There are approximately 300,000 manufacturing plants in the United States, of which less than 96,000 employ 20 or more workers. Of the 96,000, nearly 40 per cent (38,- 000) can be classified primarily as manufacturers of consumer goods. These plants employ over 4,500,000 people, some 29.6 per cent of all industrial workers. The other 58,000 manufacturing plants are engaged primarily in manufacturing industrial goods.
Of necessity, manufacturing is highly concentrated, since production cannot take place everywhere. But consumption, especially of consumer goods, takes place everywhere. The 200,000,000 people in the United States and the 20,000,000 people living in Canada live and consume everywhere. And while again we find concentrations-the United States has some 17,000 municipalities with close to 70 per cent of the total population —we also find another 17,000 townships with millions of people living in them. All these people are consumers. The finest food or apparel factory in the world is of little value unless its products get from the factories into consumers' hands. The men and women who perform the multitude of services of all kinds connected with the movement of goods from producer to consumer are the distributing middlemen. Regardless of who owns the institution-a manufacturer who operates his own sales branch, the wholesaler, the retailer, the carrier who transports the goods, or even the consumer who "buys direct"-whoever performs any service in connection with the movement of goods from factory to consumer is a middleman.
In marketing, as we have seen, we recognize two basic types of middlemen: (1) the functional middlemen (brokers, agents, commission men), and (2) the marketing middlemen (wholesalers, who are also referred to as jobbers or distributors, and retailers, who are often referred to as dealers).
The services performed by functional middlemen are limited, although very important in some lines of business. They are classified, in the Census of Distribution, as wholesale operators, and will therefore be included in the totals under wholesalers.
The student should remember, however, that functional middlemen are engaged primarily in bringing buyer and seller together and, for the most part, do not take active part in the physical movement of goods from producer to consumer. To most consumers, these functional middlemen are employees or agents of the manufacturer, much as a commission salesman might be employed by a manufacturer. To most people, there fore, these functional middlemen are not strictly middlemen at all. When people speak of middlemen, they generally have reference to the wholesale or the retail merchant.
Of the total value of goods of all kinds sold at wholesale in the United States, merchant wholesalers handle approximately 43 per cent. Manufacturer-owned sales offices and sales branches handle another 31 per cent In our consideration of wholesaling, we shall be primarily concerned with these two types of wholesale distributors: (1) the merchant wholesaler, and (2) the manufacturer-owned sales office or branch. The distinction between a sales office and sales branch is that the sales office does not carry merchandise whereas the branch does.
Friday, October 22, 2010
Wednesday, October 20, 2010
Consignment and Franchise selling
Consignment selling refers to the practice of placing goods in the hands of middlemen, with title and control remaining in the hands of the seller. Distributors who sell on consignment are in effect not wholesalers or retailers, but merely agents. They receive a commission or a share of the sales price. The manufacturer who owns the goods specifies the manner, time and price of sale.
The advantages of consignment selling to the distributor are obvious. He runs no risk of buying and being "stuck" with goods. He has no money invested in stocks. As far as the manufacturer is concerned, he fixes the price and controls the selling techniques. Consignment selling makes cut-price competition impossible.
This method of distribution is not a common one in recent years. It was particularly advantageous to a distributor who lacked the capital with which to buy and sell for his own account. But there was always some doubt about the legality of such arrangements which permitted the manufacturer to enter into agreements with the distributor as to price, selling terms, etc. This has been looked upon in some circles as a violation of antitrust laws. Consignment selling, except for individual and restricted situations, may be said to be on the way out. More and more responsible merchants are in a position to purchase merchandise and finance their profitable distribution.
Although not a new method, franchise selling has in recent years received considerable impetus. The number of independent business men doing franchise selling is estimated to be between 50,000 and 100,000. In essence, this is a system of merchandising whereby a manufacturer or other purveyor of services sets up, under a single brand, a chain of small business men who buy supplies from the franchiser, but otherwise run their own business as they see fit. In some instances, they have to pay a franchise fee, buy equipment, or pay a royalty. The franchiser keeps title to the basic product or service rights.
