10 BBPM2203 T6

Topic Managing
6 Marketing
Channels,
Intermediaries
and Physical
Distribution
LEARNING OUTCOMES
By the end of the topic, you should be able to:
1. Explain marketing channel elements like function, types and
marketing channel levels;
2. Explain how to make channel design and channel management
decisions;
3. Discuss the major developments of marketing channels;
4. Assess conflict, cooperation and competition that exist between the
marketing channels as well as legal and ethical issues in marketing
channel relations;
5. Relate the importance of intermediaries of distribution channels to
manufacturers and consumers;
6. Explain wholesaling and retailing; and
7. Apply physical distribution management and the concept of
integrated logistics systems.
Copyright Open University Malaysia (OUM)

TOPIC 6 MANAGING MARKETING CHANNELS, INTERMEDIARIES 69
AND PHYSICAL DISTRIBUTION
INTRODUCTION
Most firms or producers use intermediaries to bring their outputs to the market.
This intermediary channel is a marketing channel and is also known as a
distribution channel.
The marketing channel is one of the important elements of the marketing mix.
Marketing channel decisions have direct effects on other marketing activities. In
this topic, we will discuss forms of intermediaries as well as responsibilities of
intermediaries and their marketing activities. Effective marketing channel
management and design will also be discussed.
Apart from paying attention to forms and conflicts of distribution channels, a

marketer has to manage the members of the distribution channel. Most of the
products these days are channelled to the consumers through indirect channels,
which are the intermediaries. Distribution channel intermediaries like agents,
brokers, wholesalers and retailers have to be managed so that they move in line
with the companys objectives, especially from the aspects of maximising
customer satisfaction and increasing the companys competitiveness. Thus, the
marketer has to choose and allocate resources and power, manage conflict as well
as communicate effectively to all the intermediaries to create an efficient and
effective distribution channel process. This topic also discusses an important
component in the distribution channel, which is, physical distribution. Physical
distribution is a process that ensures that the products reach the market
efficiently and effectively and fulfils consumer needs especially from the aspect
of delivering on time.
6.1 WHAT IS A MARKETING CHANNEL?

Marketing channels are sets of interdependent organisations involved in the
process of making a product or service available for use or consumption.
6.1.1 Classifications of Marketing Channel

There are three types of marketing channels:
(a) Merchants
Merchants refer to retailers and wholesalers. The merchants marketing
channel purchases products from firms, takes title of the goods and resells
the merchandise. Merchants make profit from buying and selling.

70 TOPIC 6 MANAGING MARKETING CHANNELS, INTERMEDIARIES AND
PHYSICAL DISTRIBUTION
(b) Agents
Agents are manufacturers representatives or brokers who search for
customers and may negotiate on the producers behalf but do not take the
title of the goods. Agents obtain revenues in the form of commission from
the manufacturer.
(c) Facilitators
Facilitators are those involved in the firms merchandise distribution
process but neither take the title of the goods nor negotiate purchases or
sales. Instead, they provide support services to the firm to ensure the
merchandise distribution process to the consumers or customers is
successful. Examples of facilitators are transportation companies,
warehouses, banks and advertising agencies.
6.1.2 Marketing Channel Functions

A marketing channel is an important marketing mix element because it performs
the work of moving goods from producers to consumers. The key functions of
the marketing channel are that:
(a) They gather and disseminate marketing information about potential and
current customers, competitors as well as other actors and forces in the
marketing environment;
(b) They develop and disseminate persuasive communication regarding the

offer designed to attract the consumer;
(c) They reach agreements on prices and other terms so that transfer of
ownership or possession will not be affected;
(d) They acquire the funds to finance inventories at different levels in the
marketing channel;
(e) They assume risks of carrying out responsibilities as distributors;
(f) They provide the storage and movement of physical products;
(g) They provide for the buyers payment of their bills through banks and other
financial institutions; and
(h) They oversee actual transfer of ownership from one organisation or person
to another.

6.1.3 Marketing Channel Levels

Marketing channels can be explained as channel levels that are involved in the
process of moving goods from producers to consumers. A channel level is every
layer of the channel or intermediary who carries out the activity of moving goods
from producers to consumers. There are four forms of marketing channels based
on marketing channel levels. They are:
(a) Zero-level channel;
(b) One-level channel;
(c) Two-level channel; and
(d) Three-level channel.
Figure 6.1 shows four forms of marketing channels. A zero-level channel is also
known as a direct marketing channel while one, two and three-level channels are
known as indirect marketing channels. A direct marketing channel does not
involve intermediaries in the process of moving goods from producers to
consumers. An indirect marketing channel involves intermediaries in the process
of moving goods from producers to consumers.
Figure 6.1: Marketing channel levels
(a) Zero-level Channel

A zero-level channel, also called a direct marketing channel, consists
of a manufacturer selling directly to the final consumers. Examples of
direct marketing are personal sellers like Avon, Amway, Tupperware,
telemarketing, Internet selling, manufacturer-owned stores and TV selling.
(b) One-level Channel

A one-level channel consists of one selling intermediary, such as a retailer.
For example, manufacturers of electrical goods, furniture and tyres sell
their merchandise directly to large retailers like Carrefour and Jaya Jusco.
(c) Two-level Channel

A two-level channel contains two intermediaries which typically include a
wholesaler and retailer. This marketing channel normally takes place in
consumer markets like small distributors for foodstuff and house appliances.
(d) Three-level Channel

A three-level channel contains three intermediaries which typically include
a wholesaler, jobber and retailer. This marketing channel is normally used
in industrial markets like the meat packaging industry.
6.2 CHANNEL DESIGN DECISIONS

