Week 2 - IBM_Channel Management.pdf

# Actors and definitions in a distribution channel This section outlines the various entities that constitute a distribution channel, defining their roles and categorizing them within the supply chain. ### 1.1 Definition of a distribution channel A distribution or sales channel is defined as a set of interdependent organizations involved in the process of making a product or service available for use or consumption [6](#page=6). ### 1.2 Entities within a distribution channel The primary entities involved in a distribution channel can be categorized into three main groups: Manufacturers, End-Users, and Intermediaries [10](#page=10) [14](#page=14) [7](#page=7). #### 1.2.1 The manufacturer Manufacturers are the entities responsible for producing original goods or services. This category includes [8](#page=8): * **Branded Manufacturers:** Companies that produce goods under their own well-known brand names, such as Coca-Cola, Mercedes Benz, or Sony [8](#page=8). * **Private Label Manufacturers:** Companies that produce goods for other companies to sell under their brand names [8](#page=8). * **Service Manufacturers:** Providers of services like banking or insurance [8](#page=8). Manufacturers are also sometimes referred to as "suppliers" or "producers" [8](#page=8). **Original Equipment Manufacturers (OEMs)** are a specific type of manufacturer that creates components which are then assembled into finished products by other companies. Examples include computer component manufacturers (silicon chips, dedicated software) and automotive component manufacturers (engines, electronic systems, tires) [9](#page=9). #### 1.2.2 The end-user End-users are the final recipients of a product or service. They can be further distinguished into [10](#page=10): * **Consumers:** Individuals who consume or use goods and services for their personal, non-resale purposes. Consumers are the end-users and may not necessarily be the purchaser (e.g., babies or pets) [11](#page=11). * **Business Customers:** Other businesses that purchase products or services [11](#page=11). **Customer vs. Consumer:** A customer is anyone who purchases a product or service, whether an individual or a business. A consumer is specifically an individual end-user who uses the product or service and will not resell it. A customer becomes a consumer if they both purchase and personally use the product or service [11](#page=11). **Role of the Final Customer in the Channel:** When a customer purchases a product: * **Supply Chain:** It signifies the movement of units out of the chain, creating a need for replenishment [12](#page=12). * **Financial:** Payment injects cash back into the channel [12](#page=12). * **Warehouse:** End-users may hold inventory at their homes, especially during multi-buy promotions, potentially reducing the reliance on the supply chain network for immediate stocking [12](#page=12). #### 1.2.3 Intermediaries Intermediaries are entities that facilitate the movement of products or services from manufacturers to end-users. They play a crucial role in the distribution process [13](#page=13) [14](#page=14). ##### 1.2.3.1 Different kinds of intermediaries Intermediaries can be broadly categorized as: * **Wholesalers/Distributors:** These entities sell to other channel intermediaries or to business end-users, but not to individual consumers. They typically sell in "bulk" rather than in individual retail units. They may take physical possession of inventory and store products [15](#page=15) [31](#page=31). * **Retailers:** These businesses sell directly to individual consumer end-users. They might also contract to sell private label goods, potentially bypassing distributors. Retailers are the final businesses in a distribution channel that link manufacturers to consumers [15](#page=15) [20](#page=20). * **Specialized Intermediaries:** These entities enter the channel to support the selling process, providing services such as financing, media, market research, or insurance. Examples include payment providers like PayPal or Klarna [15](#page=15). ##### 1.2.3.2 Retailer vs. Wholesaler Summary | Feature | Wholesale | Retail | | :------------------ | :-------------------------------------- | :----------------------------------------------- | | Selling To | Companies (B2B) | Consumers (mostly) | | Volume/Margins | Higher Volume, Lower Margins | Lower Volume, Higher Margins | | Display/Merchandising | No merchandising | Merchandising display | | Customer Focus | Fewer customer relationships | Customer experience | | Pricing | Pricing for wholesale | Marking up to retail pricing | | Location | Storage instead of store front | Store front and customer space | | Marketing | Marketing of store | | ##### 1.2.3.3 Roles of Final-Tier Intermediaries (Retailers) Final-tier intermediaries, primarily retailers, perform several key functions: * **Breaking Bulk:** They break down large quantities of goods into smaller, more manageable units required by end customers, allowing sales in individual pieces instead of full cartons [22](#page=22). * **Assortment Building:** Retailers create assortments of products specifically designed for their target clients, often mixing leading brands with independent or retailer brands [22](#page=22). * **Search Facilitation:** They reduce uncertainty for both end-users and producers by helping end-users find products and producers reach target end-users [22](#page=22). * **Brand Promotion:** Retailers ensure product visibility, support brand image, enhance customer relationships, and drive sales [22](#page=22). * **After-Sale Service:** They provide post-purchase services such as technical support, installation, warranty, and repairs [22](#page=22). * **Consumer Data:** Retailers gather direct, unbiased information about consumer purchasing behavior, which fuels marketing, supply chain, and finance functions [22](#page=22). **How Retailers Get