Franchise merchandising gives the small man a chance to buy on credit. With a minimum of capital investment, he sells specialties or special services, such as ready-cooked meals, specialty foods, carpet cleaning and automobile parts. The parent company does the promoting and supplies management know-how. Bulk buying gives the franchise holder buying advantages in prices and terms.
The advantages of consignment selling to the distributor are obvious. He runs no risk of buying and being "stuck" with goods. He has no money invested in stocks. As far as the manufacturer is concerned, he fixes the price and controls the selling techniques. Consignment selling makes cut-price competition impossible.
This method of distribution is not a common one in recent years. It was particularly advantageous to a distributor who lacked the capital with which to buy and sell for his own account. But there was always some doubt about the legality of such arrangements which permitted the manufacturer to enter into agreements with the distributor as to price, selling terms, etc. This has been looked upon in some circles as a violation of antitrust laws. Consignment selling, except for individual and restricted situations, may be said to be on the way out. More and more responsible merchants are in a position to purchase merchandise and finance their profitable distribution.
Although not a new method, franchise selling has in recent years received considerable impetus. The number of independent business men doing franchise selling is estimated to be between 50,000 and 100,000. In essence, this is a system of merchandising whereby a manufacturer or other purveyor of services sets up, under a single brand, a chain of small business men who buy supplies from the franchiser, but otherwise run their own business as they see fit. In some instances, they have to pay a franchise fee, buy equipment, or pay a royalty. The franchiser keeps title to the basic product or service rights.
Franchise merchandising gives the small man a chance to buy on credit. With a minimum of capital investment, he sells specialties or special services, such as ready-cooked meals, specialty foods, carpet cleaning and automobile parts. The parent company does the promoting and supplies management know-how. Bulk buying gives the franchise holder buying advantages in prices and terms.
Sunday, October 17, 2010
Selective distribution
Selective distribution is a policy of a manufacturer who selects a limited number of wholesale or retail distributors and works closely with them to further the sale of his merchandise. Generally, this is done on a carefully worked-out plan. Selective distribution can be used on any type of product, even with convenience goods, but, of course, such a policy will restrict the distribution. The idea is to select the best distributors available, concentrate effort on them, and thus obtain a greater selling effort for the manufacturer's products.
Naturally, the volume of business desired is important in appointing selective distributors. Fewer distributors may mean fewer sales, fewer contacts with prospective buyers. There are distinct advantages, however, in appointing selective distributors. The manufacturer can pick the outlets he wants. He can concentrate on them, and eliminate some of the marketing headaches which beset almost all sellers who sell on a wide regional or national basis. Some of the problems include such things as small orders placed by buyers with limited volume sales, the credit risk in dealing with everybody, limited or negligible services rendered by the dis tributor, and excessive return of goods because of the inability of some distributors to dispose of the merchandise.
Generally speaking, selective distribution lends it self better to shopping goods, which carry a higher unit price, and which are not purchased as frequently as convenience goods. Goods which require service are often sold through selective distribution outlets. This is the case with some household appliances and office- type equipment.
Exclusive distribution refers to the practice of selecting and giving a distributor an exclusive territory. The manufacturer agrees to sell to no one else in that territory. This is called an exclusive selling agreement. The distributor in turn often (but not always) agrees not to handle or to deal in any competing product. This is called an exclusive dealing agreement.
Naturally, an exclusive distributorship limits the contacts with the buying public, and thus the total volume of possible sales. In return, however, the manufacturer gains by knowing that his products will be featured and, if the dealership has been chosen with care, the manufacturer acquires a degree of prestige because of having an exclusive dealer.
In turn, it is to the advantage of the exclusive distributor to push merchandise, because he is not only protected as far as competitors in the area are concerned, but also he is protected against any price cut ting. If price reductions are made, the manufacturer makes them, fully protecting the dealer's margins and profits as he does so. The exclusive dealer, buying with greater confidence, often places larger orders. His credit risk is minimized as is the manufacturer's.
There is some doubt about the legality of many exclusive distribution agreements. While still widely used in industry, there is growing agitation on the part of governmental agencies to examine and condemn such agreements on the grounds that they restrict trade.