In designing a marketing channel, the producer has to consider what is ideal and
practical. A firm that has newly started business normally starts in a limited
market. Thus, it has limited capital, using only a few intermediaries to carry its
products to the consumers.
The firm designs a channel system which involves analysing customer needs,
establishing channel objectives, identifying major channel alternatives, and
evaluating major channel alternatives. The problem of designing marketing
channels lies in identifying a good way to convince the best intermediary to carry
products to consumers.
6.2.1 Channel Design System

Channel design system refers to:
Analysing customer needs;
Establishing channel objectives;
Identifying major channel alternatives; and
Evaluating major channel alternatives.
(a) Analysing Customer Needs

Designing the marketing channel starts with determining the value that is
expected by the consumer from the marketing channel. Normally,
consumer needs analysis involves the following items:

(i) Lot Size

Lot size refers to the number of units the channel permits a typical
customer to purchase on one occasion.
(ii) Waiting Time

Waiting time refers to the average time customers of that channel wait
for receipt of that goods.
(iii) Spatial Convenience

Spatial convenience refers to the degree to which the marketing
channel makes it easy for customers to purchase the product, like
having more agents sell the product in the market.
(iv) Product Variety

Product variety refers to the assortment and breadth provided by the
marketing channel.
(v) Service Backup

Service backup refers to add-on services like installation, repairs,
credit and delivery.
(b) Establishing Channel Objectives and Constraints

Channel objectives differ based on the characteristics of the products.
Channel institutions should arrange their functional tasks to minimise total
channel costs with respect to desired levels of service outputs. Channel
design must take into account the strengths and weaknesses of different
types of intermediaries. Legal regulations and restrictions have to be
seriously considered when deciding channel objectives.
(c) Identifying Major Channel Alternatives

After a firm identifies its customer needs and objectives, it has to identify
major channel alternatives like:
(i) Types of Intermediaries

A firm needs to identify the types of intermediaries that are suitable to
be appointed to carry on its channel work. Some of the intermediaries
that are normally appointed by firms are:
Companys Sales Force

The companys sales force is the companys direct selling
representatives who have been appointed to contact all prospects
in an area. For example, sales representatives from Avon, Amway,
and Nutrimetics.

Company Agents
The firm appoints or hires manufacturers agents in different
regions or end-user industries to sell its products. For example,
take agents selling cars, tourist agents and insurance agents.
Industrial Distributors
The firm finds distributors in different regions or end user
industries who will buy and carry products to end users. The firm
has to offer a few benefits for the purpose of motivating its
distributors. The firm may give them exclusive distribution,
adequate margins, product training and promotional support.
(ii) Number of Intermediaries

Companies have to decide on the number of intermediaries to be used
at each channel level. Three main strategies that can be used are:
Exclusive Distribution
Exclusive distribution means limiting the number of
intermediaries significantly. It is used when the seller wants to
maintain control of the service level and products offered.
Granting of exclusive rights is normally practised in the
distribution of new automobiles and a few prestige goods.
Intensive Distribution
Intensive distribution involves the manufacturer placing the
goods or services in as many outlets as possible. This strategy is
generally used for items such as tobacco products, gas, snack food
and soap. Responsibilities and rules for channel members refer to
the pricing policy, sales rules, territory rights and certain services
that have to be carried out by elected channel members.
Selective Distribution
Selective distribution involves the use of more than a few but less
than all of the intermediaries willing to carry a particular product.
Most products like television, furniture and some electrical
appliances normally involve retailers or selected agents only.
(d) Evaluating Major Channel Alternatives

Each channel alternative needs to be evaluated against:
(i) Economy
The manufacturing firm has to take into account the sales level that
can be achieved by the channel members and the different cost of
sales estimation for every channel member.
(ii) Control
This refers to a form of control that has to be implemented by the firm
on its elected intermediaries. Control is important if the intermediary
is an independent unit, like an agent.
(iii) Adaptive Criteria

Channel members must have some degree of commitment to each
other for a specified period. The producer needs channel structures
and policies that provide high adaptability.
ACTIVITY 6.1
Give an example of a company in Malaysia that implements the
exclusive distribution, intensive distribution and selective distribution
strategies.
EXERCISE 6.1
Essay Question
1. Provide the definition of marketing channel.
2. There are four forms of marketing channels that have been
discussed in this topic. List and explain these marketing channel
levels.
3. In the marketing channel design system, what are the four major
elements that act as references for a firm?
4. Explain briefly three important elements in identifying a suitable
marketing channel for a producer.
5. Explain the differences between exclusive distribution strategy,
selective distribution strategy and intensive distribution strategy.
6.3 CHANNEL MANAGEMENT DECISIONS

The following are the steps that have to be implemented by a firm after choosing
a marketing channel.
(a) Selecting Channel Members

The selection of channel members must be done based on qualifications.
Normally, the ability to attract qualified channel members differs for every
producer. For example, Toyota has the ability to attract many new agents to

market its new Lexus car. Whether producers find it easy or difficult to
recruit intermediaries, they should at least determine which characteristics
distinguish the better intermediaries from others.
(b) Evaluating Channel Members

Producers must periodically evaluate intermediaries performance against
such standards as sales quota attainment, average inventory levels, customer
delivery time, treatment of damaged and lost goods and co-operation in
promotional and training programmes. The recruitment process demands
that producers identify the best characteristics of their channel members.
(c) Training Channel Members

Companies need to plan and implement careful training programmes for
their appointed intermediaries to increase their understanding of the firms
policies, rules and restrictions.
(d) Motivating Channel Members

The company should provide training programmes, market research
programmes and other capability building programmes to improve the
intermediaries performance.
Besides implementing the activities above, the producer has to use the
power of cooperation to increase its channel members motivation. They
can draw on the following types of power to elicit cooperation:
(i) Coercive Power

A manufacturer threatens to withdraw a resource or terminate a
relationship if intermediaries fail to cooperate.
(ii) Reward Power

The manufacturer offers intermediaries extra benefits for performing
specific actions or functions.
(iii) Legitimate Power

The manufacturer requests a behaviour that is warranted under the
contract. For example, Proton requests its agents to carry a certain
amount of stock in their area as part of the agreement.
(iv) Expert Power

The manufacturer has special knowledge that the intermediaries
value. Normally, it refers to the technology which is owned by the
manufacturer. The manufacturer permits agents to use the technology
only if the agents cannot increase their performance level and will be
left behind without it.

