The Data Institute Acquisition Manual

Home Manual Markets Planning Services Contents

Volume 9

Up Volume 1 Volume 2 Volume 3 Volume 4 Volume 5 Volume 6 Volume 7 Volume 8 Volume 9 Volume 10 Volume 11 Volume 12 Volume 13 Volume 14 Volume 15 Volume 16 Volume 17 Volume 18 Volume 19 Volume 20 Data Grid Financial Market Product Industry MDB


Corporate Development
Product Management
Overseas Development
Product Distribution & Service
Advertising + P.R.
New Technology Primers
Physical Process & Orders
Competition Analysis
Product Perceptions
Customer Perceptions
Data Grids
World MDB
Research MDB
Product MDB
Corporate MDB
Reference MDB



Product Distribution & Customer Planning

Reviewing the Distribution and Customer Servicing activities of the Company is a crucial aspect of this manual and this section thoroughly probes the actual and potential product distribution channels.

Organisational and Logistic issues delineate many of the tactical solutions which the Company has to recognize when planning distribution and customer servicing topics.

Unambiguous distribution channels and a clear product path from the Company to its customers are vital for effective marketing; and this part of the report surveys all those facets.

The relative Industry norms for Distribution Costs and Margins are given and can be compared with costs at the Company. This data is given for the national markets important to the Company and the company's captive distribution channels.

Existing or static distribution channels embody potential stagnation; and the Company must actively seek new and unique methods to attack their current and realizable customer bases.

Scenarios of the influence that an investment in Distribution Channels has on the balance sheet of the Company are given in this section. The development of product distribution and customer servicing will substantially enhance the routes to the market and thereafter will greatly improve turnover and profitability.

  1. Distribution & Marketing Channels

  2. Physical Distribution & Objectives


Distribution & Marketing Channels:



Distribution Channel (or Marketing Channel) decisions are amongst the most complex and challenging for the Company. One will usually confront a number of alternative ways to reach the market which may vary from direct selling, to using one, two, three or more intermediaries.

The entities making up the distribution channel are linked in different ways by physical, title, payment, information and promotional flows. Channels do not stay static but are characterized by continuous and often dramatic change. Two of the most significant trends are the emergence of vertical and horizontal marketing systems. Channels have a varied potential to yield sales and bear costs. If a particular marketing channel is chosen, one must usually adhere to it for a substantial period. The chosen channel will significantly affect and be affected by the rest of the marketing mix.

Good channel design should begin with a clarification of channel objectives, alternatives, and likely pay-offs. Objectives are conditioned by the particular needs of customers, products, distributors, competitors and environment. The alternatives are many because of the range of intermediaries, the different intensities of market coverage, the various ways in which channel tasks can be allocated to channel members, and the many likely trade-relations mixes. Each alternative way to reach the market has to be specified and evaluated according to economic, control, and adaptive criteria.

After the basic design of the channel is determined, one faces the task of effective channel management and thereby to select particular distributor solutions with which to work. One has to supplement the motivations provided to channel members through the trade-relations mix by special incentives and supervision. One has to periodically evaluate the performance of individual channel members against their own past sales, other members' sales, and, possibly, sales quotas.

Market environments are continually changing and need channel revisions; channel members may be dropped or added, the channels in specific markets may be modified, and sometimes the whole channel system may be redesigned. Evaluating a proposed channel change may be made through incremental analysis if only the particular unit or channel is affected; it may require a system-level analysis if the change is likely to affect other units. In the latter case, system simulation may be the most efficient way to determine the channel's equilibrium. The greater the disequilibrium in a channel, the more apparent it will be that channel modification would lead to increased profits.

Most firms do not sell their products and services directly to the final users and the route to the market usually involves a host of marketing intermediaries performing a variety of functions and bearing a variety of names. Some middlemen - such as wholesalers or retailers - buy, take title to, and resell the merchandise. Others - such as brokers, suppliers' representatives, and sales agents - search for customers and may negotiate on behalf of the firm - but do not take title to the goods.

