9. Distribution Policy 1. The nature of distribution channels. 2. Channel behaviour and channel organization. 3.Channel design decisions. 4.

Channel management decisions. 5. Physical distribution decisions. Kotler Ph., Armstrong G. - Marketing an introduction, Prentice Hall, 1990 ( !"- "9# Pride $. Marketing conce%ts and strategies, &oston, Houghton Mi''lin (om%an), 1991 ( 0*9+# ,lorescu (. Marketing, &ucure-ti, 199!, ( ..- +0#

1. The nature of distribution channels. Most %roducers use middlemen to /ring their %roducts to market. 0he) tr) to 'orge a distri/ution channel. A distribution channel is the set o' 'irms and indi1iduals that take title, or assist in trans'erring title, to a good or ser1ice as it mo1es 'rom the %roducer to the consumer or industrial user. Why Are Middlemen Used? $h) do %roducers gi1e some o' the selling 2o/ to middlemen3 0his means gi1ing u% some control o1er ho4 and to 4hom %roducts are sold. 0he use o' middlemen largel) /oils do4n to their greater e''icienc) in making goods a1aila/le to target markets. 0hrough their contacts, e5%erience, s%eciali6ation, and scales o' o%eration, middlemen usuall) o''er a 'irm more than it can achie1e on its o4n. ,igure 1 sho4s one 4a) that using middlemen can %ro1ide economies. Part A sho4s three %roducers each using direct marketing to reach three customers. 0his s)stem re7uires nine di''erent contacts. Part & sho4s the three %roducers 4orking through one distri/utor, 4ho contacts the three customers. 0his s)stem re7uires onl) si5 contacts. 8n this 4a), middlemen reduce the amount o' 4ork that must /e done /) /oth %roducers and consumers. ,rom the economic s)stem9s %oint o' 1ie4, the role o' middlemen is to trans'orm the assortment o' %roducts made /) %roducers into the assortments 4anted /) consumers. Producers make narro4 assortments o' %roducts in large 7uantities. &ut consumers 4ant /road assortments o' %roducts in small 7uantities. 8n the distri/ution channels, middlemen /u) the large 7uantities o' man) %roducers and /reak them do4n into the smaller 7uantities and /roader assortments 4anted /) consumers. 0hus, middlemen %la) an im%ortant role in matching su%%l) and demand. M M M A Distribution Channel Functions A distri/ution channel mo1es goods 'rom %roducers to consumers. 8t o1ercomes the ma2or time, %lace, and %ossession ga%s that se%arate goods and ser1ices 'rom those 4ho 4ould use them. Mem/ers o' the marketing channel %er'orm man) ke) 'unctions: Researchgathering in'ormation needed 'or %lanning and aiding e5change Promotionde1elo%ing and s%reading %ersuasi1e communications a/out an o''er Contact'inding and communicating 4ith %ros%ecti1e /u)ers ( ( ( M M M B ; ( ( (

Matchingsha%ing and 'itting the o''er to the /u)er9s needs, including such acti1ities as manu'acturing, grading, assem/ling, and %ackaging Negotiationreaching an agreement on %rice and other terms o' an o''er so that o4nershi% or %ossession can /e trans'erred Physical distributiontrans%orting and storing goods Financingac7uiring and using 'unds to co1er the costs o' the channel 4ork Risk takingassuming the risks o' carr)ing out the channel 4ork

0he 'irst 'i1e 'unctions hel% to com%lete transactions< the last three hel% 'ul'ill the com%leted transactions. 0he 7uestion is not whether these 'unctions need to /e %er'ormed=the) must /e=/ut rather who is to %er'orm them. All the 'unctions ha1e three things in common=the) use u% scarce resources, the) can o'ten /e %er'ormed /etter through s%eciali6ation, and the) can /e shi'ted among channel mem/ers. 0o the e5tent that the manu'acturer %er'orms them, its costs go u% and its %rices ha1e to /e higher. At the same time, 4hen some 'unctions are shi'ted to middlemen, the %roducer9s costs and %rices are lo4er, /ut the middlemen must add a charge to co1er their 4ork. 8n di1iding u% the 4ork o' the channel, the 1arious 'unctions should /e assigned to the channel mem/ers 4ho can %er'orm them most e''icientl) and e''ecti1el) to %ro1ide satis'actor) assortments o' goods to target consumers. Number of Channel Levels ;istri/ution channels can /e descri/ed /) the num/er o' channel le1els. >ach la)er o' middlemen that %er'orms some 4ork in /ringing the %roduct and its o4nershi% closer to the 'inal /u)er is a channel level. &ecause the %roducer and the 'inal consumer /oth %er'orm some 4ork, the) are %art o' e1er) channel. $e 4ill use the number of intermediary levels to indicate the length o' a channel. ,igure ! sho4s se1eral consumer distri/ution channels o' di''erent lengths. Level 0 Manu'acturer Manu'acturer Manu'acturer Manu'acturer Manu'acturer Manu'acturer Manu'acturer Manu'acturer $holesaler $holesaler Level 1 @etailer @etailer @etailer (onsumer (onsumer (onsumer (onsumer (onsumer (onsumer (onsumer (onsumer

