SCM Part 3 Distribution Channels AY 2025-2026 STUDENT VERSION.pptx

# Understanding distribution channels and their role in the supply chain This section explores distribution channels, their integral role and value addition within the supply chain, and the diverse functions they perform, alongside an examination of various distribution network types from a supply chain management perspective. ## 1. Understanding distribution channels and their role in the supply chain A distribution channel is defined as a chain of businesses or intermediaries through which a good or service passes until it reaches the end consumer. This chain can include wholesalers, retailers, distributors, and online platforms. Essentially, it represents the path by which products and services travel to their intended consumers, and conversely, the pathway for payments from consumers back to the vendor. These entities are often referred to as downstream partners in the supply chain, in contrast to upstream partners. The strategic choice of a distribution network significantly impacts the achievement of supply chain objectives, ranging from cost minimization to enhanced responsiveness. ### 1.1 Definition and function of distribution channels Distribution channels can vary in length and directness, depending on the number of intermediaries required to deliver a product or service to the final buyer. #### 1.1.1 Distribution intensity Distribution intensity, also known as distribution spread or numerical distribution, refers to the level of availability a company chooses for a particular product in the market. This decision is influenced by factors such as production capacity, the size of the target market, pricing and promotion strategies, and the level of product service required by the end-user. * **Formula for Numerical Distribution:** $$ \text{Numerical Distribution} = \frac{\text{# shops selling your product}}{\text{Total # shops}} $$ * **Types of Distribution Intensity:** * **Intensive Distribution:** Aims for saturation coverage by utilizing all available outlets. * **Selective Distribution:** Involves using a limited number of outlets within a geographical area. This often requires training for these outlets and focuses on preferred brands. * **Exclusive Distribution:** An extreme form of selective distribution where only one wholesaler, retailer, or distributor is permitted to sell a product in a specific geographical area, typically to maintain a high-prestige image. * **Weighted Distribution:** This metric considers the turnover of the shops selling a product relative to the total turnover of the market or category. $$ \text{Weighted Distribution} = \frac{\text{sum Turnover of shops selling your product}}{\text{sum % MS of shops present Total turnover market/category}} $$ Distribution channels are an integral part of the marketing mix, specifically the "Place" element. The costs associated with distribution channels can account for up to 40% of the selling price, and decisions regarding distribution are considered long-term strategic commitments. #### 1.1.2 Functions of distribution channels Distribution channels perform several crucial functions, broadly categorized into those that conclude a transaction and those that execute it: * **Role to Conclude Transaction:** * **Information:** Gathering and disseminating market intelligence. * **Promotion:** Developing and implementing promotional strategies. * **Contact:** Identifying and communicating with prospective buyers. * **Adaptation:** Tailoring the product offering to meet buyer needs. * **Negotiation:** Reaching an agreement on price and other terms. * **Role to Execute Transaction:** * **Physical Distribution:** Managing transport, storage, and warehousing. * **Financing:** Securing and managing funds for transactions. * **Risk Bearing:** Assuming the risks associated with holding inventory and managing the channel. ### 1.2 The added value of distribution channels Distribution channels add value by reducing the number of transactions required to get a product from the manufacturer to the end consumer. * **For Business-to-Consumer (B2C) markets:** * **Direct Distribution:** The manufacturer sells directly to consumers. * *Advantages:* Maximum control over marketing policy, retaining the full margin, potentially faster distribution. * *Disadvantages:* The manufacturer must organize and finance inventory, handle transportation, and manage after-sales service. * **Indirect Distribution:** Involves intermediaries. * *Advantages:* Outsourcing of risk, leveraging the intermediary's knowledge of the market, region, and consumers. * *Disadvantages:* Loss of control, potential increase in costs. * **For Business-to-Business (B2B) markets:** The principle of reducing transaction numbers through intermediaries like distributors also applies. ### 1.3 Behavior and organization of channels Traditionally, conventional marketing channels may lack a clear leader, leading to disagreements on objectives, tasks, financials, and profits, often resulting in conflicts and poor performance. To address this, integrated marketing systems have been developed. #### 1.3.1 Types of marketing systems * **Vertical Marketing Systems (VMS):** Involve cooperation among manufacturers, wholesalers, and retailers in a harmonious manner. One dominant member (manufacturer, wholesaler, or retailer) either owns the other partners, has a contract with them, or exerts power to ensure cooperation. VMS aims to gain control, avoid conflicts, achieve economies of scale, increase negotiation power, and improve coordination. * **Types of VMS:** * **Corporate VMS:** Combines successive stages of production and distribution under single ownership. * **Contractual VMS:** Independent firms at different levels integrate their programs through contractual agreements to achieve greater economies or sales impact. This includes wholesaler-sponsored voluntary chains, retailer cooperatives, and franchise organizations. * **Administered VMS:** Coordination is achieved through the size and power of one of the members (e.g., Kodak, Gillette, P&G). * **Franchise (a type of Contractual VMS):** A contractual agreement where a franchisor grants a franchisee the right to use its trademark, trade name, business systems, and processes in exchange for a franchise fee and ongoing royalties (often a percentage of sales revenue). * **Advantages for Franchisor:** Rapid business expansion, market coverage at lower costs, broader span of control as franchisees are self-employed. * **Advantages for Franchisee:** Being self-employed, potentially lower costs and investments, better buying conditions due to group purchasing power, immediate brand recognition, access to proven products/concepts, support in business operations and promotion. * **Disadvantages:** For the franchisor, a potential loss of control over management and uniformity. For the franchisee, deals may not always be the most favorable or could be too expensive. * **Types of Franchising:** * **Hard Franchising:** Involves stringent requirements regarding assortment, interior design, and pricing policies, aiming for uniform consumer experience. * **Soft Franchising:** Offers less strict requirements, allowing more freedom in shop interior and marketing mix, often evolving from buying groups. * **Conversion Franchise:** Existing independent businesses are converted into franchises under a well-known brand. * **Horizontal Marketing Systems (HMS):** Two or more organizations at the same level join together for marketing purposes to seize new market opportunities, achieve economies of scale, or combine resources. The "shop-in-shop" concept is an example. * **Hybrid Marketing Systems (Multichannel Distribution Systems):** A single firm utilizes two or more marketing channels to reach one or more customer segments. This can involve using different channels for the same customer segment (e.g., e-commerce and retail) or different channels for different customer segments (e.g., B2B and B2C). * *Advantages:* Increased market coverage, more customized selling, potentially lower channel costs. * *Disadvantages:* Control problems, increased channel conflicts due to competition on price and customers. ### 1.4 Steps in defining your distribution channels Defining the distribution structure is a crucial strategic decision with long-term implications. The process involves several steps: 1. **Customer Service Analysis:** Understanding customer needs is paramount. This includes analyzing the required product variety, quantity preferences, market decentralization needs (e.g., proximity of shops), waiting times for delivery, and secondary services like information and after-sales support. Customer service is the interface between marketing and logistics, aiming to deliver the right products at the right moment and cost. Key elements include pre-transactional (accessibility, terms of delivery), transactional (stock quantity, delivery time), and post-transactional (warranty, returns) aspects. 