Naturally, the volume of business desired is important in appointing selective distributors. Fewer distributors may mean fewer sales, fewer contacts with prospective buyers. There are distinct advantages, however, in appointing selective distributors. The manufacturer can pick the outlets he wants. He can concentrate on them, and eliminate some of the marketing headaches which beset almost all sellers who sell on a wide regional or national basis. Some of the problems include such things as small orders placed by buyers with limited volume sales, the credit risk in dealing with everybody, limited or negligible services rendered by the dis tributor, and excessive return of goods because of the inability of some distributors to dispose of the merchandise.
Generally speaking, selective distribution lends it self better to shopping goods, which carry a higher unit price, and which are not purchased as frequently as convenience goods. Goods which require service are often sold through selective distribution outlets. This is the case with some household appliances and office- type equipment.
Exclusive distribution refers to the practice of selecting and giving a distributor an exclusive territory. The manufacturer agrees to sell to no one else in that territory. This is called an exclusive selling agreement. The distributor in turn often (but not always) agrees not to handle or to deal in any competing product. This is called an exclusive dealing agreement.
Naturally, an exclusive distributorship limits the contacts with the buying public, and thus the total volume of possible sales. In return, however, the manufacturer gains by knowing that his products will be featured and, if the dealership has been chosen with care, the manufacturer acquires a degree of prestige because of having an exclusive dealer.
In turn, it is to the advantage of the exclusive distributor to push merchandise, because he is not only protected as far as competitors in the area are concerned, but also he is protected against any price cut ting. If price reductions are made, the manufacturer makes them, fully protecting the dealer's margins and profits as he does so. The exclusive dealer, buying with greater confidence, often places larger orders. His credit risk is minimized as is the manufacturer's.
There is some doubt about the legality of many exclusive distribution agreements. While still widely used in industry, there is growing agitation on the part of governmental agencies to examine and condemn such agreements on the grounds that they restrict trade.
Friday, October 15, 2010
Setting trade channel policy
We have seen that the manufacturer must consider the nature of the product, the characteristics of the market, the characteristics of the individual buyer, the buying habits of the buyer, and the competition he faces before he determines what he can or should do. The failure of some distributors to serve the consumer (for example, the appliance distributor who is not in a position to service major appliances in the buyer's home after purchase) has often led the manufacturer to go closer to the consumer in an effort to improve the total selling job.
Most manufacturers do not consider that the sale is made until the ultimate buyer gets full value and use out of the product. Some manufacturers have even established retail stores, feeling that many retailers lack marketing stability. A manufacturer must, therefore, constantly review his channel policies and make sure that they are not only adequate, but the best for his situation.
In setting his channel policy, the manufacturer will consider his total sales volume, the stability of sales in his line, the effect of the different channels on his gross margin and on his operating costs and profits. Much will depend on the degree of aggressiveness exhibited by different types of distributors, as well as the amount of sales effort the manufacturer considers necessary to sell his products effectively.
No marketing policy, and this includes channel selection policy, can be permanent or unchangeable. Many manufacturers have made the mistake of waiting too long before they change, only to find that competitors have outstripped them by taking advantage of the changed policy. On the other hand, of course, it is dangerous to make drastic changes without adequate information and reasonable expectation of improvement. The ultimate test must be the effectiveness and economy of serving the consumer.
Intensive distribution is the policy of a manufacturer who seeks to use as many outlets as possible, in as many places as possible. It is also called maximum expansion. Manufacturers who sell convenience goods usually try to get intensive distribution.
Convenience goods are those which consumers purchase frequently, on the spur of the moment for a small unit price. Cigarettes are a case in point. There are literally hundreds of thousands of outlets for cigarettes. The fantastic growth in the consumption of cigarettes has been due, in part, to their general availability. Tobacco manufacturers increased their advertising from $93 million to $210 million during the last decade in order to provide adequate advertising support to the ad¬ditional tens of thousands of outlets added during that period.
Most manufacturers do not consider that the sale is made until the ultimate buyer gets full value and use out of the product. Some manufacturers have even established retail stores, feeling that many retailers lack marketing stability. A manufacturer must, therefore, constantly review his channel policies and make sure that they are not only adequate, but the best for his situation.
In setting his channel policy, the manufacturer will consider his total sales volume, the stability of sales in his line, the effect of the different channels on his gross margin and on his operating costs and profits. Much will depend on the degree of aggressiveness exhibited by different types of distributors, as well as the amount of sales effort the manufacturer considers necessary to sell his products effectively.