Level 2 Level 3 Ao//er

(hannel 1, called a direct-marketing channel, has no intermediar) le1els. 8t consists o' a manu'acturer selling directl) to consumers. ,or e5am%le, A1on and $orld &ook >nc)clo%edia sell their %roducts door-todoor< ,ranklin Mint sells collecta/les through mail order< ?inger sells its se4ing machines through its o4n stores. (hannel ! contains one middleman le1el. 8n consumer markets, this le1el is t)%icall) a retailer. ,or e5am%le, large retailers such as ?ears and K mart sell tele1isions, cameras, tires, 'urniture, ma2or a%%liances, and man) other %roducts that the) /u) directl) 'rom manu'acturers. (hannel contains t4o middleman le1els. 8n consumer markets, these le1els are t)%icall) a 4holesaler and a retailer. 0his channel is o'ten used /) small manu'acturers o' 'ood, drug, hard4are, and other %roducts. (hannel " contains three middleman le1els. 8n the meat%acking industr), 'or e5am%le, 2o//ers usuall) come /et4een 4holesalers and retailers. 0he 2o//er /u)s 'rom 4holesalers and sells to smaller retailers 4ho are not generall) ser1ed /) larger 4holesalers. ;istri/ution channels 4ith more le1els are sometimes 'ound, /ut less o'ten. ,rom the %roducer9s %oint o' 1ie4,

a greater num/er o' le1els means less control. And, o' course, the more le1els, the greater the channel9s com%le5it). ,igure sho4s some common industrial distri/ution channels. 0he industrial-goods %roducer can use its o4n sales'orce to sell directl) to industrial customers. 8t can also sell to industrial distri/utors 4ho in turn sell to industrial customers. 8t can sell through manu'acturer9s re%resentati1es or its o4n sales /ranches to industrial customers, or use them to sell through industrial distri/utors. 0hus 6ero-, one-, and t4o-le1el distri/ution channels are common in industrial goods markets.

Manu'acturer Manu'acturer Manu'acturer Manu'acturer Manu'acturer Manu'acturer Manu'acturer Manu'acturer

Manu'acturerBs re%re6entati1e Manu'acturerBs sales /ranch

Level 0 Level 1 8ndustrial

distri/utor 8ndustrial

8ndustrial 8ndustrial (ustomer (ustomer 8ndustrial 8ndustrial (ustomer (ustomer 8ndustrial 8ndustrial (ustomer (ustomer 8ndustrial 8ndustrial (ustomer (ustomer

Level 2 distri/utor Level 3 distri/utor

8ndustrial

All the institutions in the channel are connected /) se1eral t)%es o' flows. 0hese include the physical flow o' %roducts, the flow of ownership payment flow information flow and promotion flow. 0hese 'lo4s can make e1en channels 4ith onl) one or a 'e4 le1els 1er) com%le5. . !hannel behaviour and channel organi"ation. ;istri/ution channels are more than sim%le collections o' 'irms tied together /) 1arious 'lo4s. 0he) are com%le5 /eha1ioural s)stems in 4hich %eo%le and com%anies interact to accom%lish indi1idual, com%an), and channel goals, ?ome channel s)stems consist o' onl) in'ormal interactions among loosel) organi6ed 'irms< others consist o' 'ormal interactions guided /) strong organi6ational structures. And channel s)stems do not stand still=ne4 t)%es o' middlemen sur'ace and 4hole ne4 channel s)stems e1ol1e. Here 4e 4ill look at channel /eha1iour and at ho4 mem/ers organi6e to do the 4ork o' the channel. Channel Behavior A distri/ution channel is made u% o' dissimilar 'irms that ha1e /anded together 'or their common good. >ach channel mem/er is de%endent on the others, A ,ord dealer de%ends on the ,ord Motor (om%an) to design cars that meet consumer needs. 8n turn, ,ord de%ends on the dealer to attract consumers, %ersuade them to /u) ,ord cars, and ser1ice cars a'ter the sale. 0he ,ord dealer also de%ends on other dealers to %ro1ide good sales and ser1ice that 4ill u%hold the re%utation o' ,ord and its dealer /od). 8n 'act, the success o' indi1idual ,ord dealers 4ill de%end on ho4 4ell the entire ,ord distri/ution channel com%etes 4ith the channels o' other auto manu'acturers. >ach channel mem/er %la)s a role in the channel and s%eciali6es in %er'orming one or more 'unctions. ,or e5am%le, 8&M9s role is to %roduce %ersonal com%uters that consumers 4ill like and to create demand through national ad1ertising. (om%uterland9s role is to dis%la) these com%uters in con1enient locations, ans4er /u)ers9 7uestions, close sales, and %ro1ide ser1ice, 0he channel 4ill /e most e''ecti1e 4hen each mem/er is assigned the tasks it can do /est.