(v) Referent Power

The manufacturer is so highly respected that intermediaries are proud
to be associated with him. For example, companies like IBM,
McDonalds and Rolex have high referent power and intermediaries
are normally willing to cooperate in all aspects desired by the firm.
(e) Modifying Channel Arrangements

A producer must periodically review and modify its channel arrangements.
Modifications become necessary when:
(i) The distribution channel is not working as planned;
(ii) There are changes in consumer buying patterns;
(iii) The market expands;
(iv) New competition arises;
(v) Innovative distribution channels emerge; and
(vi) The product moves into other stages in the product life cycle.
Normally, changes done to channel arrangements are:

(i) Adding or dropping individual channel members;
(ii) Adding or dropping particular market channels; and
(iii) Developing a totally new way to sell goods.
6.4 CHANNEL DYNAMICS

Channel dynamics refer to marketing channels that are categorised according to
continuous or dramatic changes. There are three major developments:
Growth of vertical marketing systems;
Growth of horizontal marketing systems; and
Growth of multi-channel marketing system.
6.4.1 Vertical Marketing Systems

The development of the vertical marketing system (VMS) challenges the
traditional marketing channel system. Figure 6.2 compares the traditional
marketing channel with the vertical marketing channel.

A traditional marketing channel comprises an independent producer,

wholesalers and retailers. Each party is a separate business seeking to maximise
its own profits. There is no complete control over the appointed channel
members.
Figure 6.2: Traditional marketing channel versus vertical marketing channel
A vertical marketing system, by contrast comprises producers, wholesalers, and

retailers acting as a unified system. Each channel member cooperates as one
entity and is capable of influencing the market significantly. This system is
capable of eliminating conflict and elicitng complete control over every channel.
There are three types of vertical management systems:
(a) Corporate Vertical Management System

A corporate vertical management system combines successive stages of
production and distribution under a single ownership. Vertical integration
is utilised by a company that requires a high level of control for each
channel that exists. For example, Toyota owns equity in most of its major
suppliers in the world and this makes it one of the giant companies that has
survived till today. Table 6.1 shows the equity percentage owned by Toyota
among the major suppliers in the world.

Table 6.1: Major Suppliers and Toyotas Equity Percentage
Company Equity Percentage (%)

Akebono Disc Brakes 13.1
Koito Lighting 19.0
Aisin Sicki Transmissions 21.7
Shiroki Door 11.5
Trinity Paint 30.2
Kyowa Upholstery 33.5
Nippondenso Electronics 22.9
Jaco Clocks 34.2
Tokai Rika Seat Belts 29.5
(b) Contractual Vertical Management System

A contractual vertical management system consists of independent firms at
different levels of production and distribution which are able to integrate
their programmes on a contractual basis to obtain more economic or sales
impact than they would achieve if they were alone. The contractual vertical
management system is divided into three categories:
(i) Wholesaler-sponsored voluntary chain;
(ii) Retailer co-operatives; and
(iii) Franchise organisations.
There are three types of franchise organisations:
Manufacturer-sponsored Retailer Franchise System

The manufacturer-sponsored retailer franchise system is normally
found in automobile industries. Ford, for example, licenses dealers to
sell its cars.
Manufacturer-sponsored Wholesaler Franchise System

The manufacturer-sponsored wholesaler franchise system is normally
found in the soft drink industry. Coca-Cola, for example, licenses bottlers
(wholesalers) in various markets who buy its syrup concentrates to
carbonate, bottle and sell them to retailers in local markets.

Service firm-sponsored Retailer Franchise System

Through this franchise system, a firm gives licences to retailers allowing
them to offer services to consumers. Examples are found in the fast food
industry (McDonalds and Burger King) and also in motel businesses
like Holiday Inn and Seri Malaysia.
(c) Administered Vertical Management System

An administered vertical management system coordinates successive stages
of production and distribution through the size and power of one of its
members, and not through normal ownership or contractual ties. Famous
brand producers like P&G, Kraft and Campbell Soup are able to generate
high levels of cooperation from their resellers in connection with displays,
shelf space, promotions and pricing policies.
Figure 6.3 shows the overall vertical marketing system.
Figure 6.3: Vertical marketing system
6.4.2 Horizontal Marketing System

In the horizontal marketing system, two or more unrelated companies put
together resources or programmes to exploit an emerging marketing
opportunity. For example, Proton cooperates with a few local banks to channel
multiple loan facilities and automobile insurance to the consumers.

6.4.3 Multi-channel Marketing System

Multi-channel marketing occurs when a single firm uses two or more marketing
channels to reach one or more customer segments. The benefits of using multi-
channel marketing are:
(a) Increased market coverage;
(b) Lower channel cost. The firms may add new channels for the purpose of
reducing cost of sales for the existing customer group; and
(c) Better understanding and priority is given to consumers in the selling
process. The company may add another channel to sell products that are
needed by consumers.
In Figure 6.4, through multi-channel marketing, the firm sells to consumer

segment 1 direct through catalogues, telephone and other forms of telemarketing.
Then, the firm sells its output to consumer segment 2 through retailers. For
industrial consumers, the firm sells indirectly to industrial segment 1 using
distributors and agents. For industrial segment 2, firms use their own sales force.
Figure 6.4: Multiple marketing channel

Source: Kotler & Armstrong (2000).
6.5 CONFLICT, COOPERATION AND

COMPETITION
The entire marketing channel may be involved in conflicts and competition
because of unsuitable objectives, unclear roles and rights, differences in opinions,
and relationships that are not open. Hence, the firms intervention in each
decision is required.