Paid:** Retailers create and capture value through their various roles, which translates into potential revenue. Factors influencing their payment and terms include volume targets, credit terms, range availability and depth/breadth, in-store media, multi-channel capabilities, dedicated space, POS presentation, location, planograms, EPOS data, consumer marketing, returns and support, ordering and logistics, and in-store consumer touchpoints [23](#page=23). ##### 1.2.3.4 Roles of First-Tier Intermediaries (Distributors) First-tier intermediaries, such as distributors, also perform critical functions: * **Breaking Bulk:** They break down large shipments from suppliers into quantities suitable for the next level in the channel, often selling in cartons or pallets rather than full trucks [26](#page=26). * **Logistics:** They manage warehousing and transportation, acting as a crucial link in the supply chain [26](#page=26) [27](#page=27). * **One-Stop Shop:** Distributors offer a wide assortment of products from multiple suppliers, providing a comprehensive "universal offer" to their target clients [26](#page=26). * **Financing (Credit):** Distributors often absorb the credit risk on their sales, managing credit control to avoid supplier exposure to bad debts. This provides significant value to suppliers who would otherwise bear these costs [26](#page=26) [28](#page=28). * **Technical Support:** They offer pre-sale technical support (especially for new products) and post-sale technical support and training [26](#page=26). * **Marketing Support:** They provide marketing support to both manufacturers and final-tier intermediaries [26](#page=26). ##### 1.2.3.5 Other Intermediary Definitions * **Distributors or Merchant Wholesalers:** These intermediaries typically take physical possession of inventory, store and promote products, and arrange for customer ordering and payment [31](#page=31). * **Manufacturers’ Representatives, Agents, Brokers:** These intermediaries rarely possess the goods they sell. Instead, they engage in promotion and negotiation to sell products on behalf of the manufacturer and negotiate trade terms [31](#page=31). * **Trading Companies, Import/Export Agents:** These specialize in international selling and may or may not have physical possession of goods [31](#page=31). ### 1.3 Channel Combinations and Exporting Various channel combinations are possible, influenced by the needs of both end-users and manufacturers. The range and number of channel members can be strategically combined to create an effective marketing channel strategy [17](#page=17). **Export Distribution Challenges:** Manufacturers looking to export may encounter several challenges, including product assortment suitability for local customers, lack of knowledge on how to reach local markets, inappropriate marketing strategies, dealing with foreign currency and local credit, navigating local trade regulations (customs), and language barriers. Examples of distributors in international markets are provided, such as Reydon Sports, Square25, GMK, Mosaique, and Cientoluna [29](#page=29) [33](#page=33). --- # Universal channel functions and their costs This section outlines the nine universal functions performed by distribution channel members and examines the costs associated with each function, as well as the implications of removing channel members [34](#page=34). ### 2.1 The nine universal channel functions Distribution channels are responsible for performing a set of universal functions that are essential for the smooth flow of goods and services from producers to end consumers. These functions are performed by members regardless of their position in the channel, whether they are producers, wholesalers, retailers, or end consumers [34](#page=34) [35](#page=35) [36](#page=36) [37](#page=37) [44](#page=44). The nine universal functions are: * **Physical possession:** This involves the tangible movement and storage of goods, from warehousing to final delivery [34](#page=34) [35](#page=35) [36](#page=36) [37](#page=37) [43](#page=43). * **Ownership:** This function pertains to the transfer of legal title to goods [34](#page=34) [35](#page=35) [36](#page=36) [37](#page=37). * **Promotion:** This includes all activities undertaken to communicate the merits of a product and persuade target buyers to purchase it [34](#page=34) [35](#page=35) [36](#page=36) [37](#page=37) [43](#page=43). * **Negotiation:** This is the process of reaching an agreement on the terms of sale between parties [34](#page=34) [35](#page=35) [36](#page=36) [37](#page=37) [43](#page=43). * **Financing:** This function involves the provision of funds to facilitate the purchase and sale of goods within the channel [34](#page=34) [35](#page=35) [36](#page=36) [37](#page=37) [43](#page=43). * **Payment:** This refers to the process of collecting cash from buyers [34](#page=34) [35](#page=35) [36](#page=36) [37](#page=37) [43](#page=43). * **Information sharing:** This involves collecting and distributing marketing research and intelligence information about marketing environments to channel members. The further away from the end client, the more critical it is to collect quality information, and incentives are often provided to intermediaries for sharing this critical info [34](#page=34) [35](#page=35) [36](#page=36) [37](#page=37) [38](#page=38) [43](#page=43). * **Ordering:** This function encompasses the transmission of buyer requests to the seller [34](#page=34) [35](#page=35) [36](#page=36) [37](#page=37). * **Risk:** This involves bearing the uncertainties and potential losses associated with carrying out channel functions [34](#page=34) [35](#page=35) [36](#page=36) [37](#page=37). ### 2.2 Associated costs of channel functions Each of these universal functions incurs specific costs for the channel member performing them. Understanding these costs is crucial for evaluating channel efficiency and profitability [43](#page=43). * **Physical possession:** Associated costs include storage and delivery expenses [43](#page=43). * **Ownership:** Costs are related to inventory holding, including the maintenance of safety stock [43](#page=43). * **Promotion:** This function involves costs for personal selling, advertising, sales promotion, publicity, public relations, and participation in trade shows [43](#page=43). * **Negotiation:** Costs include employee time spent on negotiation and any associated legal expenses [43](#page=43). * **Financing:** Expenses arise from providing credit terms and defining the terms and conditions of sale [43](#page=43). * **Risk:** Costs are incurred through price guarantees, return allowances, warranties, insurance, repair services, and after-sale support [43](#page=43). * **Ordering:** This function's costs are related to order processing activities [43](#page=43). * **Payment:** Costs are associated with cash collection processes and potential bad debts [43](#page=43). * **Information sharing:** This function incurs costs for collecting and storing marketing intelligence [43](#page=43). > **Tip:** While some functions like physical possession are obvious cost centers, others like negotiation and information sharing can have less visible but significant financial implications through employee time and the value of market intelligence. ### 2.3 Impact of eliminating channel members When a channel member is eliminated, the universal functions they performed do not disappear; they are simply absorbed by the remaining channel members. This redistribution of functions can lead to increased costs and complexities for the remaining entities [45](#page=45) [46](#page=46). * **Elimination of wholesalers:** If a wholesaler is removed, the producer or retailer must take on responsibilities such as warehousing, inventory management, and distribution [44](#page=44) [45](#page=45). * **Elimination of retailers:** If retailers are eliminated, producers might need to establish direct-to-consumer sales channels, which involves direct customer interaction, order fulfillment, and after-sale service [44](#page=44) [46](#page=46). * **Complex channel structures:** In complex channels with multiple tiers of intermediaries, removing even one tier can significantly alter the distribution dynamics and necessitate a re-evaluation of all channel functions and their associated costs [39](#page=39). The core principle is that channel functions are necessary to move products and ownership from producer to consumer. Eliminating a member simply shifts these functional responsibilities, often leading to increased specialization costs or broader operational burdens for the remaining members [45](#page=45) [46](#page=46). > **Example:** A car manufacturer that traditionally sold through dealerships might choose to sell directly online. In this scenario, the manufacturer takes over the functions previously handled by the dealership, such as displaying vehicles, managing inventory, processing sales, and providing after-sales service. This requires significant investment in showrooms, sales staff, and service centers, directly absorbing the costs previously borne by the independent dealerships [42](#page=42). --- # Case study: Pimkie and Shein partnership This case study examines the strategic partnership between established fast-fashion retailer Pimkie and global online fast-fashion giant Shein, analyzing the roles of each entity and the motivations behind their collaboration [3](#page=3) [47](#page=47). ### 3.1 Company profiles #### 3.1.1 Pimkie Pimkie was founded in 1971 in Lille, France, and primarily operates through a mono-brand physical store model, targeting women aged approximately 18 to 35. The company experienced structural difficulties from the late 2010s onwards, leading to store closures, subsidiary bankruptcies, and management changes. By 2025, Pimkie reported sales of 150 million euros, with 185 shops in France and 28 abroad [48](#page=48). #### 3.1.2 Shein Shein was founded in 2008 in Nanjing, China, and has evolved into a global online fast-fashion and lifestyle retailer. Its business model specializes in low-cost, on-demand production and rapid trend response, leveraging a network of over 3,000 suppliers in China. Shein produces in small batches (e.g., 100 units per design) and uses social media and digital marketing extensively. With an estimated revenue of 38 billion US dollars in 2024 and approximately 16,000 employees globally, Shein is headquartered in Singapore, with its supply chain operations based in China. The company is exploring an IPO and expanding its marketplace model. Shein has faced controversies regarding labor practices, environmental impact, sustainability, and discount advertising, including a 40 million euro fine in France for misleading promotions [49](#page=49). ### 3.2 Partnership analysis The partnership between Pimkie and Shein prompts reflection on the roles of each actor within the distribution channel. Key questions arise regarding Shein's classification as a first-tier or final-tier intermediary, and the specific universal channel functions performed by each company [50](#page=50). > **Tip:** To effectively analyze this partnership, consider the definition of first-tier and final-tier intermediaries, as well as the nine universal channel functions, to determine how Shein and Pimkie fit into these frameworks. The core of the case discussion revolves around the motivations driving Pimkie to adopt this approach and Shein's reasons for engaging in such a collaboration. This highlights a strategic alignment to leverage each other's strengths, potentially to address Pimkie's structural challenges and to further Shein's market reach or operational strategy [50](#page=50). --- # Introduction to channel management concepts This section introduces the fundamental concepts of channel management, focusing on the roles of various actors within a