SELECTING DISTRIBUTION CHANNELS FOR SMALL BUSINESSES
Distribution channels move products and services from businesses to consumers and to other businesses. Also known as marketing channels, channels of distribution consists of a set of interdependent organizations such has the wholesalers, retailers, and sales agents, involved in making a product or service available for use or consumption. Distribution channels are just one component of the overall concept of distribution networks which are the real, tangible systems of interconnected sources and destinations through which products pass on their way to final consumers.
A basic distribution network consists of two parts: 1) a set of locations that store, ship or receive materials (such as factories, warehouses, retail outlets); and 2) a set of routes (land, sea, air, satellite, cable, Internet) that connect these locations. Distribution networks may be classified as either simple or complex.
A simple distribution network is one that consists of only a single source of supply, a single source of demand, or both, along with fixed transportation routes connecting that source with other parts of the network. In a simple distribution network, the major decisions for managers to make include when and how much to order and ship based on internal purchasing and inventory considerations.
In short, distribution describes all the logistics involved in delivering a company’s products or services to the right place, at the right time, for the lowest cost. In the unending efforts to realize these goals, the channels of distribution by a business play a vital role in this process. Well chosen channels constitute a significant competitive advantage, while poorly conceived or chosen channels can doom even a superior product or service to failure in the market.
Multiple Channels of Distribution
For many products and services, their manufacturers or providers use multiple channels of distribution. A personal computer, for example, might be bought directly from the manufacturer, either over the telephone, direct mail, or the Internet, or through several kinds of retailers, including independent computer stores, franchised computer stores, and department stores. In addition, large and small businesses may make their purchase through other outlets.
Channel structures range from two to five levels. The simplest is a two level structure in which goods and services move directly from the manufacturer or provider to the consumer. Two level structures occur in some industries where consumers are able to order products directly from the manufacturer and the manufacturer fulfills those orders through its own physical distribution system.
In a three level channel structure, retailers serve as intermediaries between consumers and manufacturers. Retailers order products directly from the manufacturer, and then sell those products directly to the consumer. A fourth level is added when manufacturers sell to wholesalers rather than retailers. In a fourth level structure, retailers order goods from wholesalers rather than manufacturers.
Finally, a manufacturer’s agent can serve as an intermediary between the manufacturer and its wholesalers, creating a five level channel structure consisting of the manufacturer, agent, wholesale, retail, and consumer levels. A five level channel structure might also consist of the manufacturer, wholesale, jobber, retail, and consumer levels, whereby jobbers service smaller retailers not covered by the large wholesalers in the industry.
Selecting channels for small businesses
Given the importance of distribution channels, along with limited resources generally available to small businesses, it is particularly important for entrepreneurs to make a careful assessment of their channel alternatives. In evaluating possible channels, it may be helpful first to analyze the distribution channels used by competitors. This analysis may reveal that using the same channels would provide the best option, or it may show that choosing an alternative channel structure would give the small business a competitive advantage.
Other factors to consider include the company’s pricing strategy and internal resources. As a general rule, as the number of intermediaries included in a channel increase, producers lose a greater percentage of their control over the product and pay more to compensate each participating channel level. At the same time, however, more intermediaries can also provide greater market coverage.
Among the may channels a small business owner can choose from are: direct sales (which provides the advantage of direct contact with the consumer); original equipment manufacturers (OEM) sales (in which a small business’s product is sold to another company that incorporates it into a finished product); manufacturer’s representatives (salespeople operating out of agencies that handle an assortment of complimentary products); wholesalers (which generally buy goods in large quantities, warehouse them, and break them down into smaller shipments for their customers, usually retailers); brokers (who act as intermediaries between producers and wholesalers or retailers); retailers (which include independent stores as well as regional and national chains); and direct mail.
Ideally, the distribution channels selected by a small business owner should be close to the desired market, able to provide the necessary services to buyers, able to handle local advertising and promotion, experienced in selling compatible product lines, solid financially, cooperative, and reputable.
Since many businesses lack the resources to hire, train and supervise their own sales forces, sales agents and brokers are a common distribution channel. Many small businesses consign their output to an agent, who might sell it to various wholesalers, one large distributor, or a number of retail outlets. In this way, an agent might provide the small business with access to channels it would not otherwise have had.
Moreover, since most agents work on commission basis, the cost of sales drops when the level of sales drops; this provides small businesses with some measure of protection against economic downturns. When selecting an agent, an entrepreneur should look for one who has experience with desired channels as well as with closely related, but not competitive products.
Other channel alternatives can also offer benefits to small businesses. For example, by warehousing goods, wholesalers can reduce the amount of storage space needed by small manufacturers. They can also provide national distribution that might otherwise be out of reach for an entrepreneur.
Selling directly to retailers can be a challenge for small business owners. Independent retailers tend to be the easiest market for entrepreneurs to penetrate. The merchandise buyers for independent retailers are most likely to get their supplies from local distributors, can order new items on the spot, and can make adjustments to inventory themselves. Likewise, buyers for small groups of retail stores also tend to hold decision making power, and they are able to try out new items by writing small orders. However, these buyers are more likely to seek discounts, advertising allowances, and return guarantees.
Medium sized retail chains often do their buying through a central office. In order to convince the chain to carry a new product, an entrepreneur must usually make a formal sales presentation with brochures and samples. Once an item makes it to the shelf, it is required to produce a certain amount of revenue to justify the space it occupies, or else it will be dropped in favor of a more profitable item. National retail chains, too, handle their merchandise buying out of centralized offices and are unlikely to see entrepreneurs making cold sales calls. Instead, they usually request a complete marketing program, with anticipated returns, before they will consider carrying a new product. Once an item becomes successful, however, these larger chains often establish direct computer links with products for replenishment.
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