Types of conflict that often take place are:
(a) Vertical Channel Conflict

Vertical channel conflict involves conflict between different levels within
the same channel. For example, take conflicts between a manufacturing
firm and its distributors in terms of price, service policies and advertising.
(b) Horizontal Channel Conflict

Horizontal channel conflict involves conflict between members at the same
level within the channel. For example, some Proton Wira car dealers in one
state may criticise the aggressive promotion done by other Proton Wira
dealers in the same state.
(c) Multi-channel Conflict

Multi-channel conflict exists when the manufacturer has established two or
more channels that sell to the same market. For example, Swatch agrees to
distribute its watches through selected agents besides distributing them
through specialty stores.
The manufacturing firm normally manages all these conflicts through:
(a) Adoption of superordinate goals. This strategy resolves conflict by

encouraging channel members to come to an agreement based on the
fundamental goals that were outlined when the agreement was first made.
(b) Exchange of persons between channels.
(c) Co-optation. Co-optation is an effort by one organisation to win the support

of the leaders of another organisation by including them in the advisory
councils and board of directors. Through this method they are able to give
opinions and are assured that their opinions will be accepted. However, the
initiating organisation may have to compromise its policies and plans to
win the support of the other organisation.
(d) Joint membership in and between trade associations. For example, there is
good cooperation between the Grocery Manufacturers of America and the
Food Marketing Institute, which represents most of the food chains.
(e) Mediator. Mediation means resorting to a neutral third party who is skilled
in conciliating the two parties interests.
(f) Arbitrator. Arbitration occurs when the two parties agree to present their
arguments to one or more arbitrators and accept the arbitration decision.

6.6 LEGAL AND ETHICAL ISSUES IN CHANNEL

RELATIONS
Companies are legally free to develop whatever channel arrangements that suit
them. However, there are a few legal and ethical issues that have to be
considered in the marketing channel arrangements. These issues are:
(a) Exclusive Dealings

Exclusive dealings refer to the arrangements done between the firm and the
intermediary. For example, the dealers cannot handle competitors products;
dealers can only handle the firms products. Exclusive arrangements are
legal as long as they do not substantially lessen competition or create a
monopoly, and as long as both parties enter into the agreement voluntarily.
(b) Exclusive Territories

Exclusive territories refer to certain areas of intermediaries. It is legal as
long as the intermediary does not sell the products outside the
predetermined territory.
(c) Tying Agreements

Producers of a strong brand name sometimes sell it to dealers only if they
will take some or all of the rest of their product lines. This practice is called
full-line forcing. Such tying agreements are not necessarily illegal but it will
become a violation if the elements of market monopoly exist.
(d) Dealers Rights

Producers are free to select their dealers but their right to terminate dealers
is somewhat restricted. In general, sellers can drop dealers for cause or
for reasons stated in the agreement.
ACTIVITY 6.2
Can you differentiate between The Store supermarket line and the rice
wholesaler at your place based on the purchase volume or sales volume
of rice for both entities?

EXERCISE 6.2
Essay Questions
1. Explain the meaning of:
(a) Exclusive dealings
(b) Exclusive territories
(c) Tying agreements
(d) Dealers rights
2. List and explain the forms or types of power that are frequently
used by producers on their appointed marketing channel to elicit
cooperation.
3. What is the difference between the traditional marketing channel
system and the vertical marketing system in terms of channel
dynamics? Using a diagram, explain briefly the difference
between vertical marketing and the multi-channel marketing
system in terms of system dynamics.
4. Explain briefly three forms of vertical marketing channels.
5. Explain the difference between a wholesaler-sponsored voluntary
chain, retailer cooperatives and franchise organisations.
6.7 MANAGING INTERMEDIARIES OF

DISRIBUTION CHANNELS
Distribution channel intermediaries refer to members or a number of members
in the distribution channel. As stated in the previous topic on distribution
management, distribution members are marketers and intermediaries. There are
two main forms of distribution channels; the direct distribution channel and the
indirect distribution channel.
Direct distribution refers to the direct distribution channel which is created by

the marketer to channel products to the consumers. Indirect distribution
refers to forms of distribution channels which require the presence of a third
party or middleman to channel the products to the consumers. This third
party or middleman is known as the intermediary.

Marketing intermediaries can be classified into three categories; agents or

brokers, wholesalers and retailers. All three categories of intermediaries have
different functions and influence marketing activities in different ways. Thus, all
three categories can be differentiated easily based on two factors, risk taking and
types of business dealings.
Agents or brokers differ from wholesalers and retailers from the angle of risk
taking. Agents or brokers do not take on the risk of business dealings as
compared to wholesalers and retailers. The agent or the broker functions only as
a third party who arranges meetings between the marketer and buyer to discuss
business dealings. A big portion of the agents or brokers revenue is generated
through commission and price negotiation techniques. Price negotiation
techniques refer to the agents or brokers skill in keeping the actual offer price a
secret from the consumer and the seller.
Wholesalers and retailers can be differentiated based on the wholesalers or

