Retailing,wholesaling and physical distribution, Channels of distribution

Retailing


Commercial transaction in which a buyer intends to consume the good or 
service through personal, family, or household use.


Wholesale


Wholesale is the sale of goods, usually in quantity, for the purpose of resale to consumers. 

Wholesale is distinguished from retail, which is the direct sale of goods to the consumer. Thus 

wholesale banking is providing banking services to other financial institutions, rather than to 

individuals. Because the wholesale price to other companies excludes the retail markup, 

governments find it worthwhile to measure the increase in prices at the wholesale level as well 

as the retail level. In the US, the Producers Price Index (which until 1978 was called the 

Wholesale Price Index) is used to measure wholesale inflation. Notably, wholesale operations in 

many industries have been squeezed, as new technologies tend to eliminate links in the 

distribution chain. For example, the Internet can enable manufacturers to bypass the wholesale 

sector entirely and market directly to the consumer.

Physical Distribution


Handling, movement, and storage of goods from the point of origin to the point of consumption 
or use, via various channels of distribution. See also business logistics.


Channels of Distribution



Channels of distribution move products and services from businesses to consumers and to 
other businesses. Also known as marketing channels, channels of distribution consist of a set of 
interdependent organizations involved in making a product or service available for use or 
consumption. Channel members are assigned a set of distribution tasks by those responsible 
for channel management.
For many products and services, their manufacturers or providers use multiple channels of 
distribution. Personal computers, for example, might be bought directly from the manufacturer
—over the telephone, via direct mail, or through the company's web site on the Internet —or 
through several kinds of retailers, including independent computer stores, franchised computer 
stores, and department stores. In addition, large and small businesses may make their 
purchases through other outlets.
Channel structures range from two to five levels. The simplest is a two-level structure in which 
goods and services move directly from the manufacturer or provider to the consumer. Two-level 
structures occur in some industries where consumers are able to order products directly from 
the manufacturer and the manufacturer fulfills those orders through its own physical distribution 
system.
In a three-level channel structure retailers serve as intermediaries between consumers and 
manufacturers. Retailers order products directly from the manufacturer, then sell those products 
directly to the consumer. A fourth level is added when manufacturers sell to wholesalers rather 
than to retailers. In a four-level structure retailers order goods from wholesalers rather than 
manufacturers. Finally, a manufacturer's agent can serve as an intermediary between the 
manufacturer and its wholesalers, making a five-level channel structure consisting of the 
manufacturer, agent, wholesale, retail, and consumer levels. A five-level channel structure might 
also consist of the manufacturer, wholesale, jobber, retail, and consumer levels, whereby 
jobbers service smaller retailers not covered by the large wholesalers in the industry.

BENEFITS OF INTERMEDIARIES IN
CHANNELS OF DISTRIBUTION

If selling from the manufacturer to the consumer were always the most efficient way, there would 
be no need for channels of distribution. Intermediaries, however, provide several benefits to both 
manufacturers and consumers: improved efficiency, a better assortment of products, 
reutilization of transactions, and easier searching for goods as well as customers.
The improved efficiency that results from adding intermediaries in the channels of distribution 
can easily be grasped with the help of a few examples. In the first example there are 5 
manufacturers and 20 retailers. If each manufacturer sells directly to each retailer, there are 100 
contact lines—one line from each manufacturer to each retailer. The complexity of this 
distribution arrangement can be reduced by adding wholesalers as intermediaries between 
manufacturers and retailers. If a single wholesaler serves as the intermediary, the number of 
contacts is reduced from 100 to 25—5 contact lines between the manufacturers and the 
wholesaler, and 20 contact lines between the wholesaler and the retailers. Reducing the number 
of necessary contacts brings more efficiency into the distribution system by eliminating duplicate 
efforts in ordering, processing, shipping, etc.
In terms of efficiency there is an effect of diminishing returns as more intermediaries are added 
to the channels of distribution. If, in the example above, there were 3 wholesalers instead of only 
1, the number of essential contacts increases to 75: 15 contacts between 5 manufacturers and 
three wholesalers, plus 60 contacts between 3 wholesalers and 20 retailers. Of course this 
example assumes that each retailer would order from each wholesaler and that each 
manufacturer would supply each wholesaler. In fact geographic and other constraints might 
eliminate some lines of contact, making the channels of distribution more efficient.
Intermediaries provide a second benefit by bridging the gap between the assortment of goods 
and services generated by producers and those in demand from consumers. Manufacturers 
typically produce many similar products, while consumers want small quantities of many different 
products. In order to smooth the flow of goods and services, intermediaries perform such 
functions as sorting, accumulation, allocation, and creating assortments. In sorting, 
intermediaries take a supply of different items and sort them into similar groupings, as 
exemplified by graded agricultural products. Accumulation means that intermediaries bring 
together items from a number of different sources to create a larger supply for their customers. 
Intermediaries allocate products by breaking down a homogeneous supply into smaller units for 
resale. Finally, they build up an assortment of products to give their customers a wider selection.
A third benefit provided by intermediaries is that they help reduce the cost of distribution by 
making transactions routine. Exchange relationships can be standardized in terms of lot size, 
frequency of delivery and payment, and communications. Seller and buyer no longer have to 
bargain over every transaction. As transactions become more routine, the costs associated with 
those transactions are reduced.
The use of intermediaries also aids the search processes of both buyers and sellers. Producers 
are searching to determine their customers' needs, while customers are searching for certain 
products and services. A degree of uncertainty in both search processes can be reduced by 
using channels of distribution. For example, consumers are more likely to find what they are 
looking for when they shop at wholesale or retail institutions organized by separate lines of 
trade, such as grocery, hardware, and clothing stores. In addition producers can make some of 
their commonly used products more widely available by placing them in many different retail 
outlets, so that consumers are more likely to find them at the right time.


