Distribution Channels and Supply Chain Management
Distribution Channels
Concepts
Inbound Logistics: The manufacturing process’s supply with raw materials and components.
Outbound Logistics: The physical distribution of finished products from the manufacturer to the final consumer.
These concepts have great economic importance as they are associated with new industry installations.
End Point of Physical Distribution
- Retail store
- Direct delivery to the consumer
Those responsible for operating physical distribution handle predominantly material elements:
- Warehouses
- Transport vehicles
- Inventory
- Loading and unloading equipment
The marketing and sales staff view the supply chain through a marketing lens, focusing on product aspects and properties.
Most retail products reach consumers through intermediaries: the manufacturer, wholesaler or distributor, retailer, and possibly other intermediaries.
Key Points
- A distribution channel comprises organizations transferring product possession from the manufacturer to the final consumer.
- Marketing channels are sets of interdependent organizations making a product or service available for use or consumption.
There is a close relationship between physical product distribution and distribution channels. The company first defines the distribution channel, then the physical distribution of products.
Established distribution channels are difficult to change and generally remain stable for extended periods due to involving other companies, agents, and trade agreements.
Evolution of Distribution
Role of Intermediaries
- Retailers offer consumers a broad market range (variety).
- Producing a large variety of products would require exceptional financial resources and force companies to operate outside their core competence.
- Large retailers may marginally enter manufacturing by ordering products with their own brands and specifications.
Why Not Handle All Distribution Functions?
If manufacturers handled all distribution functions, it would be economically unproductive:
- Achieving sufficient sales volume to justify facilities and sales teams would be challenging.
- The company would be forced to market competitors’ products.
- Smaller stores offering only their own products would be impractical and not serve consumers.
The industry benefits from efficiency gains by focusing on its core competence:
- Businesses achieve higher returns by concentrating investments in their primary activity.
- Intermediaries offer greater market placement efficiency.
How companies structure distribution channels has changed substantially due to:
- Increasing market competition
- Greater consumer focus
- Increased use of information technology
- Greater demand diversification
- Faster and more reliable physical distribution
Typical Distribution Channels
- Direct supply to retail stores
- Supply to own warehouses or distribution centers, then to retail stores
- Supply to retailers’ distribution centers, then to stores
- Supply to wholesaler or distributor, then to stores
- Distribution through a logistics operator to retail stores
- Direct delivery to consumers via mail or courier (e.g., internet, phone, fax sales)
Purpose of Distribution Channels
- Ensure quick product availability in priority market segments
- Maximize product sales potential
- Foster supply chain cooperation
- Ensure a predetermined logistics service level
- Ensure fast information flow
- Pursue integrated and permanent cost reduction through partnership
Functions of Distribution Channels
- Generate product and service demand
- Commercialize products and services
- Provide after-sales support
- Exchange information along the chain, including consumer feedback
Extension of Distribution Channels
- Zero-level channel: Direct sales (e.g., Avon)
- One-level channel: Large retailers buying directly from manufacturers
- Two-level channel: Sales through wholesale outlets
Trends
- The roles of intermediaries, particularly wholesalers and distributors, are being reviewed.
- New channel forms are emerging, and indirect channels are shortening.
- Changes aim to deliver greater value to consumers by leveraging technology and market changes.
- Consumer information helps determine the best distribution channel.
- Distribution channel choice is part of the competitive strategy, not an afterthought.
Relationship Management with Suppliers (SRM)
Purchasing
Purchasing involves planning the acquisition, bidding, and contracting of materials and services, ensuring their timely provision in the correct quantities and quality.
Supply
Supply encompasses purchasing and handling incoming materials, parts, and finished products from suppliers to factories, warehouses, or retail stores. It ensures material availability when and where needed.
Long-term supply involves sourcing, supplier selection, negotiation, and relationship management to minimize prices and costs.
Manufacturing companies allocate a significant portion of their resources (50-90%) to materials, supplies, and services. Competitive advantage can be achieved through strategic materials management.
Until the mid-90s, purchasing was purely functional, focused on unit cost reduction through bulk buying. It was transactional, bureaucratic, and lacked interdepartmental communication.
In the mid-1990s, purchasing shifted towards total cost reduction and interaction with other sectors. The focus shifted to “Supplies and Sourcing,” with the creation of Logistics and Supply Directors.
The just-in-time (JIT) approach strengthened customer-supplier relationships. With global sourcing, a logistics vision emerged. Purchasing evolved into “Procurement” under Supply Chain Management, focusing on total logistics cost reduction.
The purchasing strategy now targets item criticality and value, using various tools. Suppliers have become partners, with service as important as price. The distance between suppliers and manufacturers has decreased.
Logistics network management has gained importance due to competition among supply chains. Success depends on the right strategy for each chain. Profitable manufacturing and delivery are crucial for market strength.
Relationship with Suppliers
Traditionally, supplier decisions were based on the “make or buy” criterion, prioritizing internal production over external sourcing based on cost.
This concept evolved in the 90s to include core competencies and transaction costs. Strategic supplier relationships promote continuous improvement in customer satisfaction.
Companies like Xerox, Motorola, IBM, and automotive companies pioneered partnerships in the 80s, viewing them as key to quality, rapid delivery, and continuous improvement.
Partnerships
Cooperation, the most advanced partnership stage, involves understanding each party’s potential and competitive advantages to improve processes, reduce costs, and increase synergy.
SRM
Organizations seeking market differentiation and cost reduction have strengthened supplier relationships. Managing supplier relationships is key to Supply Chain Management (SCM) for flexible market response.
Long-term relationships rely on contracts establishing rights and obligations, ensuring stability and trust. Supplier Relationship Management (SRM) reduces supply chain costs through purchase optimization.
SRM improves buyer-seller operations through improved work practices, achieving mutual success. It enables strategic relationship creation and optimization with key suppliers.
SRM simplifies and streamlines processes between companies and suppliers, similar to how CRM enhances business-customer relationships.
Exercises
Explain the following concepts:
- SRM: Supplier relationship management optimizes purchasing and reduces supply chain costs.
- Supplies: Purchasing and organizing incoming materials, parts, and finished products from suppliers to factories, warehouses, or retail stores, ensuring material availability.
- Core competency: Focusing on the company’s core business.
- Procurement: The purchasing function in industry.
What are the objectives of working with SRM? How can this impact company strategy?
The goal is to integrate and improve supplier relationships, seeking cost reduction, lead time reduction, and improved logistics service. This impacts company strategy by enhancing efficiency, competitiveness, and customer satisfaction.