2. **Define Objectives and Restrictions:** Clearly articulate the goals and constraints for the distribution channels, considering factors like sales, promotion, assortment, bulk-breaking, warehousing, transport, financing, risk-bearing, and market information. 3. **Compare and Evaluate Alternatives:** Assess different potential distribution channel options based on criteria such as profitability, manageability (control and measurement), and flexibility. International alternatives may involve higher risks and costs. 4. **Channel Management Decision:** Select suitable distribution partners, motivate them, and then continuously evaluate and control their performance using Key Performance Indicators (KPIs) such as distribution weight, market coverage, share, turnover, growth potential, and customer satisfaction. ### 1.5 Types of distribution networks – SCM viewpoint The design of a distribution network is influenced by several factors that impact both customer service and supply chain costs. #### 1.5.1 Factors influencing distribution network design * **Customer Service:** * **Response Time:** Time taken for a customer to receive an order. * **Product Variety:** The number of different products offered. * **Product Availability:** Probability of having a product in stock when ordered. * **Customer Experience:** Ease of ordering, receiving, and customization. * **Time to Market:** Speed of bringing new products to market. * **Order Visibility:** Ability to track orders. * **Returnability:** Ease of returning unsatisfactory merchandise. * **Supply Chain Costs:** * **Inventories:** Costs associated with holding stock. * **Transportation:** Costs of moving goods. * **Facilities and Handling:** Costs related to warehouses and their operations. * **Information:** Costs of building and maintaining information infrastructure. The number of facilities in a network directly impacts response time (more facilities closer to the customer reduce response time) and transportation costs (more facilities generally increase transportation costs). Inventory costs and facility costs also tend to increase with a greater number of facilities. #### 1.5.2 Design options for a distribution network From a supply chain management perspective, there are six primary designs for a distribution network, characterized by how products are delivered and whether an intermediary is used: 1. **Manufacturer Storage with Direct Shipping:** Products are shipped directly from the manufacturer to the customer. This can be efficient for large orders but may lead to longer delivery times for smaller orders and requires the manufacturer to handle customer service. 2. **Manufacturer Storage with Direct Shipping and In-Transit Merge:** Similar to the first, but with a consolidation point for shipments from multiple manufacturers before delivery to the customer. This is useful for customers ordering from various suppliers. 3. **Distributor Storage with Carrier Delivery:** Distributors hold inventory and deliver products to customers using common carriers. This offers a balance of inventory and transportation benefits. 4. **Distributor Storage with Last-Mile Delivery:** Distributors hold inventory and manage the final leg of delivery directly to the customer. This is common in urban areas where responsiveness is key. 5. **Manufacturer/Distributor Storage with Customer Pickup:** Customers pick up their orders from a designated manufacturer or distributor location. This reduces delivery costs but requires customer effort. 6. **Retail Storage with Customer Pickup:** Products are held at retail locations, and customers pick them up. This is a common model for many retail goods. The comparative performance of these designs varies based on product characteristics, customer needs, and the desired balance between cost and service levels. ### 1.6 Types of distribution – product type & consumer behavior viewpoint The choice of distribution channel is heavily influenced by the type of product and consumer behavior. #### 1.6.1 Product types and their distribution * **Convenience Goods:** High buying frequency, low involvement, low price (e.g., toothpaste, magazines). Typically require **intensive distribution** to ensure wide availability. * **Shopping Goods:** Consumers compare alternatives based on price, quality, and style (e.g., clothing, furniture). Often use **selective to intensive distribution**. * **Specialty Goods:** Unique characteristics and brand identification, significant buyer loyalty, low price sensitivity (e.g., luxury watches, high-end cars). Typically use **exclusive distribution** to maintain prestige. * **Preference Goods:** High buying frequency, but with a preference for a specific retailer due to service or other factors (e.g., certain food items at a preferred grocery store). Distribution can be **selective**. * **Unsought Goods:** Consumers typically do not think of buying them (e.g., life insurance, fire alarms). These often require direct selling or aggressive promotion. #### 1.6.2 Consumer behavior and channel types Consumer behavior, including involvement levels (low vs. high) and the need for self-service versus assisted service, also dictates channel choice. * **Low Involvement / Self-Service:** Favors intensive distribution and discount retailers. * **High Involvement / Assisted Service:** May favor selective or exclusive distribution and concept stores. #### 1.6.3 Classification based on pricing and purchasing power Distribution channels can also be classified by their pricing strategies (e.g., discount stores, factory outlets, membership-based warehouses) and by the geographical concentration of their primary and secondary purchasing power areas. ### 1.7 Types of distribution – online vs. offline retail The rise of e-commerce has transformed distribution channels, leading to a shift from single-channel to omnichannel approaches. #### 1.7.1 Impact of online sales on customer service Online sales offer significant advantages in customer service: * **Response Time:** While physical products may take longer to fulfill, information goods can be delivered instantly. * **Product Variety:** Online platforms can easily offer a much larger selection than physical stores. * **Product Availability:** Aggregated inventory and better information on customer preferences can improve availability. * **Customer Experience:** Enhanced access, customization, and convenience. * **Time to Market:** Faster introduction of new products. * **Order Visibility:** Customers can track orders from placement to delivery. * **Returnability:** While online orders may have higher return rates, effective systems can manage this. #### 1.7.2 Impact of online sales on cost Online sales can impact costs in various ways: * **Inventory Costs:** Can be lower due to centralized inventory and postponement strategies. * **Facility Costs:** May be lower if relying on fewer, larger distribution centers. * **Transportation Costs:** Can be higher for outbound logistics due to individual shipments compared to bulk shipments to retail stores. * **Information Costs:** Increase significantly to build and maintain the necessary infrastructure. The internet facilitates direct sales to customers, enabling firms to engage directly with their target audience, manage pricing and product portfolios more effectively, and convey promotional information quickly and inexpensively. It also allows for more efficient fund transfers and potentially lower facility costs. ### 1.8 Trends in distribution Several key trends are shaping the future of distribution: 1. **Individualisation:** Treating each consumer as an individual with unique needs, leading to tailored products, communication, and services. 2. **Cross-channel Integration:** Consumers do not think in terms of separate channels; therefore, businesses need to integrate online and offline experiences seamlessly, offering fast and flexible logistics, and embracing the "long tail" of product offerings. 3. **Digital Super Consumer:** Consumers are increasingly informed and empowered, becoming experts through extensive research. This shifts the role of salespeople from information providers to value creators. 4. **Prioriti-time:** Consumers are time-poor and seek convenience and enriching experiences. 5. **Transparency:** Consumers demand openness and honesty regarding product sourcing, production, and ethical practices. 6. **The New Middle of the Market:** The middle segment of the market is evolving, influenced by value-for-money retailers and luxury brands creating scarcity. 7. **Consuming Decrease:** Consumers are more price-sensitive and mindful of their spending, leading to a boom in re-use, second-hand markets, and price transparency. 