retailers involvement with the individual consumer. Most experts state that the
main difference between the wholesaler and retailer is from the aspect of
purchasing volume the wholesaler buys in bulk while the retailer buys in
smaller order sizes. There are experts who see the difference between
wholesalers and retailers from the aspect of sales volume. The wholesaler sells in
bulks while the retailer sells in smaller quantities.
Based on the question in Activity 6.2 in the previous page, you cannot
differentiate The Store supermarket line with the rice wholesaler at your place
based only on purchase and sales quantity of both these entities. This is because
the purchase quantity for The Store supermarket line is far larger than the rice
wholesaler. Thus, the opinion that wholesaling and retailing can be differentiated
through types of business dealings is more accurate.
Wholesalers and retailers can be differentiated based on the statement that

wholesalers do not have business dealings with individual consumers. This
means that if Din Borong Supermarket or a trader in Selangors wholesale market
carries out business dealings with individual consumers, that trader cannot be
categorised as a wholesaler. Considering the business transaction that was made
by that trader, a mixture of transactions were carried out part wholesaling and
part retailing. Wholesaling only takes place as a business transaction with
organisational users, especially retailers, while most of the other business
transactions are considered retailing (individual or public).

To further aid in the understanding of the presence of intermediaries in a

distribution channel, please refer to the discussion on distribution channel forms
in the distribution channel topic. However, Figure 6.5 can aid in recalling
distribution channel forms that involve all three channel intermediaries (the
three-level distribution channel).
Figure 6.5: Three-level distribution channel
ACTIVITY 6.3
Try drawing all the forms of distribution channels other than the three-
level distribution channel. What dimension is used to name the forms of
distribution channel levels?
6.7.1 Importance of Intermediaries

All intermediaries have the same amount of influence, both on the manufacturer
as well as the consumer. The difference in roles between the wholesaler, retailer
and agents or brokers is only in the form of application. The following are the
importance of intermediaries to the manufacturer and consumer:
(a) Bulk Breaking

The manufacturer faces problems in marketing its products to end-users
(individuals or organisations) because of the problem in the quantity
offered. Thus, the presence of intermediaries, especially wholesalers, help
manufacturers in marketing their products in smaller quantities according
to the consumers needs.
(b) Product Promotion

Besides distributing products, intermediaries play an important role in the
promotion of the product to the consumers either individually or with the
manufacturer. For example, the wholesaler gives trade discounts to retailers
or retailers have sales promotions for the consumers.
(c) Transportation
Intermediaries, especially wholesalers, provide efficient transportation
services in the physical distribution of products for the manufacturers.
Normally, the intermediary is liable for the transportation cost of the
products to the market.
(d) Risk Bearing

The wholesaler or retailer purchases the product from the manufacturer.
This means that the intermediary transfers the financial risk from the
manufacturer onto itself. There are wholesalers who grant credit payment
to their retailers or retailers who grant credit sales to their customers. This
means that other than helping the manufacturer to avoid losses, the
intermediary also takes on risks through the granting of credit services to
the other intermediaries or consumers.
(e) Market Information

Intermediaries, especially retailers, are known to understand the needs and
wants of consumers better as compared to manufacturers. Normally, the
intermediary will pass the latest information regarding customer taste and
preference to the manufacturer for them to act upon.
(f) Warehousing Services

Besides providing transportation services, there are a few intermediaries
especially wholesalers who provide warehousing services for the
manufacturers in the physical distribution of their products to the market.
(g) Consultation Services

Some intermediaries like wholesalers or agents (brokers) provide business
consultation services to the organisational users from the aspects of
material and financial management. Besides this, some retailers also
provide consultation services for the consumer, especially from the aspects
of product usage and financial consultation.
6.8 WHOLESALING
The number of wholesalers is declining day by day because of changes in the
marketing environment, especially consumer taste and the existence of
supermarket chains like The Store and Parkson. However, the volume of
business through wholesaling has increased tremendously. For example, the
wholesaling business in the United States has increased more than 5.8 times in
the new millennium as compared to the early 1990s (Kotler, 2002).
As stated in the earlier section of this topic, wholesaling is a distribution activity

carried out by the wholesaler to organisational consumers, especially retailers.
Wholesaling excludes business activities with the individual consumer.
Wholesalers can exist in the one-level, two-level or three-level distribution

channel. As shown in Figure 6.5, wholesalers are present before retailers in
distributing the products to the consumers. However, a wholesaler can exist
before an agent or broker in the three-level distribution channel where an agent

or broker will deal with the wholesaler before marketing the products to the
retailers. In the two-level distribution channel, the wholesaler can be present
together with the retailer, agent or broker. For the one-level distribution channel,
wholesaling only involves the marketing of industrial products or products for
the organisational consumers.
SELF-CHECK 6.1
What is meant by wholesaling?
6.8.1 Importance of Wholesaling

Wholesalers, like the other important intermediaries, are found to play an
important role in multiple aspects of helping the manufacturer produce a
product distribution process that is far more efficient and effective. Some of the
roles of wholesalers are bulk breaking for retailers and organisational consumers,
conducting trade promotion activities, providing transportation services,
warehousing, consultation, and others. The facilities provided by the wholesalers
enable the product distribution process in the market to be carried out more
efficiently and effectively.
6.8.2 Type of Wholesalers

Wholesalers can be classified into five major types which consist of merchant
wholesalers, full-service wholesalers, limited-service wholesalers, manufacturers
and retailers branches and offices, and miscellaneous wholesalers (Kotler, 2002).
The five major types of wholesalers are described briefly below:
(a) Merchant Wholesalers

These are independently owned businesses that take title to the
merchandise they handle. They are called jobbers, distributors, or mill
supply houses and fall into two categories full service and limited service.

