Physical distribution

Kotler on Marketing
Establish channels for
different target markets
and aim for efficiency,
control, and
adaptability.

Physical Distribution & Channel
Management
Dimensions of Channel Structure
One of the key characteristic of channel structure is channel
length
⇒ The free market economy, competitive forces and the
profit incentive will tend to bend towards that length of
channel which will be efficient—depending upon type of
product, number of customers, geographical dispersion of
customers, variety required by customers, type and range of
services required etc.

⇒ The second key characteristic of the channel structure
concerns the relationship between channel members—
particularly the relationships that pertain to the power and
decision - making in the channel structure.

Three broad types of channel structure can be
identified on the basis of different relationships.

⇒   Free flow / conventional marketing channels.
⇒   Single Transaction channels.
⇒   Vertical Marketing Systems.

Free flow / Conventional Marketing channels

In this type of a channel essentially each member in the
channel—producer wholesales, retailer, etc.—operates as an
autonomous business unit.

⇒ Each level operates with its own aims and objectives in
mind and no one level of the channel has any degree of
substantial control over the remaining levels.

⇒ The primary force keeping the channel intact is a mutually
beneficial trading arrangement which can be ended by either
party should the arrangement become less beneficial.

Single Transaction channels — It is a channel that
is brought into being or use specifically for each
transaction. Examples of transactions, that require
and use this form of channel relationship would
include financial stock and bond purchases, sales and
purchases of houses, etc.

Vertical Marketing System (VMS)
⇒ In a Vertical Marketing System each level in the distribution
channel acts in a planned and unified way so as to achieve
maximum efficiency for the channel as a whole.

⇒  Unlike the Conventional Marketing Channels or free flow—here
each level in the channel acknowledges and functions on the
basis of interdependence.

⇒  The Vertical Marketing System has three distinct approaches on
the basis of coordination and cooperation achieved in the
system.

⇒   The three Vertical Marketing System approaches are :
a) Corporate Vertical Marketing System.
b) Administered Vertical Marketing System.
c) Contractual Vertical Marketing System.

Corporate Vertical Marketing System (CVMS)
Here one of the channel members owns preceding
and / or subsequent levels in the channels.

⇒ CVMS combines successive stages of
production and distribution under single
ownership.

Administered Vertical Marketing System
 Coordinates successive stages of production and
distribution thro’ the dominance, size and power of one
of the channel members.
 E.g. P & G, HLL, Titan etc. are able to command
unusual cooperation from the resellers in connection with
displays, shelf space, promotions and price policies.

Contractual Vertical Marketing System - is one in which
coordination and cooperation in the channel are achieved
thro’ formal contractual arrangements to obtain more
economies or sales impact than they could achieve alone.
⇒ Consist of independent firms at different levels of
productions and distribution integrating their programme on
contractual basis.
⇒ E.g. Wholesaler - sponsored voluntary chains, retailer
cooperatives, Franchise organizations.
Horizontal Marketing System :
Unrelated companies pooling resources to exploit and
emerging marketing opportunity.
⇒ E.g. Banks and Retail outlets

Channel Design Decisions

 Push Strategy – involves the manufacturer to use its
sales force and trade promotion, money to induce
intermediaries to carry, promote and sell the product to
end users.

 This strategy is appropriate where there is low brand
loyalty in a category,

 Where the brand choice is made in the store,

 When the product is an impulse item.

 Pull Strategy – involves the manufacturer using
advertising and promotion to induce consumers to
ask intermediaries for the product – thus inducing
the intermediaries to order the product.
 This strategy is appropriate when there is high brand
loyalty and high involvement in the category,
 When consumer perceives differences between
brands, and,
 When consumers choose the brand before they go
to the store.

Channel - Design Decisions
Designing a channel system calls for
a) Analyzing customer needs.
b) Establishing channel objectives.
c) Identifying the major channel alternatives.
d) Evaluating them.

 Analyzing Service output levels desired by customers.
Understanding what, where, why, when and how target
customers buy is the first step in designing the marketing
channels.
 Establishing the channel objectives and constraints.
⇒ Channel objectives vary with product characteristics ;
Perishable, Bulky, Non - standardized, High unit value.
⇒ Channel design must take into account the strengths and
weaknesses of different types of intermediaries.
 Identifying the major channel alternatives.
⇒ Sales force, agents, distributors, dealers, direct mail,
telemarketing, internet etc.

Types of intermediaries
 Number of intermediaries
⇒ Exclusive Distribution
⇒ Selective Distribution
⇒ Intensive Distribution.
 Terms and Responsibilities of channel members. The
main elements in the ‘trade - relations mix’ are - price
policies, conditions of sale, territorial rights and specific
services to be performed by each party.

 Evaluating the major channel alternatives
⇒ Economic Criteria
⇒ Control Criteria
⇒ Adaptive Criteria
 Channel Management Decisions
⇒ Selecting Channel Members.
⇒ Motivating Channel Members.
⇒ Training, supervision, encouragement etc.

 Evaluating channel members
⇒ Sales quote attainment, customer delivery time, average
inventory levels, cooperation in promotional and training
programmes.
 Modifying channel Arrangements.
⇒ System will require periodic modification to meet new
conditions in the market place.
⇒ Modifications will be necessary when consumer buying
patterns change, market expands, product matures, new
competition arises and a new innovation in distribution
channel emerges.

 Multichannel Marketing Systems occurs when a
single firm uses two or more marketing channels to reach
one or more customer segments.

⇒ Adding more channels, companies gain three
important benefits : increased marketing coverage,
channel cost and more customized selling.

⇒ New channels may also introduce conflict and
control problems.

 Types of conflict and competition.

⇒ Vertical channel conflict - between different levels.
⇒ Horizontal channel conflicts - conflict between
members at the same channel.

 Multichannel conflict.

Two or more levels compete with each other in selling to
the same market.
 Causes of channel conflict.
⇒ Goal incompatibility.
⇒ Unclear roles and rights .
⇒ Differences in perception
⇒ Dependence

 Managing Channel Conflict
⇒ Super ordinate goals
⇒ Diplomacy
⇒ Mediation
⇒ Arbitration
⇒ Lawsuit

Physical distribution

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