8. **New Markets:** Retailers are exploring new customer needs, cost-saving opportunities, and collaborations, leading to innovative concepts like partnerships, industry blurring (e.g., a laundry shop offering food and beverages), and shop-in-shop formats. --- # Behavior and organization of distribution channels, including franchising This section explores the structural arrangements and operational dynamics of distribution channels, focusing on integrated marketing systems and the specific model of franchising. ### 2.1 Introduction to Distribution Channels A distribution channel is the pathway through which goods and services travel from the producer to the end consumer. This can involve intermediaries such as wholesalers, retailers, and distributors, or it can be a direct route. Distribution channels also define the flow of payments from consumers back to vendors. Decisions regarding distribution networks are crucial for achieving supply chain objectives, ranging from cost efficiency to responsiveness. #### 2.1.1 Definition and function of distribution channels Distribution channels can be categorized by their length (short or long) and directness (direct or indirect), depending on the number of intermediaries required to reach the final buyer. ##### 2.1.1.1 Distribution intensity Distribution intensity refers to the level of availability a company selects for a product in the market. This choice is influenced by factors such as production capacity, target market size, pricing and promotion strategies, and the level of service required by the end-user. There are three main types of distribution intensity: * **Intensive distribution:** Aims for maximum market coverage by utilizing all available outlets. * **Selective distribution:** Involves using a limited number of outlets in a geographical area, often focusing on retailers who can provide specialized training or promote preferred brands. * **Exclusive distribution:** An extreme form of selective distribution where only one wholesaler, retailer, or distributor is permitted to sell a product in a specific geographical area, typically used for prestigious products. ##### 2.1.1.2 Numerical and weighted distribution * **Numerical distribution** is calculated as: $$ \text{Numerical Distribution} = \frac{\text{Number of shops selling your product}}{\text{Total number of shops}} $$ * **Weighted distribution** is calculated as: $$ \text{Weighted Distribution} = \frac{\text{Sum of Turnover of shops selling your product}}{\text{Total Turnover Market/Category}} $$ > **Tip:** Distribution channels are a critical component of the Marketing Mix (the 4 Ps), specifically the "Place" element. The costs associated with distribution can account for up to 40% of the selling price, and decisions in this area are typically long-term commitments. ##### 2.1.1.3 Functions of distribution channels Distribution channels perform several key roles to facilitate transactions: * **Transaction conclusion:** * Information gathering and dissemination * Promotion activities * Contact establishment with potential buyers * Adaptation of the offering to buyer needs * Negotiation of terms * **Transaction execution:** * Physical distribution (transport, warehousing, inventory management) * Financing arrangements * Risk bearing Outsourcing physical distribution can offer advantages such as leveraging external expertise, achieving economies of scale in logistics, accessing advanced technology, and gaining flexibility in labor and infrastructure. #### 2.1.2 The added value of distribution channels Distribution channels add value by reducing the number of transactions required to get a product from the producer to the consumer. For example, in a business-to-consumer (B2C) scenario, a manufacturer selling directly to 1,000 customers would require 1,000 transactions. However, by selling to a distributor who then sells to 100 retailers, who in turn sell to the 1,000 customers, the number of transactions is significantly reduced. * **Direct distribution channels** offer maximum control over marketing policies and can potentially save intermediary margins. However, they require significant investment in organizing and financing stock, transport, and after-sales service. * **Indirect distribution channels** allow for risk outsourcing and benefit from the distributor's market knowledge. The disadvantages include a potential loss of control and increased costs. ### 2.2 Behavior and organization of distribution channels Traditional or conventional marketing channels often lack a clear leader, leading to disagreements on objectives, tasks, financials, and profit distribution, which can result in conflicts and poor performance. To address this, integrated marketing systems have been developed. #### 2.2.1 Types of marketing systems * **Vertical Marketing Systems (VMS):** Involve cooperation between manufacturers, wholesalers, and retailers. One dominant partner (manufacturer, wholesaler, or retailer) has the power to ensure all partners cooperate harmoniously. VMS aims to achieve economies of scale, negotiation power, increased efficiency, better coordination, and lower transaction costs. * **Corporate VMS:** Combines successive stages of production and distribution under single ownership. (e.g., Zara, which designs, manufactures, manages distribution centers, and sells through its own stores and online platform). * **Contractual VMS:** Independent firms at different levels of production and distribution integrate their programs through contractual agreements to achieve greater economies or sales impact. Types include: * Wholesaler-sponsored voluntary chains * Retailer cooperatives * Franchise organizations * **Administered VMS:** Coordinates production and distribution stages through the size and power of one of the members. #### 2.2.2 Franchise as a contractual VMS Franchising is a contractual agreement where one party (the franchisor) grants another party (the franchisee) the right to use its trademark, trade name, and/or business systems and processes to produce and market a good or service under specific contractual conditions. The franchisee typically pays an initial franchise fee and ongoing royalties (often a percentage of sales revenue). * **Types of franchise systems:** * Manufacturer-sponsored retailer franchise system * Manufacturer-sponsored wholesaler franchise system * Service firm-sponsored retailer franchise system * **Advantages for the franchisor:** * Rapid business expansion and market coverage at a lower cost and investment level. * Franchisees are self-employed, reducing direct employee management. * The contractual relationship ensures franchisees operate within agreed limits. * Increased buying power. * **Advantages for the franchisee:** * Opportunity to be self-employed with potentially lower costs and investments. * Benefit from better buying conditions due to the group's purchasing power. * Immediate brand recognition and customer trust. * Access to tried-and-tested products, concepts, building designs, and ongoing support in business operations, marketing, and product development. * **Disadvantages of franchising:** * **For the franchisor:** Potential loss of control over certain management aspects and lack of uniformity in service and results across franchisees. * **For the franchisee:** Deals may not always be the most favorable, and costs can be perceived as too high. * **Types of franchising based on requirements:** * **Hard Franchising:** Imposes strict requirements, such as adhering to a 100% dictated assortment, pre-defined shop interiors, and pricing policies. This ensures consumers perceive no difference between franchisor-owned stores and franchised ones. * **Soft Franchising:** Has less stringent requirements, allowing more freedom in shop interior design and marketing mix elements. This type often evolves from buying groups. * **Conversion Franchise:** Existing independent businesses are converted into franchises under a well-known brand. #### 2.2.3 Horizontal Marketing Systems (HMS) HMS involves two or more organizations at the same level joining forces for marketing purposes to capitalize on market opportunities, access new markets, or achieve economies of scale. Companies combine financial, production, or marketing resources to accomplish more than they could individually. #### 2.2.4 Hybrid Marketing Systems (Multichannel Distribution Systems) A hybrid marketing system occurs when a single firm establishes two or more marketing channels to reach one or more customer segments. This can involve using different channels for the same customer segment or using different channels for different segments. * **Advantages:** Increased market coverage, more customized selling by focusing channels on specific needs, and potentially lower channel costs. * **Disadvantages:** Challenges in control, and increased potential for channel conflicts as different channels may compete on price or for customers. ### 2.3 Steps in defining your retail channels Defining a distribution structure is a significant strategic decision, impacting long-term business operations. It involves structural decisions concerning the number of levels, types and numbers of distributors, and their assigned responsibilities. #### 2.3.1 Starting point: The end customer The design of any distribution network should be tailored to the needs and preferences of the end customer (B2C, B2B, or B2G). #### 2.3.2 Analyzing customer service needs Customer service