No marketing policy, and this includes channel selection policy, can be permanent or unchangeable. Many manufacturers have made the mistake of waiting too long before they change, only to find that competitors have outstripped them by taking advantage of the changed policy. On the other hand, of course, it is dangerous to make drastic changes without adequate information and reasonable expectation of improvement. The ultimate test must be the effectiveness and economy of serving the consumer.
Intensive distribution is the policy of a manufacturer who seeks to use as many outlets as possible, in as many places as possible. It is also called maximum expansion. Manufacturers who sell convenience goods usually try to get intensive distribution.
Convenience goods are those which consumers purchase frequently, on the spur of the moment for a small unit price. Cigarettes are a case in point. There are literally hundreds of thousands of outlets for cigarettes. The fantastic growth in the consumption of cigarettes has been due, in part, to their general availability. Tobacco manufacturers increased their advertising from $93 million to $210 million during the last decade in order to provide adequate advertising support to the ad¬ditional tens of thousands of outlets added during that period.
Tuesday, October 12, 2010
The four principal trade channels
Attempts have been made to establish exact points of difference between the usually recognized trade channels. Sometimes, they are designated as long or short channels, depending on the number of separate hands through which the goods pass between manufacturer and consumer. There are direct or indirect channels, depending on the degree to which the manufacturer himself controls and performs the functions which must be performed in the process of moving goods from point of production to point of consumption.
Perhaps the best method is the one that distinguishes between the type of middleman that takes part in the process. In this way, we can set out four distinct types of performers:
(a) Channel A. Distribution through an agency that stands between the manufacturer and the wholesaler. In this channel, we find the broker, the manufacturer's agent, the commission merchant, and the export merchant. Generally speaking, the manufacturer uses this channel when he cannot afford or does not wish to invest the necessary amount to develop a sales force of his own.
One example will make this clear. A manufacturer of high-pressure hose and brass couplings for the transportation industry found that he could operate a sales
branch with stock at a cost of 7.7 per cent of sales. The earnings and expenses of his salesmen cost him an addi¬tional 11 per cent of sales. Thus the cost of managing his branch and the cost of direct selling added up to 18.7 per cent of sales. A commission merchant agreed to distribute the same goods for 6.5 per cent, provided the manufacturer warehouse the stock and ship to the buyer against orders sent in.
By centralizing warehousing activities, the manu¬facturer was able to establish three shipping points, operated at an overhead cost of 6 per cent of sales. This, plus the 6.5 per cent commission to the agent, made a total cost of 12.5 per cent as against 18.7 per cent when he sold through his own branches and sales force. In this instance, the manufacturer gave up some of the advantages of control which he could exercise with his own branches, and saved the difference in cost.
(b) Channel B. Selling to wholesalers who sell to retailers. Selling to wholesalers is often referred to as the traditional channel. The term wholesaler stands for very specific functions of buying in large quantities, re¬ceiving and storing, selling in smaller quantities to a large number of retail buyers (this is sometimes re¬ferred to as breaking bulk), and doing all these things for his own account. Thus, the wholesaler is a merchant who buys goods from a manufacturer and sells to the retailer. He naturally tries to sell for more than he pays. The difference is called the margin, markup, or gross profit.
(c) Channel C. Selling direct to retailers or dealers. When the manufacturer sells direct, he assumes the functions of the agent or broker, whose job it was to find wholesale buyers. He also assumes the functions of the wholesaler, whose job it was to buy in large quantities, and resell in smaller quantities. This naturally means greater inventory and a larger sales force for the manufacturer. It means operation and management of warehouses. It means more activity on the part of the manufacturer in arranging for, supervising, and controlling transportation to the retail destinations.
The development of supermarkets, of department stores, and of discount houses would have been almost impossible if it had not been for the ability of large retailers to buy direct from the manufacturer, and, in turn, for ability of the manufacturer to establish close merchandising and promotion relations with these large-scale retailers. Exclusive selling, discussed later in this chapter, would also be difficult in some instances without this direct relationship.
