Distribution, distribution channels and distributors

One of the important sub-concepts in supply chain management (SCM) is distribution. Distribution is also one of the four Ps of the marketing mix. The four Ps of the marketing mix are product, price, place (distribution) and promotion. After the product is manufactured or service produced is ready for consumption – it has to be distributed.

Distribution describes the activity of distributing products or services from producer to the final consumer.

Distributors, which are also called intermediaries, assist in the distribution of products or services to the final consumer. Examples of distributors of products could be an agent, wholesaler or retailer. An example of distributors of services could be an employment agency which distributes the labour of job seekers to employers.

Some distributors take a title and are called merchant middlemen. Examples of merchant middlemen include wholesalers and retailers. Those distributors who do not take a title are called middlemen (as well as brokers and agents). An, example of a middleman is an insurance broker.

Distribution channels

There can be direct or indirect distribution channels:

A Direct distribution channel does not involve the help of an intermediary (distributor). In the case of a direct distribution channel, the product or service is distributed directly from the producer to the final consumer. An example of direct distribution channels is the case when an organization distributes its products directly from its website.

Indirect distribution channels involve the help of an intermediary (distributor) which acts as a middleman between the producer and final consumer. There can be one or more levels of distributors between the producer and final consumer. For example, the product can be distributed to an agent who in turn distributes it to the wholesaler who in turn distributes it to a retailer. The final customer buys product from the retailer. In this case there are three levels of distributors between the producer and final consumer.

If the company uses a combination of distribution channels it is called dual distribution. An example of dual distribution occurs when the company offers its products directly from its website (direct distribution channel) as well as via local retailers (indirect distribution channel). Dual distribution may allow the company to achieve higher profitability.

There are various factors that must be considered in selecting a distribution channel. Those factors include: nature of the product, strategies followed by competitors, availability and reliability of intermediaries, customer preferences and characteristics, cost of involving intermediaries, size of the business (capacity to deal with a large intermediary such as a national retailer) and warranties (capacity to offer warranties that may be demanded by the intermediary).

Disadvantages of using intermediaries include a generally higher price to consumers, lower degree of control over level of customer service provided to the final consumer, reliance of eagerness of intermediary to promote the product and lower degree of communication between producer and consumer.

Advantages of using intermediaries include the fact that, especially for small businesses, it may be much cheaper to use an established distribution infrastructure than to create its own (intermediaries specialize in distribution activities and can usually execute such activities more cheaply than the producer of the product). Some of the costs and activities such as storage and promotion are undertaken by the intermediary so the business can focus on its core competency – producing the product, and some of the business risk may be overtaken by merchant middlemen.

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Supply Chain Management

Supply chain refers to the network of organizations linked by movement of goods through various stages of production, storage and delivery until it becomes available to the final consumer.

Supply chain management (SCM) is a step by step integrated and coordinated process of movement of goods from raw materials stage all the way to the final product which is distributed to the final customer.

Supply chain management consists of three main flows which are product flows, financial flows and information flows. Product flow refers to the flow of products through the supply chain process. For example, products can move from raw material form to manufacturer to wholesaler to retailer and eventually to the final consumer. Financial flow refers to financial matters concerning purchasing and sale of products such as credit terms and payment schedules. Information flow refers to flow of information with regards to purchase and sale of products which move throughout the supply chain management process.

Within the strategic management process (SCM), management decision making and activities are usually grouped into strategic, tactical, and operational levels.

Strategic level – At the strategic level, a “big picture,” high level and long-term decisions with regards to supply chain management (SCM) are made in relation to the organization as a whole. Such decisions may include allocation of resources, consideration of partnerships and consideration of product life cycle (PLS) management.

Tactical level – At the tactical level, medium-term decisions are made on the subject of supply chain management (SCM) of the business. Such decisions may be on matters with regards to inventory, production and transportation.

Operational level – At the operational level, day-to-day short-term decisions are made with regards to supply chain management (SCM) of the enterprise. Operational level decisions may concern matters such as daily delivery and production.

The distinction between tactical and operational level decisions is often vague within organizations. This occurs because to meet daily orders (which occur at an operational level) organizations need to allocate resources (which occurs at the tactical level). Therefore, as with any other framework, various levels of decision making provide guidance for effective supply chain management (SMC) which should be supplemented with common sense and intuitive guidance.

There are numerous supply chain management software available, which significantly simplify supply chain management within organizations. Furthermore, the Internet has made communication within supply chain much more easier and faster compared to pre-Internet times.

Effective supply chain management (SCM) can decrease costs associated with supply management activities such as transportation, storage and packaging costs. This can contribute to obtaining  a competitive advantage over peers.