is about delivering the right products, at the right time, and at the right cost. It acts as the interface between marketing and logistics. Key service outputs to consider include: * **Product variety:** The range of products offered. * **Quantity preference:** Whether customers accept buying in larger quantities. * **Market decentralization:** The need for local availability (e.g., shops nearby). * **Waiting time and delivery time:** How long customers are willing to wait. * **Secondary service outputs:** Information, after-sales service, etc. Elements of customer service can be categorized into pre-transactional, transactional, and post-transactional aspects: * **Pre-transactional:** Accessibility, terms of delivery, flexibility. * **Transactional:** Stock quantity, delivery time, packaging. * **Post-transactional:** Warranty terms, complaint handling, parts availability, returns. #### 2.3.3 Defining objectives and restrictions Channel objectives should be clearly defined, considering the role of different intermediaries. For example, a wholesaler's objectives typically include sales and promotion, defining assortments, bulk-breaking, warehousing, transport, financing, bearing risk, and providing market information and advisory services to retailers. #### 2.3.4 Evaluating alternatives Alternatives should be evaluated based on criteria such as profitability, manageability (control and measurement), and flexibility. International alternatives introduce higher risks and costs. #### 2.3.5 Channel management decisions This involves selecting, motivating, and evaluating distribution partners. Key performance indicators (KPIs) for evaluation include: * Distribution weight (numerical and weighted distribution) * Market coverage * Share of turnover (in currency and volume) * Growth potential * Customer satisfaction performance --- # Defining and designing distribution channels based on customer needs and SCM principles This section outlines the strategic process of defining distribution channels by analyzing customer needs and integrating Supply Chain Management (SCM) principles. ## 3. Defining and designing distribution channels based on customer needs and SCM principles ### 3.1 Introduction to distribution channels A distribution channel is a series of businesses or intermediaries through which a product or service moves to reach the end consumer. This path can include wholesalers, retailers, and online platforms. It also describes the flow of payments from the consumer back to the vendor. These are considered downstream partners in the supply chain. The choice of distribution network significantly impacts the achievement of supply chain objectives, ranging from cost minimization to maximizing responsiveness. ### 3.2 Definition and function of distribution channels #### 3.2.1 Defining distribution channels Distribution channels can vary in length (number of intermediaries) and type (direct or indirect). The decision on channel structure depends on the number of intermediaries needed to deliver a product or service to the final buyer. #### 3.2.2 Distribution intensity Distribution intensity refers to the level of market availability a company selects for its products. This choice is influenced by: * Production capacity * Size of the target market * Pricing and promotion strategies * The level of product service required by the end-user ##### Types of distribution intensity: * **Intensive distribution:** Aims for complete market saturation by utilizing all available outlets. * **Selective distribution:** Involves using a limited number of outlets within a geographical area. This often includes outlets that can provide training or are recognized for selling preferred brands. * **Exclusive distribution:** An extreme form of selective distribution where only one wholesaler, retailer, or distributor is allowed to sell a product in a specific geographical area, typically to maintain a prestigious image. #### 3.2.3 Numerical and weighted distribution * **Numerical distribution:** This measures the percentage of shops selling a particular product out of the total number of relevant shops. $$ \text{Numerical distribution} = \frac{\text{# shops selling your product}}{\text{Total # shops}} $$ * **Weighted distribution:** This considers the sales turnover of shops selling a product relative to the total turnover of all shops present in the market or category. $$ \text{Weighted distribution} = \frac{\text{sum Turnover of shops selling your product}}{\text{sum % MS of shops present Total turnover market/category}} $$ Distribution channels are an integral part of the Marketing Mix, specifically the "Place" component. Distribution costs can account for up to 40% of the selling price, and decisions regarding distribution channels are typically long-term. #### 3.2.4 Functions of distribution channels The primary roles of distribution channels include: * **Roles to conclude a transaction:** * Information gathering and dissemination * Promotion of products * Contacting potential customers * Adaptation of the offering to customer needs * Negotiation * **Roles to execute a transaction:** * Physical distribution (transport, warehousing, inventory management) * Financing * Risk bearing #### 3.2.5 Outsourcing physical distribution Outsourcing physical distribution offers several advantages: * **Core Competency Focus:** Allows companies to concentrate on their primary business activities by relying on external expertise. * **Leverage:** Achieves economies of scale in logistics, technology, and transportation optimization. * **Globalization:** Provides access to new markets and facilitates cultural integration. * **Technology Access:** Ensures ongoing access to the latest technology and optimization tools. * **Infrastructure Flexibility:** Enables adaptation without current facility constraints, allowing for a "greenfield" approach. * **Labor Flexibility:** Matches personnel to fluctuating volumes and requirements. * **Enhanced Information:** Provides access to advanced tools for data analysis and actionable insights. * **Shared Risk:** Distributes capital risk and expertise when entering new markets or services. * **Government Compliance:** Leverages specialized knowledge for navigating regulations. #### 3.2.6 Added value of distribution channels Distribution channels reduce the number of transactions required to bring a product from the manufacturer to the end consumer. * **Direct distribution:** The manufacturer sells directly to the end consumer. * **Advantages:** Maximum control over marketing policy, retention of full margin, and potentially faster distribution. * **Disadvantages:** Requires organizing and financing inventory, handling transport, and managing after-sales service. * **Indirect distribution:** Involves intermediaries such as wholesalers and retailers. * **Advantages:** Outsourcing of risk, leveraging the intermediary's market knowledge. * **Disadvantages:** Loss of control, potential increase in costs. ### 3.3 Behavior and organization of channels #### 3.3.1 Conventional marketing channels In conventional marketing channels, there is often a lack of clear leadership, and disagreements can arise regarding objectives, tasks, financials, and profit distribution, leading to conflicts and suboptimal results. #### 3.3.2 Integrated marketing systems To address the issues in conventional channels, integrated marketing systems have been developed. These include: * **Vertical Marketing Systems (VMS):** Members at different levels of production and distribution cooperate harmoniously. This cooperation can be achieved through: * **Corporate VMS:** Successive stages of production and distribution are owned by a single company. * **Contractual VMS:** Independent firms integrate their programs on a contractual basis to gain economies of scale or sales impact. This includes wholesaler-sponsored voluntary chains, retailer cooperatives, and franchise organizations. * **Administered VMS:** Coordination is achieved through the size and power of one dominant member. * **Horizontal Marketing Systems (HMS):** Two or more companies at the same level of the distribution chain join forces for marketing purposes, such as exploring new markets or achieving economies of scale. * **Hybrid Marketing Systems:** A single firm utilizes two or more marketing channels to reach different customer segments. This approach can increase market coverage and allow for more customized selling but may lead to channel conflicts. #### 3.3.3 Franchise (a type of Contractual VMS) Franchising is a contractual agreement where a franchisor grants a franchisee the right to use its trademark, trade name, and business systems to produce and market goods or services under specific contractual terms. The franchisee typically pays a franchise fee and royalties. * **Types of Franchise Systems:** * Manufacturer-sponsored retailer franchise system * Manufacturer-sponsored wholesaler franchise system * Service firm-sponsored retailer franchise system * **Advantages for the Franchisor:** Rapid business expansion, lower cost and investment market coverage, greater "span of control," and increased buying power. * **Advantages for the Franchisee:** Opportunity for self-employment with potentially lower costs and investments, better buying conditions, immediate brand recognition, access to proven products/concepts, ongoing support, and business insights. * **Disadvantages:** Franchisor may experience a loss of control, and there can be a lack of uniformity among franchisees. Franchisees might not always secure the best deals and can find the arrangement too expensive. ##### Types of Franchising: * **Hard Franchising:** Imposes strict requirements, such as a mandatory assortment and predefined shop interior and pricing policies, ensuring a consistent consumer experience across all outlets. * **Soft Franchising:** Involves less stringent requirements, offering more freedom in shop interior and marketing mix decisions. This often evolves from buying groups. * **Conversion Franchise:** Existing independent businesses are converted into franchises under a well-known brand, often leading to a significant turnover increase. ### 3.4 Steps in defining your distribution channels Defining distribution channels is a crucial strategic decision that impacts the marketing mix and involves long-term commitments. 