8deall), /ecause the success o' indi1idual channel mem/ers de%ends on o1erall channel success, all channel 'irms should 4ork together smoothl). 0he) should understand and acce%t their roles, coordinate their goals and acti1ities, and coo%erate to attain o1erall channel goals. &) coo%erating, the) can more e''ecti1el) sense, ser1e, and satis') the target market. &ut indi1idual channel mem/ers rarel) take such a /road 1ie4. 0he) are usuall) more concerned 4ith their o4n short-run goals and their dealings 4ith those 'irms closest to them in the channel. (oo%erating to achie1e o1erall channel goals sometimes means gi1ing u% indi1idual com%an) goals. Although channel mem/ers are de%endent on one another, the) o'ten act alone in their o4n short-run /est interests. 0he) o'ten disagree on the roles each should %la)=on 4ho should do 4hat and 'or 4hat re4ards. ?uch disagreements o1er goals and roles generate channel conflict. !ori"ontal conflict is con'lict /et4een 'irms at the same le1el o' the channel. ?ome ,ord dealers in (hicago com%lain a/out other dealers in the cit) stealing sales 'rom them /) /eing too aggressi1e in their %ricing and ad1ertising or /) selling outside their assigned territories. ?ome Pi66a 8nn 'ranchisees com%lain a/out other Pi66a 8nn 'ranchisees cheating on ingredients, gi1ing %oor ser1ice, and hurting the o1erall Pi66a 8nn image. #ertical conflict is e1en more common and re'ers to con'licts /et4een di''erent le1els o' the same channel. ,or e5am%le. General Motors came into con'lict 4ith its dealers some )ears ago /) tr)ing to en'orce %olicies on ser1ice, %ricing, and ad1ertising. And (oca-(ola came into con'lict 4ith some o' its /ottlers 4ho agreed to /ottle ;r Pe%%er. A large chain sa4 com%an) caused con'lict 4hen it decided to /)%ass its 4holesale distri/utors and sell directl) to large retailers such as A. (. Penne) and K mart, 4hich then com%eted directl) 4ith its smaller retailers. ?ome con'lict in the channel takes the 'orm o' health) com%etition. 0his com%etition can /e good 'or the channel=4ithout it, the channel could /ecome %assi1e and noninno1ati1e. &ut sometimes, con'lict can damage the channel. ,or the channel as a 4hole to %er'orm 4ell, each channel mem/er9s role must /e s%eci'ied and channel con'lict must /e managed. (oo%eration, assigning roles, and con'lict management in the channel are attained through strong channel leadershi%. 0he channel 4ill %er'orm /etter i' it contains a 'irm, agenc), or mechanism that has the %o4er to assign roles and manage con'lict. 8n a large com%an), the 'ormal organi6ation structure assigns roles and %ro1ides needed leadershi%. &ut in a distri/ution channel made u% o' inde%endent 'irms, leadershi% and %o4er are not 'ormall) set. 0raditionall), distri/ution channels ha1e lacked the leadershi% needed to assign roles and manage con'lict. 8n recent )ears, ho4e1er, ne4 t)%es o' channel organi6ations ha1e a%%eared that %ro1ide stronger leadershi% and im%ro1ed %er'ormance. $e 4ill no4 look at these organi6ations. Channel Organization Historicall), distri/ution channels ha1e /een loose collections o' inde%endent com%anies, each sho4ing little concern 'or o1erall channel %er'ormance. 0hese conventional distribution channels ha1e lacked strong leadershi% and ha1e /een trou/led /) damaging con'lict and %oor %er'ormance. #ro$th of %ertical &arketing 'ystems Cne o' the /iggest recent channel de1elo%ments has /een the vertical marketing systems that ha1e emerged to challenge con1entional marketing channels. ,igure- " contrasts the t4o t)%es o' channel arrangements.
Conventional marketing channel

Manu'acturer Manu'acturer

$holesaler

@etailer

(onsumer (onsumer

@etailer
Vertical marketing system

$holesaler Manu'acturer

(onsumer (onsumer

A conventional distribution channel consists o' one or more inde%endent %roducers, 4holesalers, and retailers. >ach is a se%arate /usiness seeking to ma5imi6e its o4n %ro'its, e1en at the e5%ense o' %ro'its 'or the s)stem as a 4hole. Do channel mem/er has much control o1er the other mem/ers, and there are no 'ormal means 'or assigning roles and resol1ing channel con'lict. &) contrast, a vertical marketing system (EM?# consists o' %roducers, 4holesalers, and retailers acting as a uni'ied s)stem. >ither one channel mem/er o4ns the others, has contracts 4ith them, or 4ields so much %o4er that the) all coo%erate. 0he 1ertical marketing s)stem can /e dominated /) the %roducer, 4holesaler, or retailer. EM?s came into /eing to control channel /eha1ior and manage channel con'lict. 0he) achie1e economies through si6e, /argaining %o4er, and elimination o' du%licated ser1ices. EM?s ha1e /ecome dominant in consumer marketing, ser1ing as much as *" %ercent o' the total market. $e 4ill e5amine three ma2or t)%es o' EM?s sho4n in ,igure-.. >ach t)%e uses a di''erent means 'or setting u% leadershi% and %o4er in the channel. 8n a corporate #M$ coordination and con'lict management are attained through common o4nershi% at di''erent le1els o' the channel. 8n a contractual #M$ the) are attained through contractual agreements among channel mem/ers. 8n an administered #M$ leadershi% is assumed /) one or a 'e4 dominant channel mem/ers. 1. Corporate !". A cor(orate %&' com/ines successi1e stages o' %roduction and distri/ution under single o4nershi%. ,or e5am%le, ?ears o/tains o1er .0 %ercent o' its goods 'rom com%anies that it %artl) or 4holl) o4ns. ?her4in-$illiams makes %aint /ut also o4ns and o%erates t4o thousand retail outlets, Giant ,ood ?tores o%erates an ice-making 'acilit), a so't-drink /ottling o%eration, an ice cream making %lant, and a /aker) that su%%lies Giant stores 4ith e1er)thing 'rom /agels to /irthda) cakes. 8n such cor%orate s)stems, coo%eration and con'lict management are handled through regular organi6ational channels.