(b) Full-Service Wholesalers

This type of wholesaling provides all the functions of intermediaries such
as transportation, sales force supports, credit facilities, management
support assistance, promotion and others. Full-service wholesalers are
known as wholesale merchants and industrial distributors.
(c) Limited-Service Wholesalers

This type of wholesaling provides some intermediary functions such as
transportation, sales force support and credit facilities or a combination of
other intermediary functions. The wholesalers from this category are
known as cash-and-carry wholesalers, truck wholesalers, rack jobbers and
producers cooperatives.
(d) Manufacturers and Retailers Branches and Offices

Manufacturers and retailers branches and offices are organisation units
that are established by the manufacturer to market goods straight to the
consumers. Manufacturers establish branches or offices on a temporary or
permanent basis. Normally, the branch or sales office is managed by the
companys sales personnel or the appointed sales personnel (external sales
personnel).
(e) Miscellaneous Wholesalers

A miscellaneous wholesaler refers to wholesalers who specialises in one
type of business only like agricultural wholesalers, rice wholesalers, auction
wholesalers and others.
6.8.3 Trend in Wholesaling

As stated in the earlier section, wholesaling activities have shown a relatively
huge increase since the 1990s. Although the number of wholesalers is decreasing
due to changes in consumers taste and preference as well as the influence of
technology, the volume of business through wholesaling is increasing steadily.
Also, wholesalers are more aggressive in carrying out marketing activities which
are noticed in the product distribution system especially from the aspect of sales,
transportation and product promotion.

Thus, it is not surprising that there are certain brands owned by wholesalers
through the private brand strategy. Through this strategy, wholesalers will
support that particular brand in the market through distribution, pricing and
integrated promotion.
EXERCISE 6.3
Fill in the Blanks

1. Wholesaling is a marketing intermediary activity which does not
involve business transactions with the _______________________
users.
2. _____________________ wholesalers only provide certain
wholesaling services to their consumers.
6.9 RETAILING
Retailing is an important process in the product distribution system. The type of
business transaction involved in the retailing process is a business transaction
between the marketer and the individual consumer, where the product is bought
for personal or household consumption. Distribution channel members who are
involved in the retailing process are the retailers. Other than understanding the
retailing concept, one has to understand a few other important concepts that are
related to retailing management such as the importance of retailing, forms of
retailing, types and organisations of retailers, the retailing wheel and the latest
trends in retailing. The next section in this topic will help you understand all
these concepts better and in detail.
6.9.1 Importance of Retailing

Similar to wholesaling, retailing plays an important role in the creation of an
efficient and effective distribution system. The difference between the roles of
retailing and wholesaling is small. The role of retailing involves individual
consumers and other intermediaries in the channel such as wholesalers and
agents or brokers. Thus, similar to wholesaling, retailing also plays an important
role from the aspects of bulk breaking for the individual consumers, conducting
promotional activities like internal advertising and sales promotions, providing
transportation services, warehousing, consumer consultations and others.

6.9.2 Forms and Types of Retailers

Generally, the retailing process can be classified into two main categories which
are store retailing and non-store retailing. Both forms of retailing differ physically
and have obviously different tangible roles. Although both have obvious tangible
differences, both still have the same roles in creating an efficient and effective
distribution channel. Some marketers use both forms of retailing in creating the
best marketing process for the consumers.
The physical difference in store retailing and non-store retailing refers to the
need for physical space. This means that even if a retailer sells in a stall at the
night market or using a motorcycle, that retailer is still categorised as a store
retailer because the retailing process involves the use of physical space (selling
lots, tables, motorcycles and others). An example of non-store retailing is direct
marketing and online marketing. The list and a brief discussion about all the
main forms of store retailing and non-store retailing are as follows:
(a) Store Retailing

The classification of store retailing is based on a few factors like physical form
(especially size), product lines marketed and services preparation for the
customer. From the physical aspect, retailers can be categorised as grocery
stores, supermarkets, departmental stores, hypermarkets, specialty stores or
discount stores. A grocery store sells most items that are needed daily either
in wet or dry form which are frequently purchased by consumers. A
supermarket is a concept store similar to the grocery store but larger in size.
A departmental store is the larger-sized retailing form that is most popular

in Malaysia. The main difference between a departmental store and a
supermarket is the specialisation of departments according to product
categories. For example, the first floor is for daily need goods, the second
floor for womens products, the third floor for childrens products, and so
on. Hypermarkets or business malls is the latest retailing concept being
developed in Malaysia. The main difference between hypermarkets and
other grocery stores is from the aspect of size and consumers product
selection. Specialty stores refer to retailers who sell certain selected
products like cosmetics, sports equipment, personal accessories and others.
Besides size and product lines, store retailers can be classified according to
the services that are provided to consumers. Store retailers can be categorised
into three services: full service, limited service and self-service retailing. Full-
service retailing offers an array of services for the convenience of customers
like salespeople, advisory services, credit, delivery and others. On the other
hand, the limited-service retailer only offers selected services to consumers
like delivery service or credit and delivery alone.
(b) Non-store Retailing

Direct marketing and online marketing are forms of non-store retailing.
Types of direct marketing are direct selling (salespeople without stores or
door-to-door salespeople), the usage of machines like vending machines or
ATMs, kiosks, catalogue marketing (using catalogues to get nearer to the
customers), and so on.
Online marketing is a retailing form which is gaining popularity among

consumers around the world. Online retailing is mostly handled through
computer websites or electronic mails and the electronic payment method
is used. For example, you can purchase a book and make a payment
electronically at www.amazon.com or buy other products from many
marketers that provide electronic business services.
6.9.3 Retailing Wheel

The wheel of retailing refers to the life cycle that is often experienced by most
retailers. Most large retailers like The Store network and PTK (Pasaraya Taman
Kemajuan) network started their business as a small retail outlet first and then
later expanded into a large retail outlet.
Besides expanding, there are large retailers that had to close down or were taken
over by other retailers because they reached the decline stage in the retailing
wheel.
6.9.4 Trends in Retailing

Retailing in Malaysia and around the world has grown significantly. Other than
experiencing a growth rate in business, the existence of more hypermarkets and
specialty stores as well as the vast development in electronic transactions
through electronic retailing is an important trend faced by retailers in Malaysia
and around the world.
ACTIVITY 6.4
What do you understand about store retailing and non-store retailing?