1. **Analyze customer service needs:** The starting point is always the end customer. This involves understanding the service outputs they require, such as: * **Product variety:** The range of products available. * **Quantity preference:** Whether customers accept buying in larger quantities. * **Market decentralization:** The need for proximity (e.g., a shop nearby). * **Waiting time/Delivery time:** How long customers are willing to wait. * **Secondary service outputs:** Information, after-sales service, etc. Customer service is about delivering the right products, at the right time, and at the right cost. Key elements include: * **Pre-transactional:** Accessibility, terms of delivery, flexibility. * **Transactional:** Stock quantity, delivery time, packaging. * **Post-transactional:** Warranty terms, complaint handling, parts availability, returns. 2. **Define objectives and constraints:** Set clear goals for the distribution channels, considering factors like sales targets, market share, and profitability. Wholesalers, for example, define their assortment, handle warehousing, transport, financing, bear risk, and provide market information and advice. 3. **Compare and evaluate alternatives:** Assess different distribution channel options based on criteria such as: * Profitability * Manageability (control and measurement capabilities) * Flexibility When evaluating international alternatives, consider the increased risks and costs. 4. **Channel management decision:** Select distribution partners, motivate them, and evaluate their performance using Key Performance Indicators (KPIs) such as: * Distribution weight (numerical and weighted) * Market coverage * Share of turnover (in currency and volume) * Growth potential * Customer satisfaction performance ### 3.5 Types of distribution networks from an SCM viewpoint Supply chain costs are a fundamental basis for business arguments. Designing a distribution network is influenced by several factors: #### 3.5.1 Elements of customer service influenced by network structure * **Response time:** The time taken for a customer to receive an order. * **Product variety:** The number of different products offered. * **Product availability:** The probability of a product being in stock when ordered. * **Customer experience:** The ease of placing and receiving orders, including customization. * **Time to market:** The time required to introduce a new product. * **Order visibility:** The customer's ability to track orders. * **Returnability:** The ease of returning unsatisfactory merchandise and the network's ability to handle returns. #### 3.5.2 Supply chain costs affected by network structure * **Inventories:** The cost of holding stock. * **Transportation:** Costs associated with moving goods. * **Facilities and handling:** Costs related to warehouses, distribution centers, and their operations. * **Information:** Costs associated with information systems for tracking and management. #### 3.5.3 Factors influencing distribution network design * **Desired Response Time and Number of Facilities:** Increasing the number of facilities generally reduces response time by moving them closer to the consumer. For example, Amazon's extensive warehouse network allows for faster delivery times, while a company like W.W. Grainger uses a larger number of facilities to offer same-day delivery. * **Transportation Costs and Number of Facilities:** As the number of facilities increases, transportation costs tend to decrease. * **Inventory Costs and Number of Facilities:** Increasing the number of facilities generally leads to higher inventory costs due to more dispersed stock. * **Facility Costs and Number of Facilities:** Expanding the number of facilities increases facility costs. * **Total Logistics Cost, Response Time, and Number of Facilities:** There is an optimal balance between these factors. Increasing the number of facilities typically decreases response time but can increase inventory and facility costs. #### 3.5.4 Design options for a distribution network Key decisions in designing a distribution network involve: * Whether products are delivered to the customer's location or picked up from a prearranged site. * Whether products flow through an intermediary party or intermediate location. Six common designs exist: 1. **Manufacturer storage with direct shipping:** Products are shipped directly from the manufacturer to the customer. 2. **Manufacturer storage with direct shipping and in-transit merge:** Similar to direct shipping, but involves merging shipments from multiple manufacturers at a consolidation point before final delivery. 3. **Distributor storage with carrier delivery:** Distributors hold inventory and deliver to customers via carriers. 4. **Distributor storage with last-mile delivery:** Distributors hold inventory and manage the final leg of delivery directly to the customer. 5. **Manufacturer/distributor storage with customer pickup:** Customers pick up products from a manufacturer's or distributor's facility. 6. **Retail storage with customer pickup:** Products are held in retail stores for customer pickup. ### 3.6 Types of distribution networks – Product type and Consumer behavior The choice of distribution network is influenced by the product type and consumer behavior, as well as the interdependency between manufacturers and retailers. #### 3.6.1 Manufacturer-retailer dynamics In Fast-Moving Consumer Goods (FMCG), manufacturers often need retailers to carry their products, while retailers also develop their own private labels, creating potential conflicts. Marketing strategies like "push" (manufacturer-driven) and "pull" (consumer-driven) are employed. #### 3.6.2 Strategic choices based on involvement and product type * **Low Involvement / Self-service:** Products that require minimal customer decision-making and can be purchased with little assistance (e.g., convenience goods like toothpaste). * **Low Involvement / Assisted:** Products with low involvement but may benefit from some assistance. * **High Involvement:** Products that require significant customer research and decision-making (e.g., specialty goods like luxury watches). #### 3.6.3 Product types and distribution intensity * **Convenience Goods:** Typically require intensive distribution. * **Shopping Goods:** Often utilize selective to intensive distribution. * **Specialty Goods:** Best suited for selective or exclusive distribution. * **Preference Goods:** High buying frequency, demanding service, may use selective distribution. * **Unsought Goods:** Require significant promotion and distribution effort. Industrial goods and services have different distribution needs depending on their nature (e.g., raw materials, investment goods, facility goods, or services like repairs and advice). #### 3.6.4 Classification based on pricing and purchasing power * **Pricing:** * **Discount stores:** Offer standard products at low margins, often based on an Every Day Low Pricing (EDLP) strategy. * **Factory outlets:** Sell products directly from the manufacturer, often at reduced prices. * **Membership-based stores:** Require a membership card for purchase (e.g., METRO). * **Purchasing Power:** Areas can be classified into primary (representing 50% of turnover) and secondary purchasing power areas, helping companies to strategize their distribution efforts. ### 3.7 Types of distribution networks – Online vs. Offline retail The shift from single-channel to omnichannel approaches is driven by the increasing prevalence of online sales. #### 3.7.1 Impact of online sales on customer service * **Response time:** Physical products generally have longer fulfillment times than digital goods. * **Product variety:** Online platforms can offer a wider selection of products. * **Product