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Term Paper on Distribution Channels

Term Paper Contents:

  1. Term Paper on the Introduction to Distribution Channels
  2. Term Paper on the Design of Distribution Channels
  3. Term Paper on the Levels of Distribution Channels
  4. Term Paper on the Types of Distribution Channels
  5. Term Paper on the Importance and Functions of Distribution Channels
  6. Term Paper on the Monitoring and Managing Distribution Channel

Term Paper # 1. Introduction to Distribution Channels:

A distribution channel is a pathway through which the final products of manufacturers reach the end users. It is also known as marketing channel and covers the distance between the manufacturer and the customer. Several organizations believe that the distribution channels facilitate both the manufacturers and the users. On the other hand, some organizations do not use distribution channels and directly reach the end users.

The functioning of distribution channels differs in various marketing concepts, which are as follows:

i. Production Concept:

It follows the practice of linking manufacturers with customers by a middleman. The middleman plays a major role in making the product available for customers and bringing revenue for manufacturers.

ii. Product Concept:

It adds quality and other features in the product. The manufacturers add another distribution channel in the form of a warehouse to safely store the products.

iii. Sales Concept:

It adds retail outlets in the existing distribution channel. The retail outlets are managed to promote and sell the product.

iv. Marketing Concept:

It uses maximum number of distribution channels. The manufacturers use every reasonable distribution channel, channel members, and their combination to reach the end users. At this stage, the manufacturers use distribution channels to gain a competitive edge over the competitors.

The success of a new product depends on the proper adoption of distribution channels to a great extent. There are three types of intermediaries in which the first takes the ownership of the product, second negotiates on behalf of manufacturers and does not take ownership of the product, and the third facilitates the distribution of products independently.

Sometimes, manufacturers supply the products throughout the country as well as abroad. In this case, the manufacturers select the most suitable distribution channel to distribute their products. The availability of products in shops is the result of distribution channels.

For example, a customer can get Coca-Cola and Pepsi at any shop. The distribution channel plays a very important role in case of perishable products, such as milk and butter. For example, Amul butter is manufactured in Gujarat and distributed throughout India. In the distribution of milk and butter, Amul faces a challenge of storing butter as it requires safety from weather and contamination. Therefore, it needs a distribution channel that can reach the customers faster and give the facility of cold storage of the product.

Term Paper # 2. Design of Distribution Channel:

The design of a distribution channel depends on the level of services expected by customers and the type of a product. For example, a television manufacturing organization produces television sets and sells them to wholesalers in large quantity.

The wholesalers sell the television sets to local retailers in small quantity and the retailers finally sell them to end users. The middlemen involved in the process of transferring the television sets from the manufacturer to the end users decide the design of the channel.

Following are the three major decisions related to designing a distribution channel:

a. Deciding the role of a distribution channel to achieve the objectives of the organization.

b. Defining the intensity of product distribution channel.

c. Deciding the need of a particular intermediary to achieve the objectives of the organization.

A manufacturer tries to reach the customers in the best possible way to earn profit and customer loyalty and customer retention. The organizations follow a process of designing the distribution channel.

Now, let us discuss the process of designing a distribution channel in brief:

1. Analyzing Customer Service Needs:

It refers to finding out the service needs of a particular customer segment. For example, the customers of the Fast Moving Consumer Goods (FMCG) products need timely delivery and convenience in buying the products.

2. Setting Distribution Channel Objectives:

It refers to determining the goals of distribution channel. It helps an organization in visualizing the future course of actions related to distribution of its products.

3. Identifying Major Distribution Channel Alternatives:

It helps in reaching the customers in minimum time and cost. An organization can distribute the product through one or more distribution channels depending on different geographical areas.

4. Evaluating Major Distribution Channel Alternatives:

This finds out the most suitable and profitable distribution channel to reach customers from all the identified alternatives of the distribution channels. The evaluation of channel is based on its economic, control, and adaptive criteria. The economic criterion measures the input and output by using various distribution channels to reach customers. An organization selects the most beneficial distribution channel to reach the customers.

