Distribution Channel Design
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Published: Mon, 5 Dec 2016
Distribution Channel Design
Channel design facilitates the flow of goods from the manufacturer to the end-user. Hutt and Speh (2007) defined that, the link between the manufacturer and the customer is the distribution channel. The purpose of the distribution channel is to distribute the product from manufacturer to the end user to the right time to the right place (Klein and Frazier1990). The channel of distribution is the marketing manager’s bridge to the market. Channel design creates a competitive advantage that separates market winners from market losers. Stern & Weitz (1997) , says the efficient distribution channel design and administration can offer opportunities to develop sustainable competitive advantage in the long term. The channel should achieve all tasks which are necessary to affect a sale and deliver products to the end user.
The Tyre Company who is trying to enter into US market is a manufacturer of safety systems for vehicle tyres whose products allow the vehicle to continue to be driven even if the tires burst or are shot out. The main customers for the systems are police forces, security companies, emergency services like ambulance and fire service, armies, trucking companies (Original Equipment Manufacturers ‘OEMs’), and even the general public. The organization cannot serve all types of customers through a single distribution channel, so depending on the size of the market, value and the level of usage, the market for safety systems can be divided into three segments.
Ø Government Organizations (Ambulance, fire services, armies),
Ø Private sector (Original equipment manufacturers like Trucking companies & vehicle manufactures),
Ø General public
For the safety systems manufacturer there are many options to design a distribution channel.
In the above figure, channel 1 comes under direct distribution channel where the organizations directly deal with the customers. This distribution channel does not have any intermediaries like distributors, wholesalers, retailers etc. Hutt and Speh (2007) says in, direct distribution channel the manufacturer’s own sales force deals directly with the customer segments, and the manufacturer has the complete responsibility for performing all the required channel tasks. Channel 2, channel 3 and channel 4 come under indirect distribution channels. Indirect channel distribution uses one or more intermediaries like distributors, retailers, sales representatives etc.
Channel distribution for Government sectors customers:
The safety systems manufacturer is entering into the U.S market for the first time, so the organization cannot contact the government organizations for selling their products. As the government uses the safety systems for emergency services, they cannot rely on the manufacturer’s words. So, the manufacturer should approach distributors and collaborate with them for doing business. These distributors can approach the government organizations and explain the product’s features and advantages. So, the best way to serve government sector customers is to design an indirect distribution channel which consists of distributors as Intermediaries.
Corey et al. (1989) says indirect channel distribution is generally found where the markets are fragmented and widely dispersed, low transaction amount prevails and buyers typically purchase a number of items in one transaction. The government sector segment is widely dispersed and the buyers in the segment purchase a number of items in one transaction, indirect approach is recommended for dealing with this segment. The below figure shows the distribution channel design for government sector customers
In private sector, the customers (original equipment manufacturers) for safety tyres are few. So, the company can directly approach the original equipment manufacturers that use the safety systems and can directly tie up with the vehicle manufacturers or OEMs. This increases the sales of the safety systems manufacturer. Hutt and Speh (2007), says the direct sales approach is feasible when the customers are large and well defined, the customers insist on direct sales, sales involve extensive negotiations with upper management. Here in this report the manufacturer has to negotiate extensively with the upper management of the OEMs to make them agree to fit the safety systems as the original equipment. Therefore direct distribution channel design is suitable for private sector customers.
Distribution channel for general public:
General public customers will maximum order 1-4 units per orders and it’s not so easy for the manufacturer to deal with every individual customer separately. So, the manufacturer should make tie ups with dealers or wholesalers. These dealers or wholesalers create awareness about the product and encourage the general public to buy the safety systems. These distributors or wholesalers intern make tie up with the vehicle repairing sheds and retailers. These vehicle repairing sheds play a vital role in increasing the sales of the safety systems.
Therefore indirect channel is recommended for dealing with general public customers. The below figure indicates the distribution channel for dealing with general public.
Kennaugh (2009), says the primary objective of marketing communications is to create awareness of a business, its products, and its position through customer-facing materials such as brochures, press releases, Web sites, and trade show presentations. Communication helps to spread awareness about products or services that are of some use to consumer and potential buyers. A good marketing communications plan requires an in-depth understanding of target audiences and the processes involved in buying, selling, and communicating. As the safety systems manufacturer has customers in different sectors, it should use different modes of communication for taking the product to the customers.
Hutt and Speh (2007), says due to the technical complexity of the business products, the relatively small number of potential buyers, and the extensive negotiation process, the primary communication vehicle in Business to Business marketing is the sales person. As the Company’s product in this report is a technical product, the primary communication for this company should through personal selling. Personal selling is the most effective tool for building buyer’s preferences, convictions, and actions. Apart from personal selling the company can also communicate through sales promotion, advertising, public relations, Boucher’s, E-Marketing, workshops, Direct Marketing etc.
Advertising is also a most powerful tool of communication. Most of people believe the Media and attract to the media advertising. But media covers mostly general customers and some business customers. So, this can be used only as one of the communication tools for taking the safety systems into market. Aaker (1992), says Brochures are useful for the communication and this is the very cheapest way for communicating to the customers.
Communication helps to keep the consumers informed about the new models of products or services that are available in the organisation. To communicate effectively, marketers need to need to understand how communication works .Communication involves the eight elements which are shown in the below figure.
