Home / Courses / Principles of Marketing / Unit 8

Principles of Marketing Unit 8: Distribution and Supply Chains

A great product at a fair price fails if customers cannot get it when and where they want it. This unit covers how marketing channels and supply chains move products from producers to buyers.

Covers: Supply chains and the value delivery network, Why intermediaries add value, Channel levels and multichannel distribution, Channel conflict and vertical marketing systems, Distribution intensity, Retailing and wholesaling, Marketing logistics

Study guide

A supply chain includes upstream partners that supply raw materials and components and downstream partners, such as wholesalers and retailers, that link the firm to customers. Marketers often call it a value delivery network, because each partner adds value. A marketing channel (distribution channel) is the set of interdependent organizations that help make a product available. Intermediaries exist because they make exchange more efficient. Without them, 3 producers selling to 3 customers need 3 × 3 = 9 contacts; with one distributor in between, they need only 3 + 3 = 6. Channel members also perform key functions: information, promotion, contact, matching, negotiation, physical distribution, financing and risk taking.

Channels are described by their number of levels, meaning the layers of intermediaries between producer and final buyer. A direct marketing channel has no intermediary levels, such as a brand selling on its own website. Indirect channels have one or more levels: producer to retailer to consumer is a one-level channel, and producer to wholesaler to retailer to consumer is two-level. More levels mean less control for the producer and more complexity. Many firms now use multichannel (hybrid) distribution, reaching different segments through stores, online, catalogs and sales teams. Disintermediation happens when producers cut out intermediaries, or when new types of resellers, such as online sellers, displace traditional ones.

Channel members depend on each other, but each also pursues its own goals, which causes channel conflict. Horizontal conflict occurs among firms at the same level, such as two franchisees in one city. Vertical conflict occurs between different levels, such as a manufacturer and its retailers. A conventional channel has independent firms each maximizing its own profit, often at the channel's expense. A vertical marketing system (VMS) has producers, wholesalers and retailers acting as a unified system. A corporate VMS combines stages under single ownership. A contractual VMS links independent firms through contracts; franchising is the most common type. An administered VMS gains coordination through the size and power of one dominant member.

Firms must decide how many intermediaries to use at each level. Intensive distribution stocks the product in as many outlets as possible and suits convenience goods such as gum and soda. Selective distribution uses more than one, but fewer than all, intermediaries willing to carry the product and suits shopping goods such as appliances. Exclusive distribution gives a limited number of dealers the sole right to sell in their territories and suits specialty and luxury goods, protecting brand image. Retailers sell to final consumers and differ by service level, product line, relative prices and organization. Wholesalers sell to businesses that resell or use the goods, and they add value by buying, bulk breaking, warehousing, transporting and financing.

Marketing logistics (physical distribution) means planning, implementing and controlling the flow of goods, services and information from points of origin to points of consumption to meet customer needs at a profit. The main functions are warehousing, inventory management, transportation and logistics information management. Distribution centers are large, automated warehouses designed to move goods rather than just store them. Just-in-time inventory systems keep small stocks and rely on frequent deliveries, cutting carrying costs but raising the risk of stockouts. Transportation modes trade off cost, speed and reliability: pipelines and water are cheap but slow, rail suits bulky goods over long distances, trucks offer flexibility, and air is fastest but most expensive.

Key ideas

• Intermediaries cut the number of contacts needed and perform functions that add value.
• Channel levels are the layers of intermediaries between producer and consumer; a direct channel has none.
• Horizontal conflict is within one channel level, while vertical conflict is between levels.
• Vertical marketing systems can be corporate, contractual (such as franchising) or administered.
• Intensive, selective and exclusive distribution match convenience, shopping and specialty goods.
• Wholesalers sell to businesses, while retailers sell to final consumers.
• Logistics balances customer service against the costs of warehousing, inventory and transportation.

Formulas and rules

Common mistakes

• Counting the producer and consumer as channel levels; only the intermediaries count.
• Confusing horizontal conflict (same level) with vertical conflict (different levels).
• Calling franchising a corporate VMS; it is a contractual VMS.
• Using intensive distribution for luxury goods, which usually need exclusive distribution.
• Thinking intermediaries always raise costs; they often lower total costs through efficiency.

Before the test, make sure you can

• Explain how intermediaries add value and calculate the reduction in contacts.
• Identify the number of channel levels in a described channel.
• Distinguish horizontal from vertical channel conflict.
• Classify a vertical marketing system as corporate, contractual or administered.
• Match intensive, selective and exclusive distribution to product types.
• Distinguish retailers from wholesalers and name wholesaler functions.
• Compare transportation modes and explain just-in-time inventory trade-offs.

Words to know

Supply chain

The upstream and downstream partners involved in creating and delivering a product, from raw materials to final buyers.

Value delivery network

A network of the company, suppliers, distributors and customers who partner to improve the performance of the entire system.

Marketing channel

A set of interdependent organizations that help make a product or service available for use or consumption.

Channel level

A layer of intermediaries that performs some work in bringing the product and its ownership closer to the final buyer.

Direct marketing channel

A marketing channel that has no intermediary levels.

Channel conflict

Disagreement among channel members on goals, roles and rewards: who should do what and for what rewards.

Vertical marketing system (VMS)

A channel structure in which producers, wholesalers and retailers act as a unified system.

Corporate VMS

A VMS that combines successive stages of production and distribution under single ownership.

Contractual VMS

A VMS in which independent firms at different levels join together through contracts; franchising is the most common type.

Administered VMS

A VMS that coordinates successive stages through the size and power of one of the parties.

Multichannel distribution

A system in which a single firm sets up two or more marketing channels to reach one or more segments.

Disintermediation

The cutting out of marketing channel intermediaries by producers, or the displacement of traditional resellers by new ones.

Intensive distribution

Stocking the product in as many outlets as possible.

Selective distribution

Using more than one, but fewer than all, of the intermediaries willing to carry the company's products.

Exclusive distribution

Giving a limited number of dealers the exclusive right to distribute the company's products in their territories.

Wholesaling

All activities involved in selling goods and services to those buying for resale or business use.

Distribution center

A large, highly automated warehouse designed to receive goods from various plants and suppliers, take orders, fill them efficiently and deliver goods quickly.

Just-in-time inventory

A logistics approach in which only small inventories are held and new stock arrives exactly when needed.

Sample practice questions

30 more questions like these, from level 1 to 5, are in the practice set.