Two aspects of channel decisions place them among the most critical marketing decisions for management. The first reason is that the channels chosen for products intimately affect every other marketing decision. The pricing decisions depend upon whether one seeks a few franchised high-mark-up distributors or mass distribution; advertising decisions are influenced by the degree of co-operation from channel members; sales-force decisions depend upon whether it sells directly to outlets or uses agents. This does not mean that one always make channel decisions prior to other marketing decisions, but rather that they exercise a powerful influence on the rest of the mix. The second reasons for the significance of channel decisions is that they involve relatively long-term commitments. If one decides on an exclusive distribution network one cannot easily replace or modify this once conditions change. The mix of distribution networks tend to impact on one another and are often in conflict. There is always the danger of a powerful tendency toward the status quo in channel arrangements and therefore one must choose its channels with an eye on tomorrow.



The industry seeks to bond together the array of marketing intermediaries that best fulfill the objectives. This set of marketing intermediaries form the marketing channel which within the company they also sometimes call the trade channel or channel of distribution. Company managers tend to paraphrase and echo the well quoted cliché our trading channel exists since the terms of the agreements spanning the whole gap from us to our consumers are concluded between operations assumed to possess the necessary marketing capabilities - a comfortable sentiment. The relationship among the participating operations in the company distribution channels are, more or less, symbiotic in that they are usually dissimilar but work together for mutual advantage. Co-operation is the dominant theme among the members of a marketing channel, but at times conflict is no less pronounced, and company managers must monitor channel efficiency.



The industry marketing channels can be characterized according to the number of channel levels; this being each institutional level, beginning with the company, that takes legal ownership or selling responsibility. This constitutes a channel level. Clearly different product groups will encompass varying numbers of channel level.

The shortest marketing channel consists of two levels, i.e. the company selling directly to the End User. The ability of the industry to handle such direct marketing operations must be explored.

A three-level channel contains one selling intermediary. In both consumer and industrial consumable markets this intermediary is typically a sales outlet or retailer; whereas in industrial & OEM markets the intermediary is often a sales agent or broker.

A four-level channel contains two intermediaries. In consumer and industrial consumable markets they are typically a wholesaler and a retailer; in industrial and OEM markets they may be a sales agent and a wholesaler.

A five-level channel contains three intermediaries. An example is found in markets where a jobber usually intervenes between the wholesalers and the retailers. The jobber buys from wholesalers and sells to the smaller retailers, who generally are not serviced by the large wholesalers.

From the company point of view the problem of control increases with the number of levels, even though they may usually deal only with the adjacent level.

Whilst the performance and efficient of the Company distribution channels are discussed in detail in other parts of the report it would be useful for the reader to briefly seek to identify the distribution channel levels applicable to the major operational units of the company and the major product groups. For this purpose a quick checklist is given.

Target Company
Base Reference

Channels Direct to End User

Channels Via Sales-Force

Channels Via Sales Outlet

Channels Via Wholesaler

Channels Via Jobber

Performance Grid Definitions



The various components of the Company’s supply and distribution channels are inter-connected by formalized lines of communications known as Channel Flows.

It will be seen that the Channel Flows encompass both down-stream flows, i.e. between the industry and the End User, as well as up-stream flows, i.e. the suppliers and sources of the industry.

These Channel Flows are as follows:-

   1 - Physical flow
   2 - Title flow
   3 - Payment flow
   4 - Information flow
   5 - Promotional flow

The physical flow describes the actual movements of physical products from input goods and services to products for the End User. This flow moves forwards and downwards.

The title (or ownership) flow describes the actual passage of title (of ownership) from one level in the distribution channel to another. This flow moves forwards and downwards.

The payment flow shows the customer paying his bill to the supplier, and so on up the distribution channel. This flow moves backwards and upwards.

The information flow describes how information is exchanged among the institutions in the distribution channel. Information of many types flow both ways.

The promotion flow describes directed flows of influence (advertising, personal selling, sales promotion and publicity) from one party to next party in the system. This flow is usually forwards and downwards.

Were all of these flows to be superimposed on one diagram, they would emphasize the tremendous complexity of the Company’s distribution channels. This complexity goes even further, once the company starts distinguishing among different operational units and product lines and different final customers.

In order to diagrammatically illustrate the concept of Distribution Channel Flows a number of flowcharts are provided and readers should attempt to complete these as a simple exercise.

This exercise should be performed for each company operating unit and product group.



There are good reasons why the industry may be prepared to delegate some or all of its marketing activities and its product distribution to intermediaries. This surrender of corporate power usually means the relinquishment of some control over how, where and to whom the products are sold, and furthermore the industry may appear to be placing their destiny in the hands of others. Yet the extent of the successful delegation of the distribution and marketing role may demonstrate the management ability of the industry.