availability:** Aggregated inventory and better demand information can improve availability. * **Customer experience:** Online channels offer improved access, customization, and convenience. * **Time to market:** Faster introduction of new products is possible. * **Order visibility:** Customers can track orders more effectively. * **Returnability:** Online returns can be more complex and occur in higher proportions. #### 3.7.2 Impact of online sales on cost * **Direct Sales to Customers:** Enables direct pitching and promotion, bypassing intermediaries. * **Flexible Pricing, Product Portfolio, and Promotions:** Allows for more dynamic management of revenues and effective communication. * **Efficient Funds Transfer:** Streamlines payment processes. * **Inventory:** Can lead to lower inventory levels if customers are willing to wait. * **Facilities Costs:** May decrease if fewer physical stores are needed, but costs for warehousing and distribution centers increase. * **Transportation Costs:** Can be lower for digital goods, but for physical goods, aggregated inventories can increase outbound transportation costs. * **Information Costs:** Increased costs to build and maintain the necessary information infrastructure. #### 3.7.3 Online vs. Offline retail trends The penetration and expenditure in online retail continue to grow significantly, impacting traditional offline retail models. ### 3.8 Trends in Distribution Several key trends are shaping the future of distribution: 1. **Individualization:** Consumers expect to be treated as individuals with unique needs, leading to tailored products, communication, and services. 2. **Cross-channel:** Consumers do not think in terms of separate channels; they expect a seamless experience across online and offline touchpoints, demanding fast and flexible logistics and digital integration. This includes the "long tail" phenomenon, where a large number of niche products can be offered profitably online. 3. **Digital Super Consumer:** Consumers are well-informed experts who search, shop, and share information online. The role of salespeople is evolving from information providers to value creators. 4. **Priori-time:** Consumers have limited time and seek convenience and engaging experiences. 5. **Transparency:** Consumers are increasingly aware of what they are buying and consuming, demanding openness and honesty. 6. **The New Middle of the Market:** The traditional middle market has shifted, influenced by price-value retailers and the creation of scarcity by luxury brands. 7. **Consuming Decrease:** Consumers are more price-sensitive and are re-evaluating their spending habits, leading to a boom in reuse and second-hand markets. 8. **New Markets:** Retailers are exploring new markets and concepts driven by customer needs, cost savings, scale, or passion, leading to partnerships, industry blurring, and innovative retail concepts (e.g., shop-in-shops, hybrid food and service offerings). --- # Types of distribution networks considering product characteristics and consumer behavior This section explores how product characteristics and consumer behavior dictate the selection of distribution networks, alongside classifications based on pricing and purchasing power. ## 4. Types of distribution networks – Product type & Consumer behavior viewpoint The selection and design of a distribution network are intricately linked to the nature of the product being distributed and the behavior patterns of the end consumer. This interplay influences crucial decisions regarding service levels, pricing, and channel structure. ### 4.1 Product types and their distribution implications Products can be broadly categorized, each demanding a different approach to distribution: * **Consumer goods:** * **Convenience goods:** These are frequently purchased, low-involvement items with minimal comparison by the consumer. Examples include toothpaste, magazines, and washing powder. * **Distribution Strategy:** Require **intensive distribution** to ensure widespread availability. * **Shopping goods:** Consumers spend time and effort comparing alternatives before purchasing these goods. Examples include clothes, audio equipment, and furniture. * **Distribution Strategy:** Typically utilize **selective to intensive distribution**, aiming for availability in a reasonable number of outlets where consumers can compare options. * **Specialty goods:** These have strong brand preferences, and consumers are highly committed to purchasing them. Examples include luxury watches and silver cutlery. * **Distribution Strategy:** Employ **exclusive distribution** to maintain a prestigious image and ensure specialized handling. * **Preference goods:** These are daily goods with high buying frequency but also demanding consumer expectations regarding service. An example is preferring a specific shop due to its service quality. * **Distribution Strategy:** Can range from **selective to intensive distribution**, with an emphasis on customer service. * **Unsought goods:** These are products consumers do not typically think about buying, such as life insurance or fire alarms. * **Distribution Strategy:** Often requires proactive marketing and can be distributed through various channels depending on the sales approach. * **Industrial goods:** These are products used in the production of other goods or services. * **Raw materials and parts:** Used as inputs in manufacturing processes. * **Distribution Strategy:** Often involves direct sales or specialized industrial distributors. * **Investment goods:** Major capital items like machinery and buildings. * **Distribution Strategy:** Typically direct sales with extensive technical support and after-sales service. * **Facility goods:** Items like paper, lubricants, and cleaning supplies used in an organization's operations. * **Distribution Strategy:** Can be through general industrial distributors or specialized suppliers. * **Services:** Intangible products like repairs, advice, and outsourced administrative tasks. * **Distribution Strategy:** Often delivered directly to the customer, though intermediary service providers or platforms can also be involved. ### 4.2 Consumer behavior and its influence Consumer behavior significantly shapes distribution choices: * **Involvement Level:** * **Low Involvement:** Consumers make quick decisions with minimal effort. Distribution should be convenient and readily accessible. * **High Involvement:** Consumers invest time in research and comparison. Distribution channels should facilitate comparison and provide adequate information. * **Self-service vs. Assisted Service:** * **Self-service:** Suitable for convenience goods where consumers are comfortable making choices independently. * **Assisted:** Necessary for complex, high-involvement, or specialty goods where expert advice and support are crucial. * **Location Preference:** * Consumers may prefer local, convenient locations (high market decentralization) or be willing to travel further for specific products or better deals. * **Purchase Quantity and Waiting Time:** * Some consumers prefer buying in bulk, while others prioritize immediate availability and short waiting times. Distribution networks must align with these preferences. ### 4.3 Distribution Intensity Distribution intensity refers to the level of availability a product has in the market. It can be quantified using formulas: * **Numerical Distribution:** $$ \text{Numerical Distribution} = \frac{\text{# shops selling your product}}{\text{Total # shops}} $$ This measures the proportion of total outlets that carry the product. * **Weighted Distribution:** $$ \text{Weighted Distribution} = \frac{\sum \text{Turnover of shops selling your product}}{\sum \text{MS of shops present} \times \text{Total turnover market/category}} $$ This considers the market share of the shops selling the product, providing a more nuanced view of actual market presence. Types of distribution intensity include: * **Intensive Distribution:** Aims for saturation by using all available outlets. Ideal for convenience goods. * **Selective Distribution:** Uses a limited number of outlets in a geographical area. Suitable for shopping goods where some brand preference exists and intermediaries need to be trained. * **Exclusive Distribution:** Grants selling rights to only one wholesaler, retailer, or distributor in a specific area. Used for high-prestige products or to ensure specialized service. ### 4.4 Classification based on Pricing Strategies Distribution networks can also be classified based on the pricing approaches adopted by the retailers: * **Discount Retailers:** Focus on standard products with low margins, often employing an Every Day Low Pricing (EDLP) strategy. Examples include Aldi, Lidl, and Action. * **Factory Outlets:** Sell products directly from the manufacturer, often at reduced prices. Examples include Bicester Village and Maasmechelen Village. * **Membership-based Retailers:** Require customers to have a membership card to purchase goods, often offering bulk quantities and lower prices. Examples