2. Contractual !". A contractual %&' consists o' inde%endent 'irms at di''erent le1els o' %roduction and distri/ution 4ho 2oin together through contracts to o/tain more economies or sales im%act than the) could achie1e alone. (ontractual EM?s ha1e e5%anded ra%idl) in recent )ears. 0here are three t)%es o' contractual EM?s. )holesaler-s(onsored voluntary chains are s)stems in 4hich 4holesalers organi6e 1oluntar) chains o' inde%endent retailers to hel% them com%ete 4ith large chain organi6ations. 0he 4holesaler de1elo%s a %rogram in 4hich inde%endent retailers standardi6e their selling %ractices and achie1e /u)ing economies that let the grou% com%ete e''ecti1el) 4ith chain organi6ations. >5am%les include the 8nde%endent Grocers Alliance (8GA#, $estern Auto, and ?entr) Hard4ares.

*etailer coo(eratives are s)stems in 4hich retailers organi6e a ne4, 2ointl) o4ned /usiness to carr) on 4holesaling and %ossi/l) %roduction. Mem/ers /u) most o' their goods through the retailer co-o% and %lan their ad1ertising 2ointl). Pro'its are %assed /ack to mem/ers in %ro%ortion to their %urchases. Don-mem/er retailers ma) also /u) through the co-o% /ut do not share in the %ro'its. >5am%les include (erti'ied Grocers, Associated Grocers, and 0rue Ealue Hard4are. 8n franchise organi"ations, a channel mem/er called a franchiser links se1eral stages in the %roduction-distri/ution %rocess. ,ranchising has /een the 'astest-gro4ing retailing 'orm in recent )ears. ,ranchised /usinesses no4 account 'or a/out one-third o' retail sales in the F.?. Almost e1er) kind o' /usiness has /een 'ranchised= 'rom motels and 'ast-'ood restaurants to dentists and dating ser1ices, 'rom 4edding consultants and maid ser1ices to 'uneral homes and tu/ and tile re'inishers. Although the /asic idea is an old one, some 'orms o' 'ranchising are 7uite ne4. 0here are three 'orms o' 'ranchises. 0he 'irst 'orm is the manufacturer%sponsored retailer franchise system as 'ound in the automo/ile industr). ,ord, 'or e5am%le, licenses dealers to sell its cars=the dealers are inde%endent /usiness%eo%le 4ho agree to meet 1arious conditions o' sales and ser1ice. 0he second t)%e o' 'ranchise is the manufacturer%sponsored wholesaler franchise system as 'ound in the so't-drink industr). (oca-(ola, 'or e5am%le, licenses /ottlers (4holesalers# in 1arious markets 4ho /u) its s)ru% concentrate and then car/onate, /ottle, and sell the 'inished %roduct to retailers in local markets. 0he third 'ranchise 'orm is the service firm%sponsored retailer franchise system. Here, a ser1ice 'irm licenses a s)stem o' retailers to /ring its ser1ice to consumers. >5am%les are 'ound in the auto rental /usiness (Hert6, A1is#, 'ast-'ood ser1ice /usiness (Mc;onald9s, &urger King#, and motel /usiness (Holida) 8nn, @amada 8nn#. 0he 'act that most consumers cannot tell the di''erence /et4een contractual and cor%orate EM?s sho4s ho4 success'ul contractual organi6ations ha1e /een in com%eting 4ith cor%orate chains.