(d) Channel D. Selling direct to consumers. Selling direct to consumers is more common in industrial marketing than in the marketing of consumer goods. Industrial chemicals, machinery installations, heavy equipment and made-to-order installations are generally sold on a direct manufacturer-to-user basis.
The federal government, which has become the largest buyer of machinery and equipment in the world, also buys direct from the manufacturer. Most goods manufactured for the government, particularly for the defense program, are made to order. By their very nature, these cannot be commercial products. Even commercial products, such as automobiles, jeeps, and supplies are usually purchased direct by government agencies.
Direct selling of commercial goods to the consumer, by house-to-house, mail order, or through vending machines still constitutes a very small part of total retail selling, about 3 per cent.
Perhaps the best method is the one that distinguishes between the type of middleman that takes part in the process. In this way, we can set out four distinct types of performers:
(a) Channel A. Distribution through an agency that stands between the manufacturer and the wholesaler. In this channel, we find the broker, the manufacturer's agent, the commission merchant, and the export merchant. Generally speaking, the manufacturer uses this channel when he cannot afford or does not wish to invest the necessary amount to develop a sales force of his own.
One example will make this clear. A manufacturer of high-pressure hose and brass couplings for the transportation industry found that he could operate a sales
branch with stock at a cost of 7.7 per cent of sales. The earnings and expenses of his salesmen cost him an addi¬tional 11 per cent of sales. Thus the cost of managing his branch and the cost of direct selling added up to 18.7 per cent of sales. A commission merchant agreed to distribute the same goods for 6.5 per cent, provided the manufacturer warehouse the stock and ship to the buyer against orders sent in.
By centralizing warehousing activities, the manu¬facturer was able to establish three shipping points, operated at an overhead cost of 6 per cent of sales. This, plus the 6.5 per cent commission to the agent, made a total cost of 12.5 per cent as against 18.7 per cent when he sold through his own branches and sales force. In this instance, the manufacturer gave up some of the advantages of control which he could exercise with his own branches, and saved the difference in cost.
(b) Channel B. Selling to wholesalers who sell to retailers. Selling to wholesalers is often referred to as the traditional channel. The term wholesaler stands for very specific functions of buying in large quantities, re¬ceiving and storing, selling in smaller quantities to a large number of retail buyers (this is sometimes re¬ferred to as breaking bulk), and doing all these things for his own account. Thus, the wholesaler is a merchant who buys goods from a manufacturer and sells to the retailer. He naturally tries to sell for more than he pays. The difference is called the margin, markup, or gross profit.
(c) Channel C. Selling direct to retailers or dealers. When the manufacturer sells direct, he assumes the functions of the agent or broker, whose job it was to find wholesale buyers. He also assumes the functions of the wholesaler, whose job it was to buy in large quantities, and resell in smaller quantities. This naturally means greater inventory and a larger sales force for the manufacturer. It means operation and management of warehouses. It means more activity on the part of the manufacturer in arranging for, supervising, and controlling transportation to the retail destinations.
The development of supermarkets, of department stores, and of discount houses would have been almost impossible if it had not been for the ability of large retailers to buy direct from the manufacturer, and, in turn, for ability of the manufacturer to establish close merchandising and promotion relations with these large-scale retailers. Exclusive selling, discussed later in this chapter, would also be difficult in some instances without this direct relationship.
(d) Channel D. Selling direct to consumers. Selling direct to consumers is more common in industrial marketing than in the marketing of consumer goods. Industrial chemicals, machinery installations, heavy equipment and made-to-order installations are generally sold on a direct manufacturer-to-user basis.
The federal government, which has become the largest buyer of machinery and equipment in the world, also buys direct from the manufacturer. Most goods manufactured for the government, particularly for the defense program, are made to order. By their very nature, these cannot be commercial products. Even commercial products, such as automobiles, jeeps, and supplies are usually purchased direct by government agencies.
Direct selling of commercial goods to the consumer, by house-to-house, mail order, or through vending machines still constitutes a very small part of total retail selling, about 3 per cent.