The evaluation of the alternatives is done on the basis of control and adaptive criteria. The control criterion selects the distribution channel that can easily be managed by the organization. Generally, the organization adopts the distribution channel that can be easily controlled and managed. The adaptive criterion measures the relationship between manufacturers and distributors. This criterion mainly focuses on the nature and agreement of the business.

Term Paper # 3. Levels of Distribution:

Organizations must take into account several factors, such as cost, benefit, and process while selecting the level of distribution coverage. The organizations must understand that high distribution coverage costs more to the organization than the low distribution coverage. Therefore, determining the right level of distribution is important for an organization. There are three levels of distribution.

The discussion of the levels of distribution is as follows:

i. Intensive Distribution:

It makes the product available at almost every shop. This type of distribution is used for convenience products, such as salt, oil, soap, and sugar. The convenience products are basic products and widely used by customers.

ii. Selective Distribution:

It requires finding out suitable resellers to stock and sell the product. For example, perfumes, electronic equipment, and furniture.

iii. Exclusive Distribution:

It requires a limited number of resellers in the market to maintain the high level of service quality. The exclusive distribution is used for various luxurious brands, such as Armani, Gucci, and Mercedes-Benz.

The distribution channel can be divided into three parts – direct channel, indirect channel, and hybrid channel.

Term Paper # 4. Types of Distribution Channel:

A distribution channel is used by an organization to deliver its products or services into the market for industrial or customer use. The traditional distribution channel includes manufacturer, supplier, distributor, wholesaler, and retailer. The distribution channel plays a role in linking manufacturers with the customers. Each member of the distribution channel has its own specific needs that the manufacturer must take into consideration.

1. Direct Distribution Channel:

Direct distribution channel does not include any middleman and is also known as a zero level channel. In this channel, the product is directly made available to customers. The manufacturers directly approach the customers to sell their products through door-to-door sale by salespersons.

The organizations, such as Eureka Forbes, Tupperware, and Asian Sky Shop use direct marketing channel to reach the customers. Indian Oil and Bharat Petroleum use manufacturer-owned stores to sell their products.

The direct marketing channel is used under the following circumstances:

i. Local Market:

It refers to a market that is around the production unit. For example, local bread and biscuit manufacturers directly make products available in the local market.

ii. Small Lot Size:

It refers to the small quantity of the product as per the requirements of the individual customers. The manufacturers produce products in bulk and sell in small sizes directly through departmental stores and super bazaars. In direct distribution channel, there are no intermediaries between manufacturers and customers.

In addition, it can be divided into four types as explained below:

Types of Direct Distribution Channel:

The four types of direct distribution channels:

i. Direct Marketing System:

It implies that customers get information through non-personal communication, such as telemarketing and websites.

ii. Direct Retail System:

It refers to the retail outlets owned by an organization for the purpose of selling its own products. For example, Hindustan Petroleum, an oil producing organization and Starbucks, a coffee manufacturing organization have their own retail outlets to sell their products.

iii. Personal Selling System:

It involves a process in which a salesperson goes to customers to generate business from them. The salesperson has a responsibility to persuade the customers to place an order for the product.

iv. Assisted Marketing System:

It facilitates an organization to distribute products directly to customers. There are various assisted marketing systems, such as online auction websites, including eBay and BidSow(dot)com. These marketing systems help the organization to directly sell its products to customers.

Characteristics of Direct Distribution Channel:

Now, let us discuss the characteristics of direct distribution channel briefly:

i. Privacy:

It refers to the non-disclosure of information related to buying power, location, and interests of customers. An organization can maintain good relationships with the customers by keeping their information confidential.

ii. Targeted Customers:

It refers to the customers who are interested in buying products. The interested customers directly contact the manufacturer; therefore, it becomes easy to identify them.

iii. Customized Order:

It refers to the order placed by the customers as per their requirements. In this process, the production or assembling of a product starts when the manufacturer receives order from the customers.

iv. Immediate Order:

It refers to the placement of order through electronic media. For example, the Internet, mobile phones, and fax are fast modes to place an order.

v. Continuous Relationship:

This develops between the manufacturer and customers through a direct interaction. In direct distribution channel, the timely corrective actions regarding complaints improve the relationship.

vi. Higher Response:

It means that a customer can respond as per the instructions given by the manufacturers. For example, an advertisement of Asian Sky Shop gets the response of customers through the toll-free number given in the advertisement.

vii. Response Measurement:

It helps an organization to directly contact the customers to measure their responses about the product.