Provide a few examples of store retailing and non-store retailing in
Malaysia.

6.10 AGENTS AND BROKERS

Agents and brokers are traders involved in the agencys business, where the
business does not take the title of goods. This means the agents and brokers do
not take the title of goods and do not bear any risk in the business transaction.
Agents and brokers have some similarities and differences. They are similar in
the sense of a business agency, which is a form of business where the
intermediary does not take the title of goods and the agency only brings buyers
and sellers together. Other than this, the similarities between agents and brokers
are based on revenues earned. Agents and brokers obtain revenues through
commissions and negotiation price mark-ups.
However, the usage of the term agent to refer to the agencys business is more
frequently and widely used by traders and consumers. The term broker is only
used for certain agency businesses like financial shares, car sales and real estate.
According to Kotler (2002), the main difference between the two is from the
aspect of organisation forms. Organisation agents have more permanent
characteristics compared to brokers. According to some view points, consumers
and sellers are more likely to use the term agents. However, some view
brokers as more suitable because there are organisation brokers who are fixed
like security brokers.
ACTIVITY 6.5
What are the important decisions related to marketing logistics

management or physical distribution?
6.11 MANAGING PHYSICAL DISTRIBUTION

Physical distribution management is also known as marketing logistics
management and is an important decision in the distribution channel
management. Physical distribution is important especially in ensuring that the
product reaches the consumer without any problems.

The marketer needs to be familiar with a few concepts relevant to marketing

logistics management. Besides the marketing logistics component, the marketer
has to pay attention to the logistic management process, especially from the
aspect of objective setting. Normally, every marketer has the same objective
towards marketing logistics management, which is to obtain raw materials and
market the products to the consumers at the bare minimum cost.
However, to reach this objective, the marketer has to implement the following
tasks:
(a) Create an Integrated Logistics Management System

The marketing logistics system is supported by four components: order
processing, transportation, warehousing and inventory management. Thus,
the marketer has to use the best technology and has to have a systematic
management system to ensure all the four marketing logistics components
complement each other optimally. For example, the marketer will use
information technology to manage the marketing logistics system. The
usage of advanced information technology helps information channelled
between the marketing logistics component to be faster and more accurate.
(b) Implement Continuous Research on Marketing Logistics

The marketer has to research the needs and the marketing logistics
achievements based on the consumers perception regularly. The research is
done to control, monitor and access the achievement of marketing in the
marketing distribution system.
(c) Compare Companys Practice and Market Practice

The marketer needs to refer to the market practice especially that carried
out by the competitors as a basis or benchmark to measure how far the
marketer has succeeded in coming up with a distribution channel
management process that is competitive.
(d) Realistic Promises to the Market

The marketer has to look into the companys internal ability before
promising the consumer that he will deliver products according to the
consumers needs, especially from the aspect of on-time delivery and
quality conformance. The marketer has to avoid from falling into the trap of
what is promised is not the same as what is delivered.

6.11.1 Components of Physical Distribution

Management
There are four major components in the physical distribution management
system or marketing logistics system. All the four components are shown in
Figure 6.6.
Figure 6.6: The components of physical distribution management
(a) Order Processing

This consists of activities like order receipt, delivery and payment. This
includes order processing from the consumers or as passed on by the sales
personnel. The order check, scheduling, invoice delivery and receipt
preparation are all products of this component. Consumer satisfaction is
generally influenced by the efficiency of each of the operations in that
particular component. Delay in processing will cause consumer
dissatisfaction and consumers may switch to other competitors.
(b) Transportation
The marketer has to decide on the best mode of transportation to ensure
that delivery will be smooth and cost of delivery will be economical. The
marketer can choose whether to use land, water or air transportation or
through pipes (for non-solid products). Decisions on whether to use the
land, air or water transportation mode depends on two issues, namely,
timely delivery and cost.

Normally, both issues are at opposite ends. This means that to obtain a
transportation mode that is cheap, the marketer has to choose a
transportation mode that is slow and vice versa. There are two issues that
have to be considered by the marketer in choosing a mode of
transportation. They are product suitability and consumer needs.
Perishable goods need to be delivered urgently. Luxury goods may also
require a transportation mode that is fast and expensive.
(c) Warehousing
Warehousing is needed to ensure raw materials and completed products
are stored in an appropriate place so that they can be taken out or
distributed to consumers according to type and order. There are a few
important decisions to be made in warehousing management. They consist
of inventory level, location, number of warehouses and the management
itself.
Warehousing inventory management will be discussed in the next section.

Marketers have to choose and prepare suitable warehouses according to the
needs of marketers and consumers especially based on time and cost. The
marketer may also have to set up or choose a few warehouses for the
material and finished goods distribution process. The marketer will also
have to evaluate the effectiveness of using rented warehouses or his own
warehouse after considering the cost of both.
(d) Inventory Management

The marketer has to ensure that the inventory is managed at the lowest cost
possible and is capable of fulfilling production operation and consumer
needs. There are four issues that have to be seriously considered by the
marketer during inventory management. The four issues are reserve or
back-up record systems, electronic reorder point, order cost processing and
inventory handling cost.
The marketer has to ensure that all these four issues are managed
accurately to ensure that stock receipt and delivery are systematic and
efficient. The usage of information technology through computer systems
and barcode systems can aid marketers in managing all these four issues
effectively.