Saturday, October 9, 2010
Factors determining the choice of channels
The selection of channels of distribution depends first and foremost on the requirements of the market: what the consumer wants, and how much is wanted. But the manufacturer entering a market must also determine what he himself wants; what share of the market he wishes to attain, how much he is willing or able to in¬vest in order to attain it, and how best he can reach the market in order to attain it, and how best he can reach the market in order to get his desired share of it. There is no over-all blueprint which can tell any seller what the best channels are for him. In each instance, the seller has to consider his own objectives, resources, and, of course, the channels which are available to him.
The individual manufacturer or seller making a choice of how he will get his goods most economically and efficiently into the hands of potential consumers has to consider several specific factors. The following six factors will always enter into his calculations:
(a) The type, size and nature of customers demand. The market is naturally going to influence the channels selected.
(b) The nature of the company's business. A manufacturer of fine writing paper in West Virginia has only certain channels open to him if he wants to sell paper for letterheads to a corporation in New York City. But the manufacturer of locomotives has only a handful of potential customers and he deals directly with them.
(c) The type of product sold. Is it a consumer product or an industrial one? Is it a capital good (that is, a piece of major equipment capitalized over a period of years), or an industrial material, such as a heavy chemical? Is it bulk, like petroleum products, or individually packaged units, like cigarettes?
(d) The price of the unit of sale. What does the unit sell for? Three-thousand dollars, like an automobile, or thirty cents like a package of cake mix?
(e) The price, margins and markups necessary to induce distributors to handle the goods. The performers of the different services have to be compensated for their services. How much does the distributor need to make to induce him to handle the product?
The manufacturer of only one product or a limited line of products has a distribution problem entirely different from that of the multi-product manufacturer with an extensive line. For example, there is little similarity between the problem of a manufacturer of aluminum window sash and that of a manufacturer like General Foods which produces several hundred products.
The ability of the manufacturer to compete successfully will be based on his ability to gain the most economical form of distribution, and to develop continued profit. In general, we recognize two primary choices that a manufacturer has in his attempt to get his goods from factory to consumer: He may turn the selling job over to someone else, such as selling agents. These are independent business men who operate on a commission and whose principal function is to sell the entire output of a manufacturer or of a limited number of manufacturers. Such business men have unlimited territory, and generally unlimited authority to set price and terms. In effect, they operate as sales agents for manufacturers, generally for a commission ranging from 3 to 5 per cent of net sales.
He may choose to use one of the available trade channels, and thus participate to a greater or lesser extent in the distribution process. If he chooses to use a channel, he has a choice of four channels which have general identifiable characteristics setting each apart from the others.
The individual manufacturer or seller making a choice of how he will get his goods most economically and efficiently into the hands of potential consumers has to consider several specific factors. The following six factors will always enter into his calculations:
(a) The type, size and nature of customers demand. The market is naturally going to influence the channels selected.
(b) The nature of the company's business. A manufacturer of fine writing paper in West Virginia has only certain channels open to him if he wants to sell paper for letterheads to a corporation in New York City. But the manufacturer of locomotives has only a handful of potential customers and he deals directly with them.
(c) The type of product sold. Is it a consumer product or an industrial one? Is it a capital good (that is, a piece of major equipment capitalized over a period of years), or an industrial material, such as a heavy chemical? Is it bulk, like petroleum products, or individually packaged units, like cigarettes?
(d) The price of the unit of sale. What does the unit sell for? Three-thousand dollars, like an automobile, or thirty cents like a package of cake mix?
(e) The price, margins and markups necessary to induce distributors to handle the goods. The performers of the different services have to be compensated for their services. How much does the distributor need to make to induce him to handle the product?
The manufacturer of only one product or a limited line of products has a distribution problem entirely different from that of the multi-product manufacturer with an extensive line. For example, there is little similarity between the problem of a manufacturer of aluminum window sash and that of a manufacturer like General Foods which produces several hundred products.
The ability of the manufacturer to compete successfully will be based on his ability to gain the most economical form of distribution, and to develop continued profit. In general, we recognize two primary choices that a manufacturer has in his attempt to get his goods from factory to consumer: He may turn the selling job over to someone else, such as selling agents. These are independent business men who operate on a commission and whose principal function is to sell the entire output of a manufacturer or of a limited number of manufacturers. Such business men have unlimited territory, and generally unlimited authority to set price and terms. In effect, they operate as sales agents for manufacturers, generally for a commission ranging from 3 to 5 per cent of net sales.
