived from the engagement of agents or whole-sellers against the cost of maintaining extensive sales force, delivery service, handling sales and credit accounts.

Such manufacturer should also study the comparative advantages and disadvantages between traditional whole-sellers, co-operative societies and state agencies.

Marketing: Distribution Channel # 2.

Industrial Goods: Marketing Channels:

Let us consider the types of channels that exist in an industrial market of our country:

Type A: Manufacturer → Industrial users

Type B: Manufacturer → Agents→ Industrial users

Type C: Manufacturer → Industrial distributor → Industrial users

Type D: Manufacturer → Agents → Industrial distributor →Industrial users

Channel-type Features vis-a-vis Evaluation/Audit Criteria:

Channel A:

This is the most common in industrial marketing where capital goods like plant and machinery are directly marketed. The number of outlets for capital goods is small and the average value per sale is high. The ratio of marketing cost to the value of sales is usually lower.

This channel, for instance, finds extensive use with the sales of furnaces by GEC Ltd., or electronic systems by ECIL, or computer systems by HCL, as the markets for such sophisticated equipment are well established and attention has to be paid to the special requirements of the user industries.

Evaluation/audit criteria are:

(a) Technically qualified marketing/service engineers,

(b) Complexity in installation or use,

(c) Precision and after-sales service, and

(d) Last but not least, systems and abilities own vs. competitors to measure the performance gap.

Channel B:

It is most suitable for the introduction of new products in the market. Small or medium-scale firms who do not have marketing department find this channel very convenient.

Evaluation/Audit Criteria:

(a) Attractiveness of the agent’s commission fixed,

(b) Agent’s capability and areas of operation, and

(c) Competition and competitors’ strategy.

Channel C:

This is a convenient way of distribution of small accessories and equipment to the users through the industrial distributors as middlemen.

Evaluation/Audit Criteria:

(a) Basis of commission,

(b) Experience and capability of the distributors,

(c) Performance of the distributors in the assigned areas of operation,

(d) Inventory stocking levels-area-wise, and

(e) Identified market segments, etc.

Channel D:

This is the combination of the channel types B and C. This is followed by those firms which do not have marketing system of their own. The agents assume full responsibility and engage industrial distributors to meet the varying conditions on the basis geographical factors. This method offers economy in the marketing and selling efforts of a manufacturing firm.

Evaluation/Audit Criteria:

(a) Performance efficiency of the agents and of distributors,

(b) Capability limits as to stocking/finance, etc. of distributors,

(c) Attractive rates of commission to induce and motivate them, and

(d) Periodic review of the terms and conditions of their appointments.

The whole process of the channel types B, C, and D is indirect in nature. So, the management of any firm resorting to these channels should ensure regularity of supplies of products for effective distribution.

Marketing: Distribution Channel # 3.

Exportable Products:

Let us consider the types of channels (i.e. export arrangements) that exist to market the products abroad—

Type 1: Domestic divisions → Foreign customers.

Type 2: Domestic divisions → International division → Foreign customers and/or export department.

Type 3: Domestic divisions → Foreign subsidiaries → Foreign customers.

Type 4: Domestic divisions → International division → Foreign subsidiaries → Foreign customer and/or export department.

It can, therefore, be observed that a number of different channels of distribution are possible within the exporting framework stated above. With the expansion of a company’s foreign operations, it has to pass through different stages of export development in which a growing proportion of exports go to foreign sales and manufacturing affiliates for resale rather than to customers or agents.

There are, thus, three basic stages of exporting:

Stage I: Exports to customers, and agents.

Stage II: Exports to customers, agents and sales subsidiaries.

Stage III: Exports to foreign manufacturing affiliates.

(1) International Marketing Strategy:

In an attempt to market the products abroad, a firm should choose between two divergent marketing strategies:

(a) Initially a firm can enter a few of the most promising markets. Once its presence is established and the potentials of its products proved, it can penetrate new and presumably less profitable markets.

(b) A firm can enter as many potential markets as possible at the same time. The initial broad-scale penetration is followed by a strategy of abandoning some old and less profitable markets.

The first strategy requires a lower investment in marketing and permits the firm to test its products and concentrate on markets with the highest expected return. The second strategy, obviously, requires higher investments in different product-market segments initially, and the strategic issues in abandoning or retaining markets become complicated.

Whatever strategy is chosen, the management auditor’s role is to appraise and evaluate the investment proposals from the aspects of long-term future prospects and economic criteria in consideration of the corporate/product relationships and standing in business.

He should make a serious study, probing enquiry, and data refinement to understand the logic behind the exports—whether to counter domestic competition or to export the surplus production and/ or to avail of the export incentives, in addition to the business interest to capture foreign markets.

(2) Export Transaction:

An export transaction passes through several steps, of which the important ones are:

(a) Receipt of indent from abroad,

(b) Shipping and credit enquiry,

(c) Packing and forwarding of goods,

(d) Observing customs formalities,

(e) Issuing bill of lading and freight note,

(f) Preparing shipping documents,

(g) Effecting marine insurance, and

(h) Securing the payment for the goods.

The Import and Export Policy Book and the Handbook on procedures are published by the Government of India. They provide not only the valuable information but also the specific clauses and procedures to be followed mandatorily in executing an export transaction.

(3) Overseas Market Research:

Export-oriented industries as well as other Indian exporters can get wealth of information in respect of overseas market research conducted by National Agencies (e.g., Government., ministry of commerce, export promotion councils, commodity boards, chambers of commerce, export-import bank, etc.) and International agencies (e.g. UNO, GATT, IMF Year Book, International Trade Centre, UNCTAD, World Bank, IBRD, etc.).

(4) Export Profitability and Costs:

The manufacturing firms and export-oriented units, for which the product-wise cost accounting records rules apply, have to prepare various cost statements of production and sales showing therein the full details of costs incurred and export incentives/duty drawbacks, etc. earned.

(5) Evaluation of Export Marketing Channels:

The external field of information and intelligence relating to foreign market potentials, foreign country’s political and structural changes, competitors and industry, foreign customers and sales negotiations, technology break-through, etc. coupled with cost and allied information generated within the organisation would assist the management auditor in diagnosing and evaluating the following criteria necessarily to be done for deciding on the export marketing channels.