3. #dministered !". An administered %&' coordinates successi1e stages o' %roduction and distri/ution =not through common o4nershi% or contractual ties /ut through the si6e and %o4er o' one o' the %arties. Manu'acturers o' a to% /rand can o/tain strong trade coo%eration and su%%ort 'rom resellers. 0hus, General >lectric, Procter G Gam/le, Kra't, and (am%/ell ?ou% can command unusual coo%eration 'rom resellers regarding dis%la)s, shel' s%ace, %romotions, and %rice %olicies. Ty(es of &iddlemen A 'irm should identi') the t)%es o' middlemen a1aila/le to carr) on its channel 4ork. ,or e5am%le, su%%ose a manu'acturer o' test e7ui%ment has de1elo%ed an audio de1ice that detects %oor mechanical connections in an) machine 4ith mo1ing %arts. (om%an) e5ecuti1es 'eel that this %roduct 4ould ha1e a market in all industries 4here electric, com/ustion, or steam engines are made or used. 0his market 4ould include such industries as a1iation, automo/ile, railroad, 'ood canning, construction, and oil. 0he com%an)9s current sales'orce is small, and the %ro/lem is ho4 /est to reach these di''erent industries. 0he 'ollo4ing channel alternati1es might emerge 'rom management discussion: Company salesforce. >5%and the com%an)9s direct sales'orce. Assign sales%eo%le to territories and ha1e them contact all %ros%ects in the area. Cr de1elo% se%arate com%an) sales'orces 'or di''erent industries. Manufacturer&s agency. Hire manu'acturer9s agencies=inde%endent 'irms 4hose sales'orces handle related %roducts 'rom man) com%anies=in di''erent regions or industries to sell the ne4 test e7ui%ment. 'ndustrial distributors. ,ind distri/utors in the di''erent regions or industries 4ho 4ill /u) and carr) the ne4 line. Gi1e them e5clusi1e distri/ution, good margins, %roduct training, and %romotional su%%ort. ?ometimes, a com%an) has to de1elo% a channel other than the one it %re'ers /ecause o' the di''icult) or cost o' using the %re'erred channel. ?till, the decision sometimes turns out e5tremel) 4ell. ,or e5am%le, the F.?. 0ime (om%an) 'irst tried to sell its ine5%ensi1e 0ime5 4atches through regular 2e4eller) stores. &ut most 2e4eller) stores re'used to carr) them. 0he com%an) then managed to get its 4atches into massmerchandise outlets. 0his turned out to /e a 4ise decision /ecause o' the ra%id gro4th o' mass merchandising. +umber of &iddlemen (om%anies also ha1e to decide on the num/er o' middlemen to use at each le1el. 0hree strategies are a1aila/le. $ntensive %istribution. Producers o' con1enience goods and common ra4 materials t)%icall) seek intensive distribution=stocking their %roduct in as man) outlets as %ossi/le. 0hese goods must /e a1aila/le 4here and 4hen consumers 4ant them. ,or e5am%le, tooth%aste, cand), and other similar items are sold in millions o' outlets to %ro1ide ma5imum /rand e5%osure and consumer con1enience. &'clusive %istribution. &) contrast, some %roducers %ur%osel) limit the num/er o' middlemen handling their %roducts. 0he e5treme 'orm o' this %ractice is e5clusi1e distribution, 4here/) a limited num/er o' dealers are gi1en the e5clusi1e right to distri/ute the com%an)9s %roducts in their territories. >5clusi1e distri/ution is o'ten 'ound in the distri/ution o' ne4 automo/iles and %restige 4omen9s clothing. &) granting e5clusi1e distri/ution, the manu'acturer ho%es 'or stronger distri/utor selling su%%ort and more control o1er middlemen9s %rices, %romotion, credit, and ser1ices. >5clusi1e distri/ution o'ten enhances the %roduct9s image and allo4s higher mark-u%s. "elective %istribution. &et4een intensi1e and e5clusi1e distri/ution lies selecti1e distribution=the use o' more than one /ut less than all the middlemen 4ho are 4illing to carr) a com%an)9s %roducts. 0he com%an) does not ha1e to s%read its e''orts o1er man) outlets, including man) marginal ones. 8t can de1elo% a good 4orking relationshi% 4ith selected middlemen and e5%ect a /etter-than-a1erage selling e''ort. ?electi1e distri/ution lets the %roducer gain good market co1erage 4ith more control and less cost than intensi1e distri/ution. Most tele1ision, 'urniture, and small a%%liance /rands are distri/uted selecti1el).

