Managing Distribution Channels

Manufacturers typically follow a 5-step process in the creation and management of distribution strategies.

Develop the Strategy

As with any strategic decision, the company’s goals and mission statement have to be taken into account. Then go back to the target market and think about how to effectively reach that market.

Select Distribution Partners

Create specific criteria, then find candidates who meet those criteria. The relationship that a manufacturer develops with distributors can make or break a specific product.

Support those Partners

Manufacturers offer incentives and awards to sales people, even if those sales people work for a retailer. Often, manufacturers will offer to help with the costs of advertising and other promotions. And further, manufacturers look to retailers and wholesalers for recommendations for improvements.

For example, assume that JVC manufactures MP3 Players that are distributed by Best Buy. Sales people from Best Buy may be trained by a factory rep, and offered a “spiff” for each unit sold.

Then assume that Best Buy sells 4 different MP3 Players. Then assume that the JVC unit does not sell as well as the 3 competitors within Best Buy.

Say that the sales staff notes that the JVC unit is the only one not sold in a “blister pack”, which can be hung on a slat wall hook, which limits Best Buy’s display options.

It is likely that JVC would decide to redesign the packaging to best suit the needs of Best Buy.

Incorporate 4 P’s

Distribution (Place) contains elements of Product, Price and Promotion.

How will the retailer display the product; Slatwall, display case, or table top? This decision can influence how the product is positioned in the mind of the consumer.

The retail price is determined by the wholesale price, which is determined by the factory price. The final price has to be attractive to consumers, yet allow each distribution partner to make a fair profit and encourage them to stock larger quantities.

Assess Performance of the Channel

Manufacturers are keenly interested in the success of their distribution partners. A successful store typically will be given priority in the shipping schedule. A distributor with continually poor sales performance despite factory promotional support will often be eliminated.

Note:

While working out a strategy that best suits a company’s objectives, it is necessary to be aware of potential conflicts among distribution partners.

For example, if a chain of convenience stores sells Coke and Pepsi, and markets Pepsi more aggressively, then Coke has to adjust their relationship with that retail outlet.

Or, if Sony sells Stereos via Circuit City, Good Guys, Sears, The Sharper Image and a Sony outlet store within a 5-block radius, there’s a risk of over saturating that local market.

Or, if ADT offers to install home protection systems to the public at a lower price than their local dealers can afford to offer, then they may lose those dealers.

Selecting Distribution Channels

4 things to consider

Market

Know your target market segment! Who are they? Where are they, and what do they like? These answers will be helpful in deciding where to sell the product.

Product

Is it complex? Will it expire soon? Does it have custom made components? If it does, then a short distribution channel is probably the best way to go.

Organization

How big is a big company, anyway? If you have the resources to handle your own retail distribution, then you may want to eliminate intermediaries all together.

However, this is usually not a cost effective solution to distribution issues.

Competition

Manufacturers have to be assured that intermediaries will devote sufficient resources to move the product. How an intermediary handles promotions, advertising and display issues can elevate your product’s prestige, or kill it.