He may choose to use one of the available trade channels, and thus participate to a greater or lesser extent in the distribution process. If he chooses to use a channel, he has a choice of four channels which have general identifiable characteristics setting each apart from the others.
Tuesday, October 5, 2010
The importance of choice of channels of distribution
The channel chosen, whether direct from factory to consumer or through functional and merchant middlemen, has a great deal to do with the destination reached by the goods, the cost at which they reach this destination, the utility, value and satisfaction derived by the consumer from the goods.
The choice of channels will also determine the type of coverage obtained by a seller, and the services provided to both seller and consumer in the process of transferring both the physical goods and the ownership of the goods from producer to consumer. In a mass- production economy, such as we have in our complex industrial society, goods must be moved from point of production to point of consumption. This involves people, services, equipment, expense, and the passage of time.
Without this service of getting goods from point of production to point of consumption, we could not have mass production. By its very name, mass production implies production in far greater quantities than can be consumed by the people living near a factory. The bigger the production, the larger the market must be. Markets-regional, national and world-wide-would be impossible without distribution; and distribution would be impossible without the channels which render the services and perform the necessary functions. To this extent, therefore, middlemen and channels of distribution might be said to be synonymous.
When the consumer performs any part of the necessary functions of movement and transfer, such as ordering by mail, or carrying purchases home, he himself is performing as a middleman. The same is true of a manufacturer who chooses to sell direct, through sales men who sell house-to-house. The independent performer might thus be eliminated, but not the performance or function.
Thus, the choice of channels will influence not only the extent of the market attained by the seller and the service rendered the consumer, but will influence employment, total earnings, volume of goods manufactured and sold, and volume of goods consumed. It will influence the standard of living and the well-being of the nation as a whole. For this reason, many marketing people believe that the proper choice of channels is one of the most important management decisions in marketing.
The choice of channels will also determine the type of coverage obtained by a seller, and the services provided to both seller and consumer in the process of transferring both the physical goods and the ownership of the goods from producer to consumer. In a mass- production economy, such as we have in our complex industrial society, goods must be moved from point of production to point of consumption. This involves people, services, equipment, expense, and the passage of time.
Without this service of getting goods from point of production to point of consumption, we could not have mass production. By its very name, mass production implies production in far greater quantities than can be consumed by the people living near a factory. The bigger the production, the larger the market must be. Markets-regional, national and world-wide-would be impossible without distribution; and distribution would be impossible without the channels which render the services and perform the necessary functions. To this extent, therefore, middlemen and channels of distribution might be said to be synonymous.
When the consumer performs any part of the necessary functions of movement and transfer, such as ordering by mail, or carrying purchases home, he himself is performing as a middleman. The same is true of a manufacturer who chooses to sell direct, through sales men who sell house-to-house. The independent performer might thus be eliminated, but not the performance or function.
Thus, the choice of channels will influence not only the extent of the market attained by the seller and the service rendered the consumer, but will influence employment, total earnings, volume of goods manufactured and sold, and volume of goods consumed. It will influence the standard of living and the well-being of the nation as a whole. For this reason, many marketing people believe that the proper choice of channels is one of the most important management decisions in marketing.
Saturday, October 2, 2010
The meaning of distribution channels
The channels of distribution are the means employed by manufacturers and sellers to get their products to market and into the hands of users. Channels are management tools used to move goods from production to consumption; they are the means by which title to goods is transferred from seller to buyer.
In essence, therefore, channels are tools hired to do the job of getting goods from factory or place of production into the hands of the ultimate user. It is natural that the cost of hire should be paid by those who benefit from the service; in most instances, the ultimate consumer.
The entire function of getting goods into the hands of the consumer is often referred to as distribution. This function includes transportation in the broadest sense, as well as the middlemen who handle the goods and help to transfer title to the goods. Thus, it would be unwise and inaccurate to refer to channels of distribution as the middlemen engaged in moving goods from production to consumption unless we include transportation in our category of middlemen.
Channels of distribution help to move goods from one place to another; hence, they add place utility. They bring goods to the consumer when the consumer wants them; hence they add time utility. They bring the goods to the consumer in convenient shape, unit, size, style, and package; hence they add convenience value. They make it possible for the consumer to obtain goods at a price he is willing to pay, and under conditions which bring satisfaction and pride of ownership; hence, they add possession value.
