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» Channel Management
This is a research report on
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1616 views, 0 comments, Last Update: Apr 10, 2012.
P.D.LIONS COLLEGE OF COMMERCE AND ECONOMICS
S. Y. BMS - A NEERJA MAM
CHANNELS OF DISTRIBUTION
Group No. : 4
05. 28. 33. 34. 41. 57.
Puja Awasthi Trishna Goswami Ajay Jain Ankita Jain Aakash Kakkad Ruchi Mehta
We are very happy to present this project. We express our profound gratitude and sincere thanks to everybody who by their direct or indirect contact have helped us in converting our thoughts into reality. First and foremost we are extremely thankful to PROF.NEERJA for full fledge cooperation and imparting the necessary technical knowledge which led to success of our project. We also thank SY.B.M.S STUDENTS for assistance without which we would have faced many difficulties. We would like to thank our beloved colleagues for supporting us in the fabrication of project and their moral support in the course of project. We extend our sincere thanks to our peer group who worked along with us to make our project successful.
o Meanings And Definition Of Channel Distribution o Functions And Services Of Marketing channels o Types Of Distribution Channels o Marketing Channels To Consumer Goods o Intensity Distribution o Channel Conflict o Managing channel Conflict
Meaning of Channels of Distribution:
The main purpose of trade is to supply goods to the consumers living in far off places. As goods and services move from producer to consumer they may have to pass through various individuals. Let us take an example. A farmer in Srinagar has an apple orchard. Once the apples are ripened he sells the apples to an agent of Delhi. The agent collects the apples from Srinagar, packs them, and sells them to a wholesaler at New Delhi sabzimandi. The wholesaler then distributes them to various retail fruit vendors throughout Delhi by selling smaller quantities. Finally, we purchase apples from those vendors as per our requirement. Thus, we find that while coming from the producer at Srinagar, the product reaches the consumers by passing through several hands like an agent, a wholesaler and a retailer. All these three are called middlemen. These middlemen are connecting links between producers of goods, on one side and consumers, on the other. They perform several functions such as buying, selling, storage, etc. These middlemen constitute the channels of distribution of goods. Thus, a channel of distribution is the route or path along which goods move from producers to ultimate consumers. The route taken by goods as they move from producer to consumer is known as “Channel of Distribution”.
Definitions of Channel of Distribution:
According to RICHARD M. CLEWETT, “A channel is a pipeline through which a product flows on its way to the consumer. The manufacturer puts his products into the pipeline or marketing channel and various marketing people move it along to the consumer at the other end of channel.” According to WILLIAM STENTON, “A Channel of distribution (Sometimes called a trade channel) for a product is the route taken by the title to the product as it moves from the producer to the ultimate consumer or individual consumer.”
Functions and services of marketing channels:
1. Facilitate the movement of goods: Marketing channel help to move goods from one place to the other. They naturally add place utility. They also bring transfer ownership of goods. 2. Ready supply to consumers: marketing channels bring goods to consumers when they need them. Goods are made available throughout the year due to marketing channels and consumer purchase them as per their requirements. 3. Promote large-scale distribution of goods: Marketing channels bring widespread distribution of goods and thereby bring expansion of trade. The channels are useful even for taking the goods to remote areas. 4. Facilitates economical distribution: Marketing channels bring distribution of goods in a quick and economical manner. The distributive channels are useful for reducing the selling costs. A manufacturer need not create his own marketing system by investing his fund due to the availability of marketing network. 5. Create utilities: marketing channels create time, Place and possession utilities. 6. Risk Taking: The intermediaries in the marketing channels undertake the risk in the marketing of goods. They place large orders and shoulder the risk and responsibility of selling to consumer. 7. Facilitate introduction of new products: Marketing channels are useful for the introduction of new products or varieties of existing products in market by the manufacturers. They can introduce the new product by placing its existing channel in use. 8. Perform miscellaneous marketing functions: Marketing channels perform various marketing functions. They provide a dependable and efficient distribution system. Marketing channels also act as a line of communication in a distributive system. Marketing channels also act as a line of communication in the distributive system. Even information about consumer needs, expectation, reactions, etc. are available to the manufacturer through marketing channels. They ensure regular supply of goods to consumer and bring price stability.
Types of Distribution Channels:
Normally goods and services pass through several hands before they come to the hands of the consumer for use. But in some cases producers sell goods and services directly to the consumers without involving any middlemen in between them, which can be called as direct channel. So there are two types of channels, one direct channel and the other, indirect channel.