There is a tendency for manufacturers and consumers (business and

industrial users) to use the production operation system without inventory
or using the Just-in-Time Inventory Management. Through the JIT
Inventory Management system, marketers or consumers require accurate
delivery according to certain times and in appropriate quantities in line
with the production process being implemented. For example, if Modenas
needs 1000 tyres a day and the output shift is divided into four, the tyre
suppliers have to deliver 250 units of four deliveries a day to the
manufacturers factory.
6.11.2 Integrated Physical Distribution Management

System
The integrated physical distribution management system or the integrated
logistics system refers to a logistic management quality that is solid and
complementary. Although the marketing logistics management process involves
four different components, the marketer can succeed in creating an effective and
systematic logistic management system. Normally, the usage of modern
technology especially information technology using an electronic communication
network and barcode system is able to help marketers in creating the best
integrated logistics management system. Besides technology, the following
formula will aid marketers in creating the best integrated logistics management
system:
M = T + FW + VW + S
Where:
M = Total market logistics cost

T = Total transportation cost
FW = Total fixed warehouse cost
VW = Total variable warehouse cost
S = Total cost of lost sales due to average delivery delay

EXERCISE 6.4
Fill in the Blanks

1. __________________ retailing is a form of retailing that does not
involve physical business space.
2. A retailers life cycle in the market can be explained through
_________________.
3. The main difference between agents or brokers as compared
to wholesalers and retailers is that agents and brokers
______________________.
4. The four components of physical distribution are
________________________.
Essay Questions
1. Explain briefly the five functions that are carried out by the
intermediaries in the distribution channel.
2. To what extent does the concept of wholesaling and retailing
differ?
3. Explain briefly the current trends that are happening in
wholesaling and retailing in Malaysia.
4. If you have the intention of forming a logistics company or
physical distribution handling company, what are the
management decisions that the company has to handle during the
implementation of the integrated logistics management process?
The marketing channel is also known as the intermediary, merchant or

distributor channel which performs part of the marketing activities on behalf
of the manufacturer.
There are two main channels, which are, direct marketing channel and
indirect marketing channel.
The direct marketing channel does not involve intermediaries in the process
of carrying goods to consumers.
The indirect marketing channel involves intermediaries in the process of

carrying goods to consumers.
The marketing channels design decision generally involves four main stages,
which are, analysing customer needs, establishing channel objectives,
identifying major channel alternatives and evaluating major channel
alternatives.
There are three important elements that have to be considered by the

manufacturing firm: the types of marketing channels, the number of
marketing channels needed and the responsibilities of each channel member.
In the manufacturing firm, a marketing channel has to go through changes

either dynamically or continuously.
There are three trends or important transitions of a marketing channel, which

are: vertical marketing system, horizontal marketing system, and multi-
channel marketing system.
The marketing system often involves conflicts, competition due to unsuitable

objectives, unclear roles and rights, difference in opinion, and others.
The manufacturing firm has to manage this conflict to ensure cooperation

from the channel members.
Besides this, legal issues and ethical relations between firms and channels
have to be given importance in the arrangement of marketing channels.
The marketer has to create a distribution channel management process that is

good and effective.
To create the distribution channel management process mentioned, the

marketer has to ensure that each intermediary (agents or brokers, wholesalers
or retailers) is able to carry out its responsibilities effectively to create an
efficient and effective distribution channel system together.
Bulk breaking Indirect distribution

Direct distribution Indirect marketing channel
Direct marketing channel Multi-channel marketing system
Horizontal marketing system Vertical marking system

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Topic Managing

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Apart from paying attention to forms and conflicts of distribution channels, a

6.1 WHAT IS A MARKETING CHANNEL?

6.1.1 Classifications of Marketing Channel

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6.1.2 Marketing Channel Functions

(b) They develop and disseminate persuasive communication regarding the

(e) They assume risks of carrying out responsibilities as distributors;

(f) They provide the storage and movement of physical products;

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6.1.3 Marketing Channel Levels

Figure 6.1: Marketing channel levels

(a) Zero-level Channel

(b) One-level Channel

(c) Two-level Channel

(d) Three-level Channel

6.2 CHANNEL DESIGN DECISIONS

6.2.1 Channel Design System

(a) Analysing Customer Needs

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(i) Lot Size

(ii) Waiting Time

(iii) Spatial Convenience

(iv) Product Variety

(v) Service Backup

(b) Establishing Channel Objectives and Constraints

(c) Identifying Major Channel Alternatives

(i) Types of Intermediaries

Companys Sales Force

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(ii) Number of Intermediaries

(d) Evaluating Major Channel Alternatives

(iii) Adaptive Criteria

6.3 CHANNEL MANAGEMENT DECISIONS

(a) Selecting Channel Members

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(b) Evaluating Channel Members

(c) Training Channel Members

(d) Motivating Channel Members

(i) Coercive Power

(ii) Reward Power

(iii) Legitimate Power

(iv) Expert Power

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(v) Referent Power

(e) Modifying Channel Arrangements

Normally, changes done to channel arrangements are:

6.4 CHANNEL DYNAMICS

6.4.1 Vertical Marketing Systems

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A traditional marketing channel comprises an independent producer,

Figure 6.2: Traditional marketing channel versus vertical marketing channel

A vertical marketing system, by contrast comprises producers, wholesalers, and

(a) Corporate Vertical Management System

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Table 6.1: Major Suppliers and Toyotas Equity Percentage

Company Equity Percentage (%)

(b) Contractual Vertical Management System

There are three types of franchise organisations:

Manufacturer-sponsored Retailer Franchise System

Manufacturer-sponsored Wholesaler Franchise System

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Service firm-sponsored Retailer Franchise System