PENTECOST UNIVERSITY COLLEGE

PUSC201: TRANSPORTION AND DISTRIBUTION MANAGEMENT

Lecture 6: CHANNELS OF DISTRIBUTION

6.0 Introduction

Physical distribution channel is the term used to describe the method and means by which a
product or a group of products are physically transferred, or distributed, from their point of
production to the point at which they are made available to the final customer. In general, this
end point is a retail outlet, shop or factory, but it may also be the customer’s house, because
some channels bypass the shop and go direct to the consumer.

In addition to the physical distribution channel, another type of channel exists. This is known as
the trading or transaction channel. The trading channel is also concerned with the product, and
with the fact that it is being transferred from the point of production to the point of consumption.
The trading channel, however, is concerned with the non-physical aspect of this transfer. These
aspects concern the sequence of negotiation, the buying and selling of the product and the
ownership of the good as they are transferred through the various distribution systems.

One of the more fundamental issues of distribution planning is regarding the choice and
selection of these channels. The question that arises, for both physical and trading channels is
whether the producer should transfer the product directly to the consumer, or whether
intermediaries should be used. These intermediaries are, at the final stage, very likely to be
retailers, but for some of the other links in the supply chain it is now very usual to consider a
third-party operator to undertake the operation.

6.1 Channel Types and Structure

There are several alternative channels of distribution that can be used, and a combination of
these may be incorporated within a channel structure. The diagram in Figure 1 indicates the
main alternative channels for a single consumer product being transferred from a manufacture’s
production point to a retail store or shop. Channels from industrial suppliers to industrial

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customers are, of course, equally important. Many of the alternatives described here are
relevant for movements such as these.

retail retail
retail

Parcels Retail ware

carrier house broker

collect Cash & retail

retail Production
carry direct
facility

Wholesale
warehouse Third-party Manufacturer’s
service warehouse

retail
retail
retail

Figure 1 Alternative distribution channels for consumer products

The alternative channels are described below:

6.1.1 Manufacturer Direct To Retail Store

The manufacturer or supplier delivers direct from the production point to the retail store. As a
general rule, this channel is only used when full vehicle loads are being delivered:

6.1.2 Manufacturer via manufacturer’s distribution operation to retail store

This was one of the classic physical distribution channels and the most common channel for
many years. Here, the manufacturer or supplier holds units products either in a finished goods
warehouse, a central depot or a series of regional depots. The products are trunked in large
vehicles to the depots, where they are stored and then broken down into individual orders that
are delivered to retail stores on the supplier’s retail delivery vehicles. The use of this type of
physical distribution channels has decreased in importance in recent years due to a number of
developments in alternative channels of physical distribution. Thus type of channels is still
commonly used by the brewing industry. Example Coca Cola, Ghana Breweries etc

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6.1.3 Manufacturer via retailer depot to retail store
This channel consists of manufacturers supplying their products to national distribution centers
(NDCs) or regional distribution centers (RDCs), which are depots run by the retail organizations.
These centers act as consolidation depots, as goods from the various manufacturers and
suppliers are consolidated at the depot i.e. creating bulk the retailers then use their own delivery
vehicles to deliver full vehicle loads of all the different manufactures’ product (i.e. breaking bulk)
to their own stores. This type of distribution channel grew in importance during the 1970s as a
direct result of the growth of the large multiple retail organizations that are now a feature of the
high street and of the large retail parks. Many retailers now use third parties to run these final
delivery operations.

6.1.4 Manufacturer to wholesaler to retail shop

Wholesalers have acted as the intermediaries in distribution chains for many years, providing the
link between the manufacturer and the small retailer’s shops. However, this physical distribution
channel has altered in recent years with the development of wholesale organizations or
voluntary chains. These wholesaler organizations are known as ‘symbol’ groups in the grocery
trade. They generally began on the basis of securing the price advantage of buying in bulk from
manufacturers or suppliers. One consequence of this has been the development of an important
physical distribution channel because the wholesalers use their own depots and vehicle fleets.

6.1.5 Manufacturer to cash-and-carry wholesaler to retail shop

Another important development in wholesaling has been the introduction of cash-and-carry
businesses. These are usually built around the wholesale organization and consist of small
independent shops collecting their orders from regional wholesalers, rather than having them
delivered. This increase in cash-and-carry facilities has arisen because many suppliers will not
deliver direct to small shops because the order quantities are very small.

