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Big ideas for small business managers : In these difficult times, managing channels of distribution

08 Jun 2015 - {{hitsCtrl.values.hits}}

Three instalments back, when we spoke about marketing mix, we said that it is made up of four Ps. In the past two instalments we concentrated on the first two Ps – product and price. Today, we review the third P – ‘place’ or what we usually call as ‘distribution’.

For our convenience, we may define distribution as “all the organisations through which a product must pass between its point of production or import and consumption.”

Looking at that definition, you can see that a product might pass through several stages before it finally reaches the consumer. The organisations involved in each stage of distribution are commonly referred to as ‘intermediaries’.

The need
Why does a business give the job of selling its products to intermediaries? After all, using an intermediary means giving up some control over how products are sold and who they are sold to. An intermediary will also want to make a profit by getting involved.
The answer lies in efficiency of distribution costs. Intermediaries are specialists in selling. They have the contacts, experience and scale of operation, which means that greater sales can be achieved than if the producing business tried to run a sales operation itself.
It is one thing having a great product, sold at an attractive price. But what if: (1) customers are not near a retailer that is selling the product? (2) A competing product is stocked by a much wider range of outlets? Or (3) a competitor is winning because it has a team of trained distributors or sales agents who are out there meeting customers and closing the sale? That is why distribution matters for a business of any size and it is a crucial part of the marketing mix.
The objective of distribution is clear. It is to make products available in the right place at the right time in the right quantities.

Intermediaries
Distribution is achieved by using one or more distribution channels, including: retailers, distributors/sales agents, direct (e.g. via e-commerce) and wholesalers.
Organisations that form any particular distribution channel perform many key functions: (1) Gathering and distributing market research and intelligence – (important for marketing planning), (2) developing and spreading communications about offers, (3) finding and communicating with prospective buyers, (4) adjusting the offer to fit a buyer’s needs, including grading, assembling and packaging, (5) reaching agreement on price and other terms of the offer, (6) transporting and storing goods, (7) acquiring and using funds to cover the costs of the distribution channel, (8) assuming some commercial risks by operating the channel (e.g. holding stock). As you can see, a whole load of activities are done by the distributer.

All channels eventually get exhausted
However, the problem with relying on one particular distribution channel is, at some point that channel will become exhausted and you will no longer be able to acquire customers at the scale that your business requires.
Exhausting a channel is inevitable for a number of reasons. Firstly, there is always going to be a limited amount of new potential customers that can be sourced through a given channel. Even channels with a lot of open space eventually become exhausted. Secondly, if a channel is particularly effective, your competitors will also start using it to acquire customers. This will drive up the cost of acquiring customers through this channel to a point where it is no longer a cost-effective method. Thirdly, unexpected changes in the market will render certain channels ineffective, often overnight. For example, a new form of distribution channel might pop up that renders your current method totally obsolete.
This is why many manufacturers/importers utilise multiple channels. For example, a manufacturer may, (1) sell to a wholesaler, (2) have a website or shop selling ‘factory direct’ to the public, (3) have representatives selling ‘special offers’ to the public, (4) have agents or distributors selling in other territories.
In determining the best structure (or structures) for your business you’ll need to consider the following questions: (1) What is the most convenient means for customers to obtain the products or services they want? (2) What is the specific level of customer service standard required? (3) What is the most cost-efficient way of providing accessibility and service? (4) How many customers are there? (5) Where are they located and what is their average transaction value? (6) What structures do your competitors use and how efficient are they?

Logistics
Logistics is how you plan, implement and control the physical flow of raw materials, final products or services and related information from your business, or source of supply, to the final end-user (or consumer).
You will need to consider: (1) How you will plan and schedule production, (2) how you will order and receive raw materials or finished products from your suppliers, (3) how much of each finished product you should carry in stock and what are the reorder points, (4) how you will store the products to ensure they are ready for delivery to your customers in good condition, (5) how you will deliver the products to your customers, (6) what stock control, invoicing and transportation administration systems you will require.

E-enabled commerce
In today’s e-enabled world, timely and accurate information is a requirement. The days of keypunching in daily distribution activity and nightly updates to host financial systems are becoming a distant memory for successful distribution operations. Today’s reality is that distribution execution systems must be real-time, customer requirements are moving toward being able to instantly track an order through every step of the fulfilment process to delivery. Optimally, this information is linked to an Internet front-end where a customer can easily log in and see the exact status of their order. Real-time interfaces and host system updates enable this customer-focused initiative.
The reality is that paper equates to errors. Language and educational barriers result in paper, at best, resulting in lost money within the distribution operation or, worse still, lost customers due to fulfilment issues that escape even the best inspection processes. The solution is paperless systems requiring operator validation that the right steps were followed and that the correct product was picked and packed.
Place (or distribution) is a critical element of marketing – after all, marketing is about getting the right product, in the right quantity, to the right place, at the right time.

Planning guidelines for business plan
Current channels -- Describe the make-up of your supply chain. Identify the functions performed at each stage within the network (distributor, dealer, direct, e-commerce). Indicate levels of performance, expressed in sales volume, profitability and percentage of business increases. Where appropriate, also analyses your physical distribution system, such as warehouse locations, inventory systems or just-in-time delivery procedures.

Effectiveness of coverage -- Characterize the effectiveness of coverage by the programmes and services provided for each channel. Comment on effectiveness of the supply chain. Specify the key activities performed at each point and indicate any areas that require corrective action. Also comment on the impact of the future trends in supply chain management including e-commerce.

Future trends -- Indicate future trends in supply management and how they would affect various links in the chain. Also describe trends in e-commerce and any new methods of physical distribution.

(Lionel Wijesiri, a corporate director with over 25 years’ senior managerial experience, can be contacted at [email protected])

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Big ideas for small business managers : In these difficult times, managing channels of distribution

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