Chapter Three: Channels of Distribution Management

CHAPTER THREE:
CHANNELS OF DISTRIBUTION MANAGEMENT
LECTURER:
SHAMARIZA BINTI MAAROF

J A B ATA N P E R D A G A N G A N
POLITEKNIK NILAI
Lesson Learning Outcome
2
Students should be able :
1. Explain physical distribution channel types
2. Distribution channel structure
3. Explain outsourcing channels

Market
Company Channel
Resource characteristics Product
Competitive
3
Channel characteristics
4
There a number of channel characteristics also need

to be considered in association of the channel
objective in the previous section.
These characteristics could affecting the decision on

designing a channel to be used in the distribution
system.
5
Market characteristics – the main consideration

for this characteristics is to use the channels that are
the most appropriate to get the product to the end
user.
 The size, spread and density of the market are the factors
to be considered. If the market is a very large one that is
widely spread from a geographic point of view, the ‘long’
channel could be used. If the market is considered very
small, then use the ‘short’ channel.
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Long channel:
 There are several different storage point, different movement for the
product to be transferred from the production house to final customer
 Example: Manufacturer’s warehouse > manufacturer’s depot > 3 rd
party central depot > 3rd party regional depot > retailer’s regional
depot > retail store
Short channel:
 Only has a very few buyers in a limited geographical area

 Example: Manufacturer’s warehouse > buyer’s factory warehouse
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Product characteristics – the importance of the

product itself could determining the appropriate
channel to be used. This is because the products may
put a constraint on the selected channel. For example:
 High-value items – most likely to be sold through the short

channel due to the high gross profit margins can more easily
cover the higher sales and distribution cost. The short channel also
could improve the security aspects such as loss. Its also could
reduce the requirement for carrying the inventory of high value
goods and the associates poor use of working capital.
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 Complex products – often require direct selling

because any intermediary may not be able to explain how
the product work to potential customers.
 New products – often distributed via 3rd party channel

because final demand is unknown and supply channels
need to be very flexible to respond to both high and low
demand levels. Existing own account operations can
seldom deal effectively with the vagaries of new product
demand.
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 Time-sensitive products – products need a ‘fast’ or ‘short’

channel, for shelf life reasons in the case of food products such
as bread and cakes, and relevance in the case of newspapers
and tender documents.
 Product with handling constraint may require a specialist

physical distribution channel, e.g. frozen food, china and glass,
hanging garments and hazardous chemicals.
10
Competitive characteristics – concern the

activities of any competitors selling a similar
product, or whether to try a different channel such as
exclusive outlets to sell the product in order to avoid
the competition and risk of substitution.
It may well be that the consumer preference for a

wide choice necessitates the same outlet being
supplied. Good examples include confectionary and
most grocery items.
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Company Resources – In the final analysis, it is often the

size and the financial strength of the company that is most
important in determining channel strategy.
Only a large and cash-rich company can afford to setup their

own distribution structure that includes all of its own
distribution and transport facilities.
This is because the company wants a greater control which

they can deliver what their customers desired. For the small
companies, they might used the intermediaries or 3 rd party to
perform their distribution function.
The Design of A Channel Structure
12
 All of the factors in previous section must be taken into

consideration when designing a channel structure and
selecting a channel members.
 This is the formalize approach that might be adopted when

undertaking the design of a channel structure is set out.
1. Set and co-ordinate distribution objective

2. specify the distribution tasks
3. develop alternative channel structure
4. evaluate the relevant variables
5. choose the best channel structure
6. select channel members
13
14
The Future of Outsourcing
15
In recent years, the 3rd party service providers has

been questionable due to the service levels are not up
to the standard.
There is disappointment that agreed service levels

are not maintained, the costs are higher than
estimated and no proof on cost reduction, and the
quality, commitment and ability of the people used
to manage their operations are insufficient.
16
There are several solution has been put forward to overcome

this issues.
i. A partnership approach – to create a more positive and

co-operative alliance between the user and the contractor
and to eliminate the combative culture that has evolved in
some relationship. The ideal is for a constructive alliance
where both parties work together to identify ways of
improving service and reducing costs.
ii. The creation of integrated global contractors – who

are able to offer a full logistics services across all region.
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iii. The use of incentivized contracts – The

contract is drawn up with clearly defined opportunities
for the service provider to identify and introduce
methods of service improvement or cost reduction.
The key is that the service provider is rewarded for
identifying and implementing these improvement.
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iv. A move to much more rigorous selection of

contractors – there is now a clearly laid-out process
for contractors selection, which most large companies
adhere to.
v. The 4th party logistics – the creation of an

additional enterprise or organisation to oversee and
take responsibility for all the outsourced operations.
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CHAPTER THREE:

CHANNELS OF DISTRIBUTION MANAGEMENT

SHAMARIZA BINTI MAAROF

Students should be able :

1. Explain physical distribution channel types

2. Distribution channel structure

3. Explain outsourcing channels

There a number of channel characteristics also need

These characteristics could affecting the decision on

Market characteristics – the main consideration

 Only has a very few buyers in a limited geographical area

Product characteristics – the importance of the

 High-value items – most likely to be sold through the short

 Complex products – often require direct selling

 New products – often distributed via 3rd party channel

 Time-sensitive products – products need a ‘fast’ or ‘short’

 Product with handling constraint may require a specialist

Competitive characteristics – concern the

It may well be that the consumer preference for a

Company Resources – In the final analysis, it is often the

Only a large and cash-rich company can afford to setup their

This is because the company wants a greater control which

 All of the factors in previous section must be taken into

 This is the formalize approach that might be adopted when

1. Set and co-ordinate distribution objective

In recent years, the 3rd party service providers has

There is disappointment that agreed service levels

There are several solution has been put forward to overcome

i. A partnership approach – to create a more positive and

ii. The creation of integrated global contractors – who

iii. The use of incentivized contracts – The

iv. A move to much more rigorous selection of

v. The 4th party logistics – the creation of an

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