In this channel, producers sell their goods and services directly to the consumers. There is no middleman present between the producers and consumers. The producers may sell directly to consumers through door-to-door salesmen and through their own retail stores. For example, Bata India Ltd, HPCL, Liberty Shoes Limited has their own retail shops to sell their products to consumers. For certain service organizations consumers avail the service directly. Banks, consultancy firms, telephone companies, passenger and freight transport services, etc. are examples of direct channel of distribution of service.
(ii) Indirect Channel
If the producer is producing goods on a large scale, it may not be possible for him to sell goods directly to consumers. As such, he sells goods through middlemen. These middlemen may be wholesalers or retailers. A wholesaler is a person who buys goods in large quantities from producers; where as a retailer is one who buys goods from wholesalers and producers and sells to ultimate consumers as per their requirement. The involvement of various middlemen in the process of distribution constitute the indirect channel of distribution.
Marketing Channels to Consumer Goods:
1. Producer direct
This is the shortest marketing channel as there is no middleman. It is a direct channel. It is an example of simple, direct and economical channel. It is zero level channels. In this case, the goods are directly supplied to consumer either establishing mail order house or through travelling salesmen or through retail shop. The order method is to appoint a large number of salesmen for canvassing and sales promotion. These salesmen are usually paid commission on the basis of their sales. Small manufacturers sell their production in local market directly. In villages, village artisans sell goods directly to local people. Small business establishment like bakeries, dairies and sweetmeat stalls use this direct marketing channel. This direct channel is not convenient for a wide market. In big cities of our country, goods like cold drinks and chocolates are sold through automatic machines. Machines are installed at convenient places and the buyer has to insert coins in the machine and collect the required commodity. Neither salesmen nor dealers are required to push the sales. Industrial goods may be sold directly to industrial buyers.
This marketing channel is shorter with only one middleman i.e. Retailer. Here, the goods move directly from manufacturer to retailer & finally to consumer. The manufacturer keeps close contact with retailers and supplies them good regularly for distribution to consumers. He maintains huge sales organization for supplying goods regularly to retailers. Sometimes, large scale retailers (departmental stores/chain shops) keep direct contact with manufacturer and purchase goods for distribution to consumer. Manufacturer and retailers finds this shorter channel convenient and economical. It is used for the distribution of consumer goods and durable products here, the wholesalers are by-passed and naturally their functions are undertaken by manufacturer.
• This channel is suitable for the distribution of consumer items like clothing, shoes and food items. It is suitable for the distribution of durable products such as machinery, automobiles and computers.
This is one of the popular and extensively used marketing channels. It is rightly called ‘Traditional channel’ for the distribution of goods. Here, the manufacturer utilizes the services of two middlemen (Wholesale & retailers) for the distribution of goods. Manufacturer sells goods through them. The wholesalers should have close contacts with retailers. They must have adequate warehousing facility and should be able to perform marketing functions such as transporting, advertising and sales promotion. In addition, they should be able to give financial support to manufacturer in case of need. As far as possible the manufacturer should select wholesaler who do not deal in the products of his competitors.
Suitability: • This lengthy channel is suitable for large scale distribution of consumer goods like soaps, detergents and cosmetics. Hindustan Lever Ltd. And Godrej make use of this channel. Consumer goods which are durable and not subject to physical deterioration can be distributed through this channel. Consumer items which need strong promotional support are distributed through this channel as middlemen are useful for promoting sales.
In this lengthy marketing channel, the manufacturer appoints some dealers as sole distributors for his goods in a particular region or territory. The sole distributors accept the entire responsibility of marketing of products within his area. He is paid commission for his services. The sole distributors must have considerable marketing influence in concerned territory. They must have efficient sales organization and sufficient financial backing. The appointment of sole selling agents facilitates planned production and control over the sale of products. It also lowers overhead expenditure provide incentive to distributors and finally to consumer through wholesalers and retailers. Naturally, this channel is lengthy with three marketing middlemen.
• • It is suitable for distribution of consumer goods as well capital goods. Manufacturers of mass consumption of goods with nationwide market prefer this lengthy channel for distribution.
There are three broad options – intensive, selective and exclusive distribution:
Intensive distribution aims to provide saturation coverage of the market by using all
available outlets. For many products, total sales are directly linked to the number of outlets used (e.g. cigarettes, beer). Intensive distribution is usually required where customers have a range of acceptable brands to choose from. In other words, if one brand is not available, a customer will simply choose another.