1) Sender: The party sending the message to another party -in this case it is the Tyres Company.
2) Encoding: The process of putting the intended message into symbolic form that will differentiate us from other companies into an advertisement that will convey the intended message (Kotler et al 2008).
3) Message: This set of words, pictures or symbols that the sender transmits in the advertisements.
4) Decoding: The process by which the receiver assigns meaning to the symbols encoding by the sender -a consumer reads the ad and interprets the words and illustrations it contains.
5) Receiver: The party receiving the message sent by the company; the customer or the company that reads the tyres advertising.
6) Response: The reactions of the receiver after being exposed to the message -any of thousands of possible responses, such as the customer is more aware of the attributes of our tyres products.
7) Feedback: The part of the receiver’s response communicated back to the sender -tyres Company research shows that consumer like and remember the ad or consumers write or call the company praising or criticising the ad or its products.
8) Noise: The unplanned static or distortion during the communication process which result in the receiver getting a different message from the company.
This is diagram shows that how message would pass to customers and how they would have respond by taking response and feed back like questionnaire, by filling feedback form, interviews and so forth.
Scope for Conflict:
Cannel conflict occurs when members of two channels fight for same goal. Organisational growth is badly affected by conflicts. Generally organisation doing business depends upon their Agents, Wholesalers, and Retailers. As long as the organization maintains a good relation with all its channel members the organisation gets good results, if the organisation does not maintain a healthy relations to all its channel members then the organisation sales growth decreases, and conflicts occur (Kogut, 1988).
For instance, a premier distributor may be expected to share market analysis data, have an outside force and create account plans maintain specific inventory, and provide a complete service and repair function- in exchange for preferred pricing and product availability. An authorized distributor may be expected to share market analysis data, have a telemarketing operation, and maintain specific inventory. An affiliate distributor may have access to the manufacturer’s products without being given any special pricing or compensation. When there are too many distributors in a given area, or when one distributor “cherry-picks” accounts in another distributor’s territory, there can be price competition and conflict (Erramilli, 1991).
Pricing related conflicts are most common in channel conflicts. It is very essential that the manufacturer creates the base for a pricing structure where each member is able to make a profit from the value they bring to the marketing channel process. Each member’s price must reflect his or her role within the channel (Aaker, 1992). For example, if a retailer is able to purchase directly from the manufacturer at a cost that is equal or less than the cost that their distributor gives them, then the distributor losses his business from the retailer. This is one of the reasons for channel conflict.
The other reason for channel conflict is, if the organisation supply tyres to the end customer with help of the wholesaler/distributor and retailers in particular area, and also maintaining good relations with wholesalers and retailers as well. But, that area is very small or there is no need of retailers in that area. Then organisation distributes the tyres directly from wholesaler/distributor to end-user. In this regards retailers lose their business. So conflict may occur in between retailers and organisation or in between retailer to distributor. Based on this conflict Retailer may merges with the competitor which in turn effects the organization.
Other sources of channel conflict may result from goal incompatibility, poorly defined roles and rights, perceptual differences, and interdependent relationships. All of these factors must be taken into consideration, addressed when necessary, and “managed” whenever possible (Nygaard, 1994).
Relationship marketing is a term introduced by Berry (1983) that puts forward that marketers should move away from transactional marketing and build longer term relationships with their customers, focusing on building trust between buyer and seller so that loyalty develops. Morgan and Hunt, (1994), say Relationship marketing refers to all marketing activities directed toward establishing, developing and maintaining successful relational exchanges. The idea of relationship marketing was developed by Gronroos (1994) whose opinion was that relationship marketing was all about identifying, establishing maintaining, enhancing and, occasionally, terminating relationships with customers. The objective of such relationships, he suggested, is to give mutual benefit through the exchange and fulfilment of promises as well as communication.
Relationship Marketing involves organisations gathering information about their customers and then deciding with whom they can develop a dialogue; it allows buyers and sellers to work together in joint problem solving, easing the pressures on the buyer. Rather than employing market share as a measure of marketing success, this approach uses customer retention (Gummesson, 1994). The effectiveness of Business to Business marketing is largely determined by long-term relationships between buyers and sellers (Dion et al., 1995). According to Webster (1992), buyer-seller or customer-supplier interdependence is an integral part of business to business marketing. Over the past 10 or so years, there has been clear evidence to suggest that, in business to business marketing, the nature of buyer-seller interactions has changed from adversarial to relationship building, and, consequently, emphasis has moved away from discrete transactions and towards relational exchanges (Weitz and Jap, 1995). Pressures to meet the demands of global competition, reliance on single-source suppliers, the development and adoption of just-in-time systems, outsourcing and development of ‘partnerships’ have been cited as some of the main driving forces behind such developments (Metcalf et al, 1992).
Over the last 20 years, relationship marketing has been espoused by many in the services and industrial arenas, where it is, perhaps, easier to developer longer term relationships. The acquisition, retention and nurturing of customer relationships is fundamental to an organisation engaging in relationship marketing. Nurturing the customer is a step along the path to invoking loyalty on the part of the customer. Loyalty is one of the objectives of relationship marketing because a loyal customer may be of strategic advantage our Company.
In this case, as the manufacturer newly entering into the US market, he has to build the relationship with the channel partners. By building relationship, he can understand the market well. By building relationship all the channel members can work for the common goal and they can solve any problem effectively.
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