*es(onsibilities of !hannel &embers 0he %roducer and middlemen need to agree on the terms and res%onsi/ilities o' each channel mem/er. 0he) should agree on %rice %olicies, conditions o' sale, territorial rights, and s%eci'ic ser1ices to /e %er'ormed /) each %art). 0he %roducer should set u% a list %rice and a 'air set o' discounts 'or middlemen. 8t must de'ine each middleman9s territor) and /e care'ul 4here it %laces ne4 resellers. Mutual ser1ices and duties need to /e care'ull) s%elled out, es%eciall) in 'ranchise and e5clusi1e distri/ution channels. ,or e5am%le, Mc;onald9s %ro1ides 'ranchisees %romotional su%%ort, a record-kee%ing s)stem, training, and general management assistance. 8n turn, 'ranchisees must meet com%an) standards 'or %h)sical 'acilities, coo%erate 4ith ne4 %romotion %rograms, %ro1ide re7uested in'ormation, and /u) s%eci'ied 'ood %roducts. 4 !valuating the Ma"or Channel Alternatives ?u%%ose a %roducer has identi'ied se1eral %ossi/le channels and 4ants to select the one that 4ill /est satis') the 'irm9s long-run o/2ecti1es. >ach alternati1e should /e e1aluated against economic control and adaptive criteria. Fsing economic criteria a com%an) com%ares the likel) %ro'ita/ilit) o' di''erent channel alternati1es. 8t estimates the sales that each channel 4ould %roduce and the costs o' selling di''erent 1olumes through each channel. 0he com%an) must also consider control issues. Fsing middlemen usuall) means gi1ing them some control o1er the marketing o' the %roduct, and some middlemen take more control than others. Cther things /eing e7ual, the com%an) %re'ers to kee% as much control as %ossi/le. ,inall), the com%an) must a%%l) adaptive criteria. (hannels o'ten in1ol1e long-term commitments to other 'irms, making it hard to ada%t the channel to the changing marketing en1ironment. 0he com%an) 4ants to kee% the channel as 'le5i/le as %ossi/le. 0hus, to /e considered, a channel in1ol1ing a long commitment should /e greatl) su%erior on economic or control grounds. ,. Physical distribution decisions. $e are no4 read) to look at physical distributionho4 com%anies store, handle, and mo1e goods so that the) 4ill /e a1aila/le to customers at the right time and %lace. Here, 4e 4ill consider the nature ob(ectives systems and organi"ational aspects o' %h)sical distri/ution. # Nature of $hysi%al &istribution 0he main elements o' the %h)sical distri/ution mi5 are sho4n in ,igure -*. Physical distribution in1ol1es %lanning, im%lementing, and controlling the %h)sical 'lo4 o' materials and 'inal goods 'rom %oints o' origin to %oints o' use order to meet the needs o' customers at a %ro'it. 0he ma2or %h)sical distri/ution cost is trans%ortation, 'ollo4ed /) in1entor) carr)ing, 4arehousing, and order %rocessingHcustomer ser1ice.
Management has /ecome concerned a/out the total cost o' %h)sical distri/ution, and e5%erts /elie1e that large sa1ings can /e gained in the %h)sical distri/ution area. Poor %h)sical distri/ution decisions result in high costs. >1en large com%anies sometimes make too little use o' modern decision tools 'or coordinating in1entor) le1els, trans%ortation modes, and %lant, 4arehouse, and store locations. ,or e5am%le, at least %art o' the /lame 'or ?ears9s slo4 sales gro4th and sinking earnings o1er the %ast se1eral )ears goes to its anti7uated and costl) distri/ution s)stem. Cutmoded multistor) 4arehouses and nonautomated e7ui%ment ha1e made ?ears much less e''icient than its com%etitors. ;istri/ution costs amount to + %ercent o' sales at ?ears, com%ared 4ith less than %ercent at close com%etitors K mart and $al-Mart. Moreo1er, %h)sical distri/ution is more than a cost=it is a %otent tool in demand creation. (om%anies can attract more customers /) gi1ing /etter ser1ice or lo4er %rices through /etter %h)sical distri/ution. Cn the other hand, com%anies lose customers 4hen the) 'ail to su%%l) goods on time.

Costs of physical distribution elements as a percentage of total physical distribution costs

' (he $hysi%al &istribution Ob"e%tive Man) com%anies state their o/2ecti1e as getting the right goods to the right %laces at the right time 'or the least cost. Fn'ortunatel), no %h)sical distri/ution s)stem can both ma5imi6e customer ser1ice and minimi6e distri/ution costs. Ma5imum customer ser1ice im%lies large in1entories, the /est trans%ortation, and man) 4arehouses=all o' 4hich raise distri/ution costs. Minimum distri/ution cost im%lies chea% trans%ortation, lo4 in1entories, and 'e4 4arehouses. 0he com%an) cannot sim%l) let each %h)sical distri/ution manager kee% do4n his or her costs. 0rans%ortation, 4arehousing, and order-%rocessing costs interact, o'ten in an in1erse 4a). ,or e5am%le, lo4 in1entor) le1els reduce in1entor)-carr)ing costs. &ut the) also increase costs 'rom stockouts, /ack orders, %a%er4ork, s%ecial %roduction runs, and high-cost 'ast-'reight shi%ments. &ecause %h)sical distri/ution costs and acti1ities in1ol1e strong tradeo''s, decisions must /e made on a total s)stem /asis. 0he starting %oint 'or designing the s)stem is to stud) 4hat customers 4ant and 4hat com%etitors are o''ering. (ustomers 4ant se1eral things 'rom su%%liers: on-time deli1er), su''icientl) large in1entories, a/ilit) to meet emergenc) needs, care'ul handling o' merchandise, good a'ter-sale ser1ice, and 4illingness to take /ack or re%lace de'ecti1e goods. A com%an) has to research the im%ortance o' these ser1ices to customers. ,or e5am%le, ser1ice-re%air time is 1er) im%ortant to /u)ers o' co%)ing e7ui%ment. ?o Iero5 de1elo%ed a ser1icedeli1er) standard that can J%ut a disa/led machine an)4here in the continental Fnited ?tates /ack into o%eration 4ithin three hours a'ter recei1ing the ser1ice re7uest.J Iero5 runs a ser1ice di1ision 4ith 1!,000 ser1ice and %arts %ersonnel. 0he com%an) must also look at com%etitors9 ser1ice standards in setting its o4n. 8t 4ill normall) 4ant to o''er at least the same le1el o' ser1ice as com%etitors. &ut the o/2ecti1e is to ma5imi6e %ro'its, not sales. 0he com%an) has to look at the costs o' %ro1iding higher le1els o' ser1ice. ?ome com%anies o''er less ser1ice and charge a lo4er %rice. Cther com%anies o''er more ser1ice than com%etitors and charge higher %rices to co1er higher costs. 0he com%an) must ultimatel) set %h)sical distri/ution o/2ecti1es to guide its %lanning. ,or e5am%le, (oca-(ola 4ants Jto %ut (oke 4ithin an arm9s length o' desire.J (om%anies go 'urther and de'ine standards 'or each ser1ice 'actor. Cne a%%liance manu'acturer has set the 'ollo4ing ser1ice standards: to deli1er at least 9. %ercent o' the dealer9s orders 4ithin se1en da)s o' order recei%t, to 'ill the dealer9s order 4ith 99 %ercent accurac), to ans4er dealer 7uestions on order status 4ithin three hours, and to ensure that damage to merchandise in transit does not e5ceed 1 %ercent. Gi1en a set o' o/2ecti1es, the com%an) is read) to design a %h)sical distri/ution s)stem that 4ill minimi6e the cost o' attaining these o/2ecti1es. 0he ma2or decision issues are: Ho4 should orders /e handled )order processing*+ $here should stocks /e located )warehousing*+ Ho4 much stock should /e ke%t on hand )inventory*+ And ho4 should goods /e shi%%ed )transportation*+ ) Order $ro%essing Ph)sical distri/ution /egins 4ith a customer order. 0he order de%artment %re%ares in1oices and sends them to 1arious de%artments. 8tems out o' stock are /ack-ordered. ?hi%%ed items are accom%anied /) shi%%ing and /illing documents, 4ith co%ies going to 1arious de%artments. 0he com%an) and customers /ene'it 4hen the ste%s in order %rocessing are carried out 7uickl) and accuratel). 8deall), sales%eo%le send in their orders dail), o'ten using online com%uters. 0he order de%artment 7uickl) %rocesses orders and the 4arehouse sends the goods out on time. &ills go out as soon as %ossi/le. 0he com%uter is o'ten used to s%eed u% the order-shi%%ing-/illing c)cle. ,or e5am%le, General >lectric o%erates a com%uter-/ased s)stem that, u%on recei%t o' a customer9s order, checks the customer9s credit standing and 4hether and 4here the items are in stock. 0he com%uter then issues an order to shi%, /ills the customer, u%dates the in1entor) records, sends a %roduction order 'or ne4 stock, and rela)s the message /ack to the sales%erson that the customer9s order is on its 4a)=all in less than 1. seconds. 4 Warehousing >1er) com%an) has to store its goods 4hile the) 4ait to /e sold. A storage 'unction is needed /ecause %roduction and consum%tion c)cles rarel) match. ,or e5am%le, ?na%%er, 0oro, and other la4n mo4er makers must %roduce all )ear long and store u% their %roduct 'or the hea1) s%ring and summer /u)ing season. 0he storage 'unction o1ercomes di''erences in needed 7uantities and timing.