Not all channels perform all these services with equal efficiency. Some cost more than others. Some render greater service to the consumer than others. Some add greater value to the goods in transit than others. Manufacturers and sellers are therefore constantly reviewing their channels of distribution with an eye to improving efficiency and reducing cost. There is consequently continual change going on at both the wholesale and retail level.
It is essential ior the student to distinguish between the service rendered by the various channels of distribution and the cost of distribution. Many persons have glibly advocated eliminating the middleman as the cure-all for rising costs of distribution. This is fallacious thinking because these critics confuse the function with the performer.
The function performed by the distribution channels must be performed if we are to get the goods from the furniture factory in Grand Rapids, Michigan, for example, to the housewife in Boston, Massachusetts. Someone must handle, ship, package, transport, warehouse, store, sell, retail and deliver the furniture before the consumer can use it. And, of course, unless the consumer can use it-that is, can get utility out of it-the particular item, whether furniture, gasoline or a head of lettuce, has little use to the consumer.
It is possible, of course, to eliminate a given individual, such as a wholesaler or a retailer middleman, and buy direct from the factory. But this means that the service of transfer, storage, handling, and transportation has to be performed either by the manufacturer or by the consumer himself.
The services or functions connected with the movement of goods from factory to home must be performed. The desired objective is to perform these services or functions at the lowest possible cost, with the greatest possible efficiency in order to serve the consumer best. This is not charity but common sense. If one manufacturer or seller does not seek to do this, a competitor will replace him. Even if a manufacturer should not want to serve the consumer to the best of his ability, he would be forced by competition to do so.
In essence, therefore, channels are tools hired to do the job of getting goods from factory or place of production into the hands of the ultimate user. It is natural that the cost of hire should be paid by those who benefit from the service; in most instances, the ultimate consumer.
The entire function of getting goods into the hands of the consumer is often referred to as distribution. This function includes transportation in the broadest sense, as well as the middlemen who handle the goods and help to transfer title to the goods. Thus, it would be unwise and inaccurate to refer to channels of distribution as the middlemen engaged in moving goods from production to consumption unless we include transportation in our category of middlemen.
Channels of distribution help to move goods from one place to another; hence, they add place utility. They bring goods to the consumer when the consumer wants them; hence they add time utility. They bring the goods to the consumer in convenient shape, unit, size, style, and package; hence they add convenience value. They make it possible for the consumer to obtain goods at a price he is willing to pay, and under conditions which bring satisfaction and pride of ownership; hence, they add possession value.
Not all channels perform all these services with equal efficiency. Some cost more than others. Some render greater service to the consumer than others. Some add greater value to the goods in transit than others. Manufacturers and sellers are therefore constantly reviewing their channels of distribution with an eye to improving efficiency and reducing cost. There is consequently continual change going on at both the wholesale and retail level.
It is essential ior the student to distinguish between the service rendered by the various channels of distribution and the cost of distribution. Many persons have glibly advocated eliminating the middleman as the cure-all for rising costs of distribution. This is fallacious thinking because these critics confuse the function with the performer.
The function performed by the distribution channels must be performed if we are to get the goods from the furniture factory in Grand Rapids, Michigan, for example, to the housewife in Boston, Massachusetts. Someone must handle, ship, package, transport, warehouse, store, sell, retail and deliver the furniture before the consumer can use it. And, of course, unless the consumer can use it-that is, can get utility out of it-the particular item, whether furniture, gasoline or a head of lettuce, has little use to the consumer.
It is possible, of course, to eliminate a given individual, such as a wholesaler or a retailer middleman, and buy direct from the factory. But this means that the service of transfer, storage, handling, and transportation has to be performed either by the manufacturer or by the consumer himself.
The services or functions connected with the movement of goods from factory to home must be performed. The desired objective is to perform these services or functions at the lowest possible cost, with the greatest possible efficiency in order to serve the consumer best. This is not charity but common sense. If one manufacturer or seller does not seek to do this, a competitor will replace him. Even if a manufacturer should not want to serve the consumer to the best of his ability, he would be forced by competition to do so.
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