Since the industry are free, in principle and, in fact to market directly to final customers, there must be certain advantages or necessities for using a structured distribution channel.

Some of the major factors for the industry to consider are:

1. Does the company have the financial resources to embark on a new or extended programme of direct marketing.

For example, General Motors' new automobiles are marketed by over 18,000 independent dealers and whilst being one of the world's largest companies they would not have the cash to buy out their dealers.

Direct marketing may require the company to itself become a distribution channel for the complementary products of other suppliers in order to achieve economies of scale and critical mass for distribution efficiency.

For example, a supplier of single confectionery products would not find it practical to establish retail shops throughout the country or to sell a single product confectionery door to door. The supplier would have to tie confectionery in with the sale of many other small products and would thus emerge in the retail business. It is much easier for such a supplier to work through the existing and extensive network of privately owned distribution institutions.

If the company does have the required capital to develop, extend or buy their own distribution channels, management must consider that often one can earn a greater return by increasing the levels of investment in other aspects of their business. If a company is earning a 20 percent rate of return on its existing operations and foresees only a 5 percent rate of return on investing in direct marketing, it would not make sense to put money toward vertically integrating its channels.

The industry use of distribution channels largely depends on their superior efficiency in the performance of basic marketing tasks and functions. Marketing intermediaries, through their experience, their specialization, their contacts, and their scale, may offer the industry more than they might usually achieve on their own.



















End User


The physical flow describes the actual movements of physical products from input goods and services to products for the End User. This flow moves forwards and downwards.



















End User


The title (or ownership) flow describes the actual passage of title (of ownership) from one level in the distribution channel to another. This flow moves forwards and downwards.





























End User



The payment flow shows the customer paying his bill to the supplier, and so on up the distribution channel. This flow moves backwards and upwards.
























End User



The information flow describes how information is exchanged among the institutions in the distribution channel. Information of many types flows both ways.



















End User


The promotion flow describes directed flows of influence (advertising, personal selling, sales promotion and publicity) from one party to next party in the system. This flow is usually forwards and downwards.

The chief functions of marketing intermediaries are to assemble a few lines of several suppliers, or several lines of a few suppliers and aggregate them into a range of potential interest to buyers; - thereby achieving "the goal of marketing which is the matching of segments of supply and demand".

This matching of segments of supply and demand requires the industry to carry out of a number of specific marketing functions.

  1. Contact - the searching out of buyers and sellers

  2. Merchandising - the fitting of the goods to market requirements

  3. Pricing - the selection of a price high enough to make supply possible and low enough to induce users to accept the products

  4. Propaganda - the conditioning of the buyers or of the sellers to a favorable attitude toward the product of its sponsor

  5. Physical Handling - the transporting and storing of the goods and/or the physical handling of customers

For the company manager it is not simply a question of whether these functions must be performed in order to bridge the gap between themselves and their customer - clearly it must be - but rather the question of who is to perform the functions. Are these functions currently being performed to maximum effect and how can performance be improved?

All of the functions have two things in common:

  1. They use up scarce resources.

  2. They can often be performed better through specialization.

If the company is convinced that it can perform these functions, then the company's costs go up and thus prices have to be higher.

When some of these tasks are delegated to intermediaries, the company costs and prices are lower, but the intermediary must add a margin to cover the use of their own scarce resources.

The issue of who should perform various channel tasks is largely one of relative efficiency and effectiveness. To the extent that specialist intermediaries achieve economies through their scale of operation and their know-how, the company may gain profitability by transferring some or all of the channel functions to their charge.

A major point for the industry to keep in mind is that marketing functions are more basic, than the institutions that, at any given time, appear to perform them. Changes in the number of channel levels and/or types of selling intermediaries largely reflect the discovery of more efficient ways to combine or separate the economic work that must be carried out if meaningful assortments of products are to be presented to customers.



It would be useful at this point if the reader were to attempt to grade or estimate the relative efficiency of the marketing functions of the various operational and product groups of the industry.

The checklists given here can be used as a quick exercise.