A com%an) must decide on the /est num/er o' stocking locations. 0he more stocking locations, the more 7uickl) goods can /e deli1ered to customers. Ho4e1er, 4arehousing costs go u%. 8n making its decision a/out the num/er o' its stocking locations, the com%an) must /alance the le1el o' customer ser1ice against distri/ution costs. (om%anies ma) use either storage warehouses or distribution centres. ?torage 4arehouses store goods 'or moderate to long %eriods o' time until the) are needed. Distribution centres are designed to mo1e goods rather than 2ust store them. 0he) are large and highl) automated 4arehouses designed to recei1e goods 'rom 1arious %lants and su%%liers, take orders, 'ill them e''icientl), and deli1er goods to customers as 7uickl) as %ossi/le. ,or e5am%le, $al-Mart ?tores, a regional discount chain, o%erates 'our distri/ution centres. Cne center, 4hich ser1es the dail) needs o' 1*. $al-Mart stores, contains some !+ acres o' s%ace under a single roo'. Kaser scanners route u% to 190,000 cases o' goods %er da) along 11 miles o' con1e)or /elts, and the centreBs 1,000 4orkers load or unload 10 trucks dail). $arehousing 'acilities and e7ui%ment technolog) ha1e im%ro1ed greatl) in recent )ears. Clder multistor) 4arehouses 4ith slo4 ele1ators and outdated materials-handling methods are 'acing com%etition 'rom ne4er single-stor) automated warehouses 4ith ad1anced materials-handling s)stems under the control o' a central com%uter. 8n these 4arehouses, onl) a 'e4 em%lo)ees are necessar). 0he com%uter reads orders and directs li't trucks, electric hoists, or ro/ots to gather goods, mo1e them to loading docks, and issue in1oices. 0hese 4arehouses ha1e reduced 4orker in2uries, la/or costs, the't, and /reakage and ha1e im%ro1ed in1entor) control. * +nventory 8n1entor) le1els also a''ect customer satis'action. Marketers 4ould like their com%anies to carr) enough stock to 'ill all customer orders right a4a). Ho4e1er, it costs too much 'or a com%an) to carr) this much in1entor). 8n1entor) costs increase at an increasing rate as the customer-ser1ice le1el a%%roaches 100 %ercent. 0o 2usti') larger in1entories, management needs to kno4 4hether sales and %ro'its 4ill increase accordingl). 8n1entor) decisions in1ol1e kno4ing when to order and how much to order. 8n deciding 4hen to order, the com%an) /alances the risks o' running out o' stock against the costs o' carr)ing too much. 8n deciding ho4 much to order, the com%an) needs to /alance order-%rocessing costs against in1entor)-carr)ing costs. Karger a1erage-order si6e means 'e4er orders and lo4er order %rocessing costs, /ut it also means larger in1entor)-carr)ing costs. , (rans-ortation Marketers need to take an interest in their com%an)9s transportation decisions. 0he choice o' trans%ortation carriers a''ects the %ricing o' the %roducts, deli1er) %er'ormance, and condition o' the goods 4hen the) arri1e=all o' 4hich 4ill a''ect customer satis'action. 8n shi%%ing goods to its 4arehouses, dealers, and customers, the com%an) can choose among 'i1e trans%ortation modes: rail, truck, 4ater, %i%eline, and air. *ailroads are one o' the most cost-e''ecti1e modes 'or shi%%ing large amounts o' /ulk %roducts=coal, sand, minerals, 'arm and 'orest %roducts=o1er long distances. 8n addition, railroads ha1e recentl) /egun to increase their customer ser1ices. 0he) ha1e designed ne4 e7ui%ment to handle s%ecial categories o' goods, %ro1ided 'latcars 'or carr)ing truck trailers /) rail (%igg)/ack#, and %ro1ided such in-transit ser1ices as the di1ersion o' shi%%ed goods to other destinations en route and the %rocessing o' goods en route.