include METRO and Costco. ### 4.5 Classification based on Purchasing Power Areas Distribution network design can be informed by analyzing where the target customers with purchasing power are located. * **Primary Purchasing Power Area:** The area that accounts for approximately 50% of the company's turnover. * **Secondary Purchasing Power Area:** The remaining areas that contribute to the other 50% of the turnover. By identifying and mapping these areas, companies can strategically allocate resources and establish distribution points that best serve their most valuable customer segments. --- # Online vs. Offline retail and emerging trends in distribution This topic explores the dynamics of online versus offline retail distribution, their impact on customer service and costs, and the emerging trends shaping distribution strategies. ## 5. Online vs. offline retail and emerging trends in distribution Distribution channels are the pathways through which goods and services move from producers to end consumers, involving intermediaries like wholesalers and retailers, and now crucially, the internet. The choice of distribution network significantly impacts supply chain objectives, ranging from cost reduction to enhanced responsiveness. ### 5.1 Definition and function of distribution channels A distribution channel is a chain of businesses or intermediaries facilitating the passage of a good or service to the end consumer. It can be short or long, direct or indirect, depending on the number of intermediaries required. #### 5.1.1 Distribution intensity Distribution intensity, also known as distribution spread or numerical distribution, refers to the level of availability a product has in the market. It is calculated as: $$ \text{Numerical distribution} = \frac{\text{Number of shops selling your product}}{\text{Total number of shops}} $$ There are three main types: * **Intensive distribution:** Utilizes all available outlets for saturation coverage. * **Selective distribution:** Employs a limited number of outlets in a geographical area, often requiring training and a focus on preferred brands. * **Exclusive distribution:** An extreme form of selective distribution, using only one wholesaler, retailer, or distributor in a specific geographical area, often to maintain a prestigious image. Weighted distribution is another metric, calculated as: $$ \text{Weighted distribution} = \frac{\text{Sum of turnover of shops selling your product}}{\text{Sum of % Market Share of shops present}} \times \text{Total turnover market/category} $$ Distribution channels are an integral part of the marketing mix (the 'Place' component) and can account for up to 40% of the selling price. Decisions regarding distribution channels are long-term and strategic. The primary functions of distribution channels include: * **Transaction conclusion:** Information, promotion, contact, adaptation (to buyer needs), and negotiation. * **Transaction execution:** Physical distribution (transport, stock), financing, and risk bearing. Outsourcing physical distribution can offer advantages such as focusing on core competencies, leveraging external expertise and economies of scale, gaining access to new markets, utilizing advanced technology, achieving flexibility in labor, obtaining better information through analytics, sharing risks, and ensuring compliance with government regulations. #### 5.1.2 Added value of distribution channels Distribution channels add value by reducing the number of transactions required to reach the end consumer. * **Business-to-Consumer (B2C) direct distribution:** Offers maximum control over marketing policy, potential for higher margins, and faster distribution, but requires significant investment in organizing and financing stock, transport, and after-sales service. * **Business-to-Consumer (B2C) indirect distribution:** Can outsource risk, leverage distributor knowledge of the market, but may lead to a loss of control and increased costs. ### 5.2 Behavior and organization of channels Traditional marketing channels often lack a clear leader, leading to conflicts and poor results. This has led to the development of integrated marketing systems: * **Vertical Marketing Systems (VMS):** Different stages of production and distribution cooperate. This can be achieved through: * **Corporate VMS:** Successive stages are owned by a single entity. * **Contractual VMS:** Independent firms integrate through contractual agreements. This includes wholesaler-sponsored voluntary chains, retailer cooperatives, and franchise organizations. * **Administered VMS:** Coordination is achieved through the size and power of one dominant member. * **Horizontal Marketing Systems (HMS):** Two or more organizations at the same level join forces to pursue new market opportunities, achieve economies of scale, or combine resources. * **Hybrid Marketing Systems:** A firm uses two or more marketing channels to reach one or more customer segments, offering increased market coverage and more customized selling, but potentially leading to channel conflicts. #### 5.2.1 Franchise organizations (a type of Contractual VMS) A franchise is a contractual agreement where a franchisor grants a franchisee the right to use its trademark, trade name, and business systems to produce and market a good or service. The franchisee pays an initial fee and ongoing royalties. * **Advantages for the franchisor:** Rapid expansion, lower costs and investment, wider market coverage, and contractual assurance of franchisee adherence. * **Advantages for the franchisee:** Entrepreneurial opportunity with potentially lower initial costs, better buying conditions due to group purchasing power, immediate brand recognition, access to tried-and-tested products and support, training, and ongoing assistance. * **Disadvantages:** Franchisor may lose some control; franchisees may vary in service quality. Franchisees might face less favorable deals and potentially high costs. Franchise types include: * **Hard Franchising:** Strict requirements regarding assortment, interior design, and pricing, leading to a uniform customer experience. * **Soft Franchising:** Less stringent requirements, allowing more freedom in assortment, interior, and marketing mix. * **Conversion Franchise:** Existing independent businesses are converted into franchises under a well-known brand. ### 5.3 Steps in defining distribution channels The design of a distribution network should be tailored to the needs of the end customer, as channels exist to serve them. 1. **Customer service analysis:** Understanding customer needs related to product variety, quantity preferences, market decentralization requirements (e.g., proximity of shops), waiting time, delivery time, information, and after-sales service. Customer service is the interface between marketing and logistics, ensuring the right products reach customers at the right time and cost. Elements of customer service include pre-transactional (accessibility, terms of delivery, flexibility), transactional (stock quantity, delivery time, packaging), and post-transactional aspects (warranty, complaints, returns). 2. **Define objectives and restrictions:** Clearly articulate the goals and limitations of the chosen channel(s). For example, a wholesaler's objectives may include defining the right assortment, bulk-breaking, warehousing, transport, financing, and bearing risk. 3. **Compare and evaluate alternatives:** Assess possible distribution channel options based on profitability, manageability (control and measurement), and flexibility. International alternatives often involve higher risks and costs. 4. **Channel management decisions:** Select distribution partners, motivate them, and evaluate and control their performance using Key Performance Indicators (KPIs) such as distribution weight (numerical and weighted), market coverage, share, turnover, growth potential, and customer satisfaction. ### 5.4 Types of distribution networks: SCM viewpoint Factors influencing distribution network design are interconnected with supply chain costs and customer service elements: * **Customer Service Elements:** * **Response time:** Time taken to fulfill an order. * **Product variety:** Number of different products offered. * **Product availability:** Probability of having a product in stock. * **Customer experience:** Ease of ordering and receiving, customization. * **Time to market:** Time to introduce a new product. * **Order visibility:** Ability to track orders. * **Returnability:** Ease of returning merchandise. * **Supply Chain Costs:** * **Inventories:** Costs associated with holding stock. * **Transportation:** Costs of moving goods. * **Facilities and handling:** Costs of warehouses, logistics operations. * **Information:** Costs of managing and sharing data. **Distribution network design options include:** 1. Manufacturer storage with direct shipping. 2. Manufacturer storage with direct shipping and in-transit merge. 3. Distributor storage with carrier delivery. 4. Distributor storage with last-mile delivery. 