WHAT FLOWS THROUGH THE
CHANNELS OF DISTRIBUTION

Members of channels of distribution typically buy, sell, and transfer title to goods. There are, 
however, many other flows between channel members in addition to physical possession and 
ownership of goods. These include promotion flows, negotiation flows, financing, assuming risk, 
ordering, and payment. In some cases the flow is in one direction, from the manufacturer to the 
consumer. Physical possession, ownership, and promotion flow in one direction through the 
channels of distribution from the manufacturer to the consumer. In other cases there is a two-way 
flow. Negotiations, financing, and the assumption of risk flow in both directions between the 
manufacturer and the consumer. Ordering and payment are channel flows that go in one 
direction, from the consumer to the manufacturer.
There are also a number of support functions that help channel members perform their 
distribution tasks. Transportation, storage, insurance, financing, and advertising are tasks that 
can be performed by facilitating agencies that may or may not be considered part of the 
marketing channel. From a channel management point of view, it may be more effective to 
consider only those institutions and agencies that are involved in the transfer of title as channel 
members. The other agencies involved in supporting tasks can then be described as an 
ancillary or support structure. The rationale for separating these two types of organizations is 
that they each require different types of management decisions and have different levels of 
involvement in channel membership.
Effective management of the channels of distribution involves forging better relationships among 
channel members. With respect to the task of distribution, all of the channel members are 
interdependent. Relationships between channel members can be influenced by how the 
channels are structured. Improved performance of the overall distribution system is achieved 
through managing such variables as channel structure and channel flows.

BENEFITS OF SUPPLY CHAIN
MANAGEMENT

Supply chain management is concerned with managing the flow of physical goods and 
associated information from initial sourcing to consumption. One benchmarking study showed 
that best-practice supply chain management companies enjoyed a 45 percent total supply chain 
cost advantage over their median competitors. Bottom-line benefits included: I) reduced costs 
relating to inventory management, transportation, and warehousing; 2) improved service using 
techniques such as time-based delivery; and 3) enhanced revenues through greater product 
availability and more customized products.
Some companies contract out the task of supply chain management to a specialized service 
firm. The supply chain management firm typically provides vertical market expertise, transaction 
processing capabilities, and business consulting services, allowing the company to focus on its 
core competencies. In addition to reducing costs, effective supply chain management can result 
in enhanced supplier relations and greater customer satisfaction through timely deliveries and 
accurate responses to customer inquiries.


TREND TOWARD CONSOLIDATION OF
DISTRIBUTION CHANNELS

In some industries there has been a noticeable trend toward consolidation of distribution 
channels. Through mergers and acquisitions some companies have achieved ownership of 
two or more channels of distribution, as when a distributor or wholesaler acquires a retailer. As 
a result of this type of consolidation, channel members who are closest to the consumer, such as 
retailers, have acquired more control. Historically, it was the manufacturer who invented and 
controlled the channels of distribution. Now, end-user dominated channels are replacing those 
invented and controlled by the manufacturer. One example has been the explosion of discount 
outlet malls, which obtain high-image products directly from manufacturers and sell them at a 
discount.
Manufacturers have countered that trend by opening historically closed channels of distribution. 
That has made the lines of distinction between manufacturers, retailers, and direct-to-consumer 
sellers less clear. Manufacturers such as Apple Computer and Nike have opened their own 
retail outlets, thus blurring the line that once separated manufacturers from retailers. The 
distinction between retailers and direct-to-consumer sellers, or catalogers, has also become 
blurred as companies such as Eddie Bauer, Spiegel, and Victoria's Secret build one brand 
across both channels. In addition, some catalog companies such as J. Crew and Lands' End 
have opened retail outlets. The overall result is that there are new channel options for marketers 
to consider.