6.1.6 Manufacturer via third-party distribution to retail shop

Third-party distribution or the distribution service industry has grown very rapidly indeed in
recent years as a result specialization. The industry has grown for a number of reasons, the
main ones being the extensive rise in distribution costs and the constantly changing an more
restrictive contribution legislation that has occurred. Thus, a number of companies have
developed a particular expertise in warehousing and distribution. These companies consist of
those offering general distribution services as well as those that concentrate on providing a
‘specialist’ service for one type of product (e.g. china and glass, hanging garments), or for one
client company.

6.1.7 Manufacturer via small parcels carrier to retail shop

Very similar to the previous physical distribution channel, these companies provide a ‘specialist’
distribution service where the ‘product’ is a small parcel. There has been an explosion of small

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parcels companies, specializing particularly in on-time delivery. The competition generated by
these companies has been quite fierce.

6.1.8 Mail order

The use of mail order or catalogue shopping has become very popular. Goods are ordered by
catalogue, and delivered to the home by post or parcels carrier. The physical distribution channel
is thus from manufacturer to mail order house as a conventional trunking operation, and then to
the consumer’s home by post or parcels carrier, bypassing the retail store.

6.1.9 Factory direct to home

The direct factory-to-home channel is a relatively rare alternative. It can occur by direct selling
methods often as a result of newspaper advertising. It is also commonly used for ‘one-off’
special products that are specially make and do not need to be stocked in a warehouse to
provide a particular level of service to the customer.

6.1.10 Internet and shopping from home

There is now an important development in shopping via the Internet. Initial physical distribution
channels were similar to those used by mail order operations – by post and parcels carrier. The
move to Internet shopping for grocery products has led to the introduction of specialist home
delivery distribution operations. These are run either by the retailers themselves or by third-party
companies. In addition, it is now possible to distribute some products, such as music, software
and films, directly, computer to computer.

6.1.11 Factory to factory

The factory-to-factory channel is an extremely important one, as it includes all of the movement
of industrial products, of which they are very many. This may cover raw materials, components,
part-assembled products, etc. options vary according to the type and size of product and order,
and may range from full loads to small parcels.

6.2 The main Differences Among the Channels are:

It can be seen from the list of alternative channels that the channel structures can differ from one
company to another. The main differences are:
a. The type of intermediaries
b. The number of levels of intermediaries (how many companies handle the product); and
c. The intensity of distribution at each level (i.e. are all or just selective intermediaries used
at the different levels?).
An individual company may have many different products and many different types of
customers. Such a company will therefore use a number of different channels within its
distribution operation. This, together with the large number of variable factors and elements
possible within a channel structure, makes it difficult to summarize effectively. The diagram of
Figure 2, however, gives a fair representation of a typical single-channel structure. Note the
different physical and trading channels.

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 Physical channel Trading channel
Production Central
warehouse
sales
Manufacture’s
trunk vehicle
Distribution Regional/
centre District
sales
Third-party
carrier
Regional depot Wholesaler
Local delivery
Shop/store Retailer

Consumer

Figure 2: Typical channel of distribution, showing the different physical

and trading routes to the consumer.

6.3 Objective in Channel Selection:

Channel objectives will necessarily differ from one company to another, but it is possible to
define a number of general points that are likely to be relevant. These should normally be
considered by a company in the course of its distribution planning process to ensure that the
most appropriate channel structure is developed. The main points that need to be addressed are
as follows:

 To make the product readily available to the market consumers at which it is

aimed: Perhaps the most important factor here is to ensure that the product is
represented in the right buying environment for customers. For a consumer product this
might be, for example retail store and internet. Having identified the correct market-place
for the goods, the company must make certain that the appropriate physical distribution
channel is selected to achieve this objective.
 To enhance the prospect of sales being made: This may be the responsibility of
either the sales group or the logistics group or joint as a team. It can be achieved in a
number of ways. For example, the general aims of delivery to stores/shops might be to
get good positions and displays in the store, and to gain the active support of the retail
salesperson, if this is relevant. The product should be visible, accessible and attractively
displayed in the shop. Does the product need to be installed, demonstrated, or
explained? Is there a special promotion of the product?

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  To achieve co-operation with regard to any relevant distribution factors: These
factors may be from the supplier’s or the receiver’s point of view and include minimum
order sizes, until load types, product handling characteristics, materials handling aids,
delivery access (e.g. vehicle size) and delivery time constraints, amongst others.

 To achieve a given level of service: Once again, form both the supplier’s and the
customer’s viewpoints, a specified level of service should be established, through a
formal service level agreement which is then mentioned, measured and maintained. The
customer normally sees this as crucial. Relative performance in achieving service level
requirements is often used to compare suppliers and may be the basis for subsequent
buying decisions.