Selective distribution involves a producer using a limited number of outlets in a
geographical area to sell products. An advantage of this approach is that the producer can choose the most appropriate or best-performing outlets and focus effort (e.g. training) on them. Selective distribution works best when consumers are prepared to “shop around” – in other words – they have a preference for a particular brand or price and will search out the outlets that supply.
Exclusive distribution is an extreme form of selective distribution in which only one
wholesaler, retailer or distributor is used in a specific geographical area.
Channel conflict occurs manufacturers (brands) disintermediate their Channel partners, such
as distributors, retailers, dealers, and sales representatives, by selling their products direct to consumers through general marketing methods and/or over the internet through eCommerce. Channel conflict can also occur when there has been over production. This results in a surplus of products in the market place. Newer versions of products, changes in trends, insolvency of wholesalers and retailers and the distribution of damages goods also affect channel conflict. In this connection, a company’s stock clearance strategy is of importance. To avoid a channel conflict in a click-and-mortar, it is of great importance that both channels are fully integrated from all points of view. Herewith, possible confusion with customers is excluded and an extra channel can create business advantages
Channel conflict is of three types:
Vertical channel conflicts: This conflict relates to different levels within the same
channels e.g., conflict between the manufacturer and distributors. Currently, the city of Mumbai is witnessing the conflict between the film producers and multiplex owners regarding the percentage commission to be shared by them.
Horizontal channel conflicts – Horizontal channel conflict takes place on the same
level of distribution. This conflict relates to difference between members at the same level within the channel e.g., dealers often overlap and interfere with sales territory assigned to the other dealer or dealer takes one skilled decision and adopts price cutting for obtaining higher sales turnover.
A classic example is the business of cellular phone. Cell phone equipment and service can be bought anywhere. Basically, horizontal conflict is a form of business competition which may occur among: a) Middlemen of the same type. b) Different types of middlemen on the same level
Multilevel channel conflicts - This conflict arises when the manufacturer uses two or
more differ channels to sell the product to same target market e.g. A manufacturer sell his product through sole selling agent and also online. If prices differ in the two channels conflict automatically takes place.
Managing Channel Conflict:
Large companies generally go for channel mix in order to increase total sales thereby creating ground conflicts. In a country like India, where rural market is growing at a rate faster than urban market, companies add channel to serve the typical needs of rural people. Some conflicts are of minor nature and they are managed easily whereas some other conflicts take serious dimension leading to litigation, termination of agreement and at times boycott of the producer’s products. The challenge before the company is not to eliminate conflict but to manage it better. The following are the main mechanisms for effective conflict management: 1. Effective Communication: Effective and regular communication between the producer and channel members can improve relations and minimize conflicts. Progressive companies organize one or two formal meeting with channel members to listen to their grievances, solve channel problems, provide platform for two-way dialogue and get the members familiarised with future plans. Some companies prepare newsletter and mail them to the dealers to keep them updated with the latest company policies and achievements.
2. Arbitration: Arbitration is a blessing in disguise. Companies discourage litigation which is cumbersome, time consuming and expensive. The best way out is to go for third party intervention which is economical and time saving. Even courts favour arbitration. An arbitration is not a judge, he’s is a friend to the conflicting parties. He does not give verdict but works out a compromise between the parties. Channel conflict is well managed by arbitrators.
3. Co-option: Some large companies co-opt channel association leaders in various advisory bodies to keep them associated with the discussion-making process. Such inclusion of dealer leaders makes them happy because they are treated as insiders.
4. Formation of dealer council: Dealer councils are representative body of the dealers who enjoy the ride to negotiate and settle the channel conflict with the producers. Some companies consider formation of dealer councils as an unwanted evil because they fear dealers will pressurise the companies with unreasonable demands. Those companies that favor formation of dealer councils get them established on regional basis. Frankly, dealer councils are considering controversial. 5.
Mediation and diplomacy: Mediation means acting as peacemaker between the
conflicting parties. It is third party intervention to arrive at a compromise. If it id agreeable to both the parties, mediation is a good option. Diplomacy takes place when each side sends one or more persons to meet with its counterpart to settle the conflicts.
Ø Marketing Management : SYBMS Text book Ø www.business.gov.in Ø www.consumerpsychologist.com Ø www.en.wikipedia.org/wiki/Channel_conflict
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