Trucks account 'or the largest %ortion o' trans%ortation within cities as o%%osed to between cities. 0he) are highl) 'le5i/le in their routing and time schedules. 0he) can mo1e goods door to door, sa1ing shi%%ers the need to trans'er goods 'rom truck to rail and /ack again at a loss o' time and risk o' the't or damage. 0rucks are e''icient 'or short hauls o' high-1alue merchandise. 8n man) cases, their rates are com%etiti1e 4ith rail4a) rates, and trucks can usuall) o''er 'aster ser1ice. 0he cost o' $ater trans%ortation is 1er) lo4 'or shi%%ing /ulk), lo4-1alue, non%erisha/le %roducts such as sand, coal, grain, oil, and metallic ores. Cn the other hand, 4ater trans%ortation is the slo4est trans%ortation mode and is sometimes a''ected /) the 4eather. Pi(elines are a s%eciali6ed means o' shi%%ing %etroleum, natural gas, and chemicals 'rom sources to markets. Pi%eline shi%ment o' %etroleum %roducts costs less than rail shi%ment /ut more than 4ater shi%ment. Most %i%elines are used /) their o4ners to shi% their o4n %roducts. Although air carriers trans%ort a small %ercent o' the nation9s goods, the) are /ecoming more im%ortant as a trans%ortation mode. Air 'reight rates are much higher than rail or truck rates, /ut air 'reight is ideal 4hen s%eed is needed or distant markets ha1e to /e reached. Among the most 're7uentl) air-'reighted %roducts are %erisha/les ('resh 'ish, cut 'lo4ers# and high-1alue, lo4-/ulk items (technical instruments, 2e4elr)#. (om%anies 'ind that air 'reight reduces in1entor) le1els, 4arehouse num/ers, and %ackaging costs. . Choosing (rans-ortation Modes 8n choosing a trans%ortation mode 'or a %roduct, shi%%ers consider as man) as 'i1e criteria. 0a/le - 1 ranks the 1arious modes on these criteria. 0hus, i' a shi%%er needs s%eed, air and truck are the %rime choices. 8' the goal is lo4 cost, then 4ater and %i%eline might /e /est. 0rucks a%%ear to o''er the most ad1antages=a 'act that e5%lains their gro4ing share o' the trans%ortation market. TAB-. - 1 *ankings of Trans(ortation &odes /1 ( 0ighest *ank1 Transportation Mode Rail Truck Water Pipeline Air Speed (door to-door delivery time) 3 4 2 5 1 Dependability (meeting schedules on time) 4 5 2 1 3 Capability (ability Availability (No of to handle various geographic points products) served) 2 1 3 5 4 2 4 1 5 3 Cost (per ton - mile) 3 1 4 2 5

0hanks to containeri"ation shi%%ers are increasingl) com/ining t4o or more modes o' trans%ortation. !ontaineri"ation consists o' %utting goods in /o5es or trailers that are eas) to trans'er /et4een t4o trans%ortation modes. Piggyback descri/es the use o' rail and trucks< fishyback 4ater and trucks< trainship 4ater and rail< and airtruck air and trucks. >ach com/ination o''ers ad1antages to the shi%%er. ,or e5am%le, %igg)/ack not onl) is chea%er than trucking alone /ut also %ro1ides 'le5i/ilit) and con1enience. / Organizational 0es-onsibility for $hysi%al &istribution $e see that decisions on 4arehousing, in1entor), and trans%ortation re7uire much coordination. A gro4ing num/er o' com%anies ha1e set u% %ermanent committees made u% o' managers res%onsi/le 'or di''erent %h)sical distri/ution acti1ities. 0hese committees meet o'ten to set %olicies 'or im%ro1ing o1erall distri/ution e''icienc). ?ome com%anies e1en ha1e a 1ice-%resident o' %h)sical distri/ution 4ho re%orts to the marketing 1ice-%resident, the manu'acturing 1ice-%resident, or e1en the %resident. 0he location o' the %h)sical distri/ution de%artment 4ithin the com%an) is a secondar) concern. 0he im%ortant thing is that the com%an) coordinate its %h)sical distri/ution and marketing acti1ities in order to create high market satis'action at a reasona/le cost.