5. Manufacturer/distributor storage with customer pickup. 6. Retail storage with customer pickup. The choice of network design depends on the desired response time, number of facilities, transportation costs, and inventory levels. ### 5.5 Types of distribution: Product type and consumer behavior The choice of distribution strategy is influenced by product type and consumer behavior: * **Consumer goods:** * **Convenience goods:** (e.g., toothpaste, magazines) require intensive distribution. * **Shopping goods:** (e.g., clothes, furniture) suit selective distribution. * **Specialty goods:** (e.g., luxury watches) demand exclusive distribution due to brand preference. * **Preference goods:** High buying frequency but with specific store preferences, requiring selective distribution with good service. * **Unsought goods:** (e.g., life insurance) require aggressive promotion and selective distribution. * **Industrial goods:** Raw materials, parts, investment goods, and facility goods have varied distribution needs. * **Services:** Require specific distribution approaches like repairs, advice, or outsourced services. Distribution intensity aligns with product types: * **Intensive distribution:** For convenience goods. * **Selective to intensive distribution:** For shopping goods. * **Selective distribution:** For specialty goods with brand preference. * **Exclusive distribution:** For high-end specialty goods. Classification based on pricing: * **Discount retailers:** (e.g., Aldi, Lidl) focus on low prices and low margins. * **Factory outlets:** Sell directly from manufacturers at reduced prices. * **Membership-based retailers:** (e.g., METRO) require a membership card. Classification based on purchasing power areas: Identifying primary (50% of turnover) and secondary areas helps optimize distribution efforts. ### 5.6 Online vs. offline retail Online sales have a significant impact on customer service and costs: * **Impact on Customer Service:** * **Response time:** Physical products generally take longer to fulfill online compared to immediate availability in a retail store. Information goods can be delivered instantly. * **Product variety:** Online channels can easily offer a larger selection of products. * **Product availability:** Aggregated inventory and better customer preference data can improve availability. * **Customer experience:** Online offers improved access, customization, and convenience. * **Time to market:** Faster for information goods. * **Order visibility:** More advanced tracking capabilities online. * **Returnability:** Can be more complex with online orders, often resulting in a higher proportion of returns. * **Impact on Cost:** * **Direct sales to customers:** Social networking can facilitate direct sales and promotions. * **Flexible pricing, product portfolio, and promotions:** Easier to manage revenues and communicate information. * **Efficient funds transfer:** Streamlined payment processes. * **Inventory:** Potentially lower inventory levels if customers are willing to wait, enabling postponement of variety until order receipt. * **Facilities costs:** Can be reduced if products are shipped directly from manufacturers or distributors, but can increase if a large, centralized inventory is maintained. * **Transportation costs:** Can be lower for information goods, but may increase for non-digital goods due to fewer, larger outbound shipments. * **Information costs:** Additional investment is required to build and maintain the information infrastructure for online operations. While online channels are growing rapidly, direct-to-consumer sales through online channels are still a relatively small portion of overall retail, though their significance is increasing. ### 5.7 Emerging trends in distribution Several key trends are reshaping distribution strategies: 1. **Individualization:** Consumers expect to be treated as individuals with unique needs, leading to demands for tailored products, communication, and services. 2. **Cross-channel (Omnichannel) approach:** Consumers no longer think in terms of separate channels. They expect seamless integration between online and offline experiences, demanding fast and flexible logistics, a wider product selection (long tail), and integrated digital experiences. 3. **Digital super consumer:** Consumers are well-informed experts who search, shop, and share information online. This shifts the role of salespeople from information providers to value creators. 4. **Priori-time:** Consumers have limited time and prioritize convenience and experience, influencing how and where they shop. 5. **Transparency:** Consumers are increasingly aware of product origins, production processes, and ethical sourcing, demanding openness and honesty from brands. 6. **The new middle of the market:** The traditional middle market is being squeezed by price-value retailers and luxury brands that create scarcity. 7. **Consuming decrease:** Consumers are more price-sensitive and mindful of their spending, leading to a boom in re-use, second-hand markets, and price transparency. 8. **New Markets:** Retailers are exploring new market concepts driven by evolving customer needs, cost savings, scale, or passion. This includes partnerships, blurring of industry boundaries (e.g., a laundromat offering food and beverages), and new retail concepts like "shop-in-shops." --- ## Common mistakes to avoid - Review all topics thoroughly before exams - Pay attention to formulas and key definitions - Practice with examples provided in each section - Don't memorize without understanding the underlying concepts

| Term | Definition | |------|------------| | Distribution Channel | A chain of businesses or intermediaries through which a good or service passes until it reaches the end consumer. It can include wholesalers, retailers, distributors, and the internet. | | Distribution Intensity | The level of (inter)national availability selected for a particular product by the company or marketer, aiming for saturation, limited outlets, or exclusive single outlet coverage in a geographic area. | | Numerical Distribution | A measure of distribution intensity calculated as the number of shops selling a product divided by the total number of shops in the market. | | Weighted Distribution | A measure of distribution intensity calculated as the sum of the turnover of shops selling a product divided by the total turnover of the market or category. | | Marketing Mix | A set of tactical marketing tools that a firm blends to produce the response it wants in the target market. The 'Place' element refers to distribution decisions. | | Vertical Marketing System (VMS) | A unified marketing system where producers, wholesalers, and retailers cooperate. This integration can be achieved through corporate ownership, contractual agreements, or administered coordination by a dominant member. | | Horizontal Marketing System (HMS) | A system where two or more companies at the same level of the marketing channel join together to pursue new marketing opportunities, such as gaining economies of scale or accessing new markets. | | Hybrid Marketing System | A system where a firm establishes two or more marketing channels to reach one or more customer segments, allowing for customized selling and increased market coverage. | | Franchise | A contractual agreement where a franchisor grants a franchisee the right to use its trademark, trade name, and business systems and processes to produce and market a good or service under specific contractual specifications. | | Franchisor | The party in a franchise agreement that grants the right to use its trademark, trade name, and business systems to another party. | | Franchisee | The party in a franchise agreement that receives the right to use the franchisor's trademark, trade name, and business systems. | | Push Strategy | A marketing strategy where a company promotes its product to intermediaries, who then push it on to the end consumer. | | Pull Strategy | A marketing strategy where a company promotes its product directly to the end consumer, who then demand it from intermediaries, thus pulling the product through the distribution channel. | | Customer Service | The support and advice provided by a company to people who buy or use its products or services. In distribution, it involves getting the right products to the customer at the right time and at the right cost. | | KPI (Key Performance Indicator) | A measurable value that demonstrates how effectively a company is achieving key business objectives. In distribution, KPIs might include market coverage, customer satisfaction, and turnover share. | | Omnichannel | A strategy that integrates various channels of communication and sales to provide a seamless customer experience, allowing customers to interact with a brand across different touchpoints. | | Long Tail | A business strategy that allows companies to sell a large number of unique items in relatively small quantities, often made possible by online retail which reduces the costs of storage and distribution for niche products. |