2. Indirect Distribution Channel:

Indirect distribution channel involves middleman for the distribution of products to the customers. It is used mainly by large-scale manufacturers because they produce goods in bulk that are difficult to sell directly. The manufacturers need middlemen to carry out the distribution of the product. The middlemen in the distribution, channel can be agents, wholesalers, or retailers.

The indirect distribution channel can be divided into two parts, which are discussed in the following points:

i. Single Party Selling System:

It involves a middleman between the manufacturer and customer. The middleman is mainly the retail stores and online retailers.

ii. Multiple Party Selling System:

It includes two or more middlemen to carry out the distribution of the products to end users.

An organization can make products available to the customers through many levels depending on the mutual benefits of the organization and the customers. The indirect distribution channel can be divided in three types on the basis of customer, industry, and service.

These types are discussed below:

i. Customer Distribution Channel:

The customer distribution channel is selected for a market where the number of customers is high but their individual demand of a product is less. There are four types of customer distribution channels.

In customer distribution channel, the organization can reach the customers either directly or indirectly. If the organization directly approaches the customer then it is called direct customer distribution channel or zero-level channel.

For example, Dell computer uses zero-level distribution channel. On the other hand, if organization takes help of intermediaries, such as retailers, wholesaler, and jobbers to reach the customers then it follows indirect customer distribution channel.

For example, Indian Tobacco Company (ITC) and Reliance Chemicals use indirect customer distribution channels to reach their end users. The number of intermediaries involved in the indirect distribution of the product determines the levels of indirect customer distribution channel. If there is one intermediary in the indirectly customer distribution channel then it is known as I-Level. If there are two intermediaries between organization and customers then it is called 2-Level and so on.

ii. Industrial Distribution Channel:

In an industrial distribution channel, an organization sells its products directly to the other organization. In this channel, the number of customers is very less but they buy in a large quantity. The manufacturers are indulged in manufacturing heavy and sophisticated products, such as machinery. Therefore, they need to have updated information about new technologies. In this channel, the manufacturer and the customer share a close liaison due to a direct interaction between them.

In industrial distribution channel, an organization reaches its industrial customers directly or with the help of representatives. If the organization directly reaches its customers then it is called direct industrial distribution channel.

The organization adopts indirect industrial distribution channel if it takes help of its representatives or industrial distributors to reach industrial customers. For example, Xerox Corporation uses indirect industrial distribution channel to distribute photocopier machines to the industrial customers.

iii. Service Distribution Channel:

An organization cannot maintain an inventory for services; therefore, the service distribution channel is shorter or sometimes works as a direct channel. In this channel, there is no role of distributors, retailers, and other marketing intermediaries.

In service distribution channel, an organization does not involve any distribution channel to deliver the services to its customers. In this channel, there is no role of distributors, retailers, and other marketing intermediaries. In some instances, the organization uses agents to deliver the service. For example, hotels and restaurants use service distribution channel in delivering services to customers.

3. Hybrid (Mixed) Distribution Channel:

The combination of more than one distribution channel to reach customers is called hybrid distributional channel. The manufacturers can use various distribution channels, such as wholesalers, online stores, vending machines, retail stores, direct mail, and telemarketing to sell products and services. An organization can experience several benefits, including increased market penetration and lower distribution cost by using suitable distribution channel and managing just-in- time delivery of products and services.

Customers favor the distribution channel on the basis of various factors, such as price and convenience. Hybrid distribution channel improves the efficiency of market coverage. An organization takes care of channel conflicts while implementing hybrid distribution channel system. The proper management of hybrid distribution channel is important for the success of the organization.