distribution channel and defining what a distribution channel entails. ### 2.1 Course objectives and key topics The objective of this module is to provide a comprehensive understanding of channel management. Key topics covered include: * The various actors within a distribution channel and their respective roles [2](#page=2). * The distinction between first-tier and final-tier intermediaries [2](#page=2). * The nine universal channel functions [2](#page=2). * Project guidelines review [2](#page=2). * A case study on Pimkie x Shein [2](#page=2). ### 2.2 Distribution channel definitions and actors A distribution channel refers to a set of interdependent organizations involved in the process of making a product or service available for use or consumption by the end consumer or business user [ ] [1](#page=1). The actors within a distribution channel can include various intermediaries that facilitate the movement of goods from the producer to the consumer. These actors play crucial roles in the distribution process, ensuring that products reach their intended markets efficiently. #### 2.2.1 First-tier and final-tier intermediaries Intermediaries within a distribution channel can be categorized based on their position relative to the producer and the end consumer. * **First-tier intermediaries** are those directly engaged with the producer. * **Final-tier intermediaries** are those that deal directly with the end consumer or business user [2](#page=2). #### 2.2.2 Universal channel functions Distribution channels perform a set of universal functions that add value to the supply chain. These functions are essential for effective product distribution and include: * [Specific function 1 * [Specific function 2 * [Specific function 3 * [Specific function 4 * [Specific function 5 * [Specific function 6 * [Specific function 7 * [Specific function 8 * [Specific function 9 These functions collectively contribute to the efficient and effective flow of goods and services from origin to consumption [2](#page=2). --- ## 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 set of interdependent organizations involved in the process of making a product or service available for use or consumption by end-users. | | Manufacturer | An entity that produces original goods or services, also referred to as a supplier or producer. This can include branded manufacturers, private label manufacturers, and service manufacturers. | | Original Equipment Manufacturer (OEM) | A company that makes components which are assembled into finished products and services by another company. Examples include producers of computer or car components. | | End-User | The final consumer or business that ultimately uses or consumes a product or service. They are the ultimate destination of goods within a distribution channel. | | Customer | Any individual or business who purchases a product or service. This term can encompass both those who resell and those who consume the purchased items. | | Consumer | An individual end-user who consumes or uses goods or services. They are the final recipient and do not resell the product. | | Intermediary | An organization that participates in a distribution channel to facilitate the movement of products or services from manufacturers to end-users. | | Wholesaler/Distributor | An intermediary that sells to other channel intermediaries or to business end-users, typically in bulk quantities, and not directly to individual consumer end-users. | | Retailer | An intermediary that sells directly to individual consumer end-users, often for personal or family use. They are a key final business in many distribution channels. | | Specialized Intermediaries | Entities that enter a distribution channel specifically to support the selling process, such as those providing financing, media services, or market research. | | Breaking Bulk | The function performed by intermediaries, particularly retailers, to break down large quantities of products (e.g., cartons) into smaller quantities required by individual end-customers. | | Assortment Building | The process by which intermediaries create a curated selection of products designed for specific target clients, often mixing leading brands with their own private labels. | | Search Facilitation | The role of intermediaries in reducing uncertainty for both end-users and producers by connecting buyers with the products they seek and helping producers reach their target markets. | | After-Sale Service | Services provided to end-users after a purchase, such as technical support, installation, warranty, repair, and other forms of post-purchase assistance. | | Consumer Data | Direct, unbiased information about consumer purchasing behavior collected by intermediaries, which can fuel marketing, supply chain, and finance functions. | | First-Tier Intermediary | An intermediary that operates earlier in the distribution channel, typically selling to other intermediaries rather than directly to the final consumer. Distributors are a common example. | | Final-Tier Intermediary | An intermediary that sells directly to the end-user, such as a retailer selling to consumers. They are the last link in the channel before the product reaches the consumer. | | Export Distribution | The process of selling products or services outside of a manufacturer's home domestic market, involving challenges related to product suitability, market reach, and local regulations. | | Universal Channel Functions | A set of nine fundamental activities that are performed by various members of a distribution channel to move products from producers to consumers. These include physical possession, ownership, promotion, negotiation, financing, payment, information sharing, ordering, and risk-taking. | | Information Sharing | The crucial exchange of data and insights about market trends, consumer behavior, and product performance between channel members, vital for strategic decision-making. |