 To minimize logistics and total costs: As always cost is very important, as it is

reflected in the final price of the product. The selected channel will reflect a certain cost,
and this cost must be assessed in relation to the type of product offered and the level of
service required.

 To receive fast and accurate feedback of information: A good flow of relevant

information is essential for the provision and maintenance of an efficient distribution
service. It might include sales trends, damage reports, service levels, cost monitoring.

6.4 Factors Affecting Channel Selection in a Distribution System

 Market Characteristics
 Product Characteristics
 Channel Characteristics
 Competitive Characteristics
 Company Resources

6.4.1 Market Characteristics

The important consideration here is to use the channels and types of outlet most appropriate for
the eventual end user. The size and spread of the market are also important. If a market is a
very large one that is widely spread form a geographic point view, then it is usual to use ‘long’
channels. A long channel is one where there are several different storage points and a number
of different movements for the product as it goes from production to the final customer. Where a
market has only a very few buyers in a limited geographical area, then ‘short’ channels are used.

A simple example of what are known as ‘long’ and ‘short’ channels is illustrated in figure 3 below.

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 Long channel
Manufacturer’s Manufacturer’s Third-party
warehouse depot central depot

Retail Retailer’s Third-party

Stores regional depot regional depots

Short channel

Manufacturer’s Buyer’s factory

warehouse warehouse

Figure 3 ‘Long’ and ‘short’ distribution channels

6.4.2 Product characteristics

The importance of the product itself when determining channel choice should not be
underestimated. This is because the product may well impose constraints on the number of
channels that can be considered. For example:

 High-value items are more likely to be sold direct via a short channel, because the high
gross profit margins can more easily cover the higher sales and distribution costs that are
usual from short channels. In addition, the security aspects of highly priced items (e.g.
jewelry, watches, CDs, etc.) makes a short channel much more attractive because there
is less opportunity for loss and theft than with a long channel. Short channels also reduce
the requirement for carrying large inventories of high value good and thus help to avoid
the associated issues of poor use of working capital and the cost of obsolesce.

 Complex products often require direct selling because any intermediary may not be able
to explain how the product works to potential customers.

 New products may have to be distributed via third-party channel because final demand is
unknown and supply channels need to be flexible to respond to both high and low
demand levels. Exiting own-account operations may find it difficult to deal effectively with
the vagaries of new product demand.

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  Time – sensitive products need a ‘fast’ or short channel, for shelf-life reasons in the case
of food products such as bread and cakes, and relevance in the case of newspapers &
tender documents.

 Products with a handling constraint may require a specialist physical distribution channel,
e.g. frozen food, china and glass, hanging garments and hazardous chemicals.

6.4.3 Channel Characteristics

As well as taking account of market and products characteristics, another aspect to be
considered concerns the characteristics of the channel itself. There are two different factors that
are important.
 Firstly, does the channel being considered serve or supply the customer in the way
required? A simple example might be new grocery product that needs to be
demonstrated or tested in the shop. There would be no point in distributing this product
through a call self-service store where no facilities can be provided for a demonstration.
 Secondly, how efficient is the channel being considered? Efficiency may include a
number of different features related to sales or distribution. These might include the sales
potential in the outlet served, the size of orders placed, the frequency of delivery
required, etc.


6.4.4 Competitive characteristics

Competitive characteristics that need to be considered concern the activities of any competitors
selling a similar product. Typical decisions are whether to sell the product alongside these similar
products, or whether to try for different, exclusive outlets for the product to avoid the competition.
It may well be that the consumer preference for a wide choice necessitates the same outlets
being supplied. Good examples include confectionery and most grocery items.

Also of very real significance is the service level being offered by the competition; it is essential
that channel selection is undertaken with a view to ensuring that the level of service that can be
offered is as good as, or better than, that which is being provided by key competitors. This may
well be the main area of competitive advantage, especially for those products where it is very
difficult to differentiate quality and price.

6.4.5 Company resources

In the final analysis, it is often the size and the financial strength of the company that is most
important in determining channel strategy. Only a fairly large and cash-rich company can afford
to set up a distribution structure that includes all of its own warehousing and transport facilities.
With these, the company has more control and can provide the service it thinks its customers
require. Smaller and less financially secure companies may have to use intermediaries or third-

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party organizations to perform their distribution function, because they do not have the financial
resources to allow them to run their own distribution operations.

6.4.6 Third-party Vs. own-account distribution and logistics

The most common channel decision for those operating in physical distribution is whether to use
a third-party distribution service, or whether to run an own-account (in-house) distribution
operation.

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