Term Paper # 5. Importance and Functions of Distribution Channel:

A distribution channel affects various marketing activities, such as pricing strategies and location decisions of the organization. There are several organizations that use distribution channels to gain competitive advantage over competitors.

For example, Dell, a computer manufacturing organization, uses direct marketing channel to reach its customers. It delivers products on time and gets feedback from the customers immediately for the continuous improvement in the products and services.

Following points show the importance of distribution channel:

a. Helps to reduce the cost of the product by adopting the shortest way to reach customers

b. Reduces time in making the product available to customers

c. Minimizes the customer’s effort to get the product

d. Breaks the lot size of the product as per the requirement of customers

e. Explores new geographical areas to increase or create sales of the product

f. Provides financial assistance to customers through credit purchases, payment in installments, and exchange offers.

It provides information to the organization about the products and other aspects, such as preferences, geographical location, type, and feedback of customers.

Now, let us discuss the functions of a distribution channel in brief:

i. Making Products Available:

It refers to the primary function of any distribution channel. The distributor brings the products to the place from where the customers can directly buy them.

ii. Transferring Ownership and Possession:

It refers to taking the ownership and possession of the product from manufacturers and giving it to customers.

iii. Financing:

It refers to monetary facilities provided by intermediaries to help the customers in buying the product. Installment and delayed payments are the examples of monetary facilities provided by a distributor to its customers.

iv. Risk Taking:

It means bearing the risk of damage to the product while it is in the possession of the distributor.

v. Negotiation:

It refers to the dialogue intended to produce agreement between an organization and customers. An intermediary negotiates with the customers regarding the price and place of delivery of the product on behalf of manufacturers.

vi. Value-Added Services:

It refers to add some extra features to modify the product. The intermediaries can add services to the product or features to capture other markets. Value-added services can be servicing, maintenance, and home delivery of the product.

Term Paper # 6. Monitoring and Managing Distribution Channel:

The distribution channel needs to be properly managed for enhancing its performance. There are several decisions taken by the organization to manage a channel.

The distribution channel management decisions are as follows:

i. Selecting and Training Distribution Channel Members:

It implies that an organization should be careful in selecting the distribution channel members. The channel members should have related experience, sales efficiency, product knowledge, and administrative abilities. The training helps channel members to handle the customers’ queries in an effective manner.

ii. Motivating Distribution Channel Members:

It refers to a continuous process of encouraging the distribution channel members to enhance their performance. The channel members can be motivated by channel power, which changes the behavior of channel members.

The manufacturers use the following distribution channel power to manage a distribution channel:

a. Coercive Power:

It threatens the intermediaries to withdraw the resources and terminate channel membership if they fail to cooperate and perform the assigned task.

b. Reward Power:

It offers extra benefits to the intermediaries if they perform the tasks up to or above the set standards.

c. Legitimate Power:

It refers to the power of distribution channel to assign the behavior of the intermediary’s channel members.

d. Expert Power:

It refers to the special knowledge of manufacturers. The intermediaries follow the viewpoint of the/manufacturer who possesses an expert power. The manufacturer should continue to develop the new areas of expertise so that expert power should not be weaken.

e. Referent Power:

It refers to the respect given to the manufacturer by its intermediaries. The intermediaries should feel proud to be associated with the manufacturer. The organizations that have referent power are ITC, Tata Group, Dabur India Limited, IBM, Hewlett-Packard, and Caterpillar.

iii. Evaluating Distribution Channel Members:

It refers to assessing the performance of the channel members at a regular interval of time against any set standards. The set standards can be target achievement, average inventory level, cooperation in promotional activities, handling of lost or damaged products, and delivery time. The channel members who do not perform according to the set standards should be counseled and motivated.

iv. Modifying Distribution Channel Design Arrangements:

It refers to the changes in the marketplace and corresponding modifications in the channel. Market expansion, new technologies, and new entrants in the market play an important role in making modification in distribution channels. The channel modification is done though selecting or terminating the distribution channel and developing a new channel to distribute the products.