Company Products

Products & Services

Significant Company Products

Company Product / Brand Sector 1

Company Product / Brand Sector 2

Company Product / Brand Sector 3

Company Product / Brand Sector 4

Company Product / Brand Sector 5

Company Product / Brand Sector 6

Company Product / Brand Sector 7

Company Product / Brand Sector 8

Company Product / Brand Sector 9

Company Product / Brand Sector 10

Company Product / Brand Sector 11

Company Product / Brand Sector 12

Company Product / Brand Sector 13

Company Product / Brand Sector 14

Company Product / Brand Sector 15

Major Products

Industry Product Sector 1

Industry Product Sector 2

Industry Product Sector 3

Industry Product Sector 4

Industry Product Sector 5

Industry Product Sector 6

Industry Product Sector 7

Industry Product Sector 8

Industry Product Sector 9

Industry Product Sector 10

Industry Product Sector 11

Industry Product Sector 12

Industry Product Sector 13

Industry Product Sector 14

Industry Product Sector 15

Target Company
Base Reference





Physical Handling

Performance Grid Definitions



Distribution Channel components, like products, exhibit a life cycle. A specific channel may emerge or be developed, enjoy steady or rapid growth, reach a point of relative maturity, and finally move into a period of slow decline. A major force behind the Distribution Channel life cycle is the changing economics, which make new combinations of marketing functions suddenly more efficient than previous ones.

All products and services have a point of sale, and whatever the term applied to this point of sale, it is nevertheless the case that all companies are (in some form or another) in the business of retailing their products and services.

Over the years totally new ideas and concepts of distribution channels have appeared in many markets and this has reflected the general sophistication of marketing methods which in turn mirror the deepening in the complexity of products and services which need to be marketed.

The distribution revolution is thus a multi-faceted movement and is a process of "creative destruction" where many of the changes in retail and sales outlets, but by no means all of them, can be explained by the cycle of retailing hypothesis.

  • According to this hypothesis, many new types of distribution channel components first begin as low-status, low-margin, low-price operations. They become effective competitors of more conventional outlets, which have grown "fat and inefficient" over the years. Their success gradually leads them to upgrade their facilities and offer additional services.

  • This increases their costs and forces price increases until they finally resemble the conventional outlets that they displaced. They, in turn, become vulnerable to still newer types of low-cost, low-margin operations.

This cyclical pattern explains the success and later troubles of many sales outlets and points of distribution.

The industry must analyze and be aware of the point in the cycle at which each of their distribution components have reached - and thereafter monitor any sign of downturn.



This section analyses the effects of a Distribution Channel Improvement programme and its inferred expenditure in terms of the industry's Financial and Operational results.

Distribution Channel Investments can bring almost immediate results in terms of turnover and profitability and in general terms the investment involves both short-term tactical projects as well as medium-term expenditure on equipment and capital projects.

The Financial and Operational Distribution Channel Investment Scenario Data forecasts given make the following assumptions:-

1. Forecasts are based on all external factors:
   a. Market Growth (Medium + Long Term)
   b. Competitive Market Factors
   c. Competitor + Industry Environment Factors

2. Forecasts assume ceteris paribus in terms of internal factors with the exception of a Distribution Channel Improvement programme and its expenditure which is assumed to increase by a rate equivalent to 5% greater than the competitor average

3. Forecasts assume changes in Market Competitors. The forecast assumptions use Competitor databases to forecast changes in competitive situations which will affect the Company and includes the Competitor response (in Distribution Channel Terms) to the scenario shown.


Distribution Channel Improvement



While individual channel forms undergo continuous and occasionally dramatic change, a very significant development is occurring that cuts across many markets and which is perceived in the activities of many of the competitors of the company.

This development is the emergence of vertical marketing (channel) system and to understand them one should first define traditional marketing channels.

Traditional channels are "highly fragmented networks in which loosely aligned suppliers, wholesalers, and retailers have bargained with each other at arm's length, negotiated aggressively over terms of sale, and otherwise behaved autonomously".

By contrast:

Vertical marketing systems are "professionally managed and centrally programmed networks, pre-engineered to achieve operating economies and maximum market impact".

These systems offer effective competition to individualistic marketing systems because they achieve impressive scale economies through their size, bargaining power, and elimination of duplicated services. In fact, they have emerged in many markets as the preferred mode of distribution and thus accounting for a majority percentage of the available market.

Three types of vertical marketing systems (VMS) can be distinguished.

1. Corporate system

A corporate vertical marketing system has as its distinguishing characteristic the combining of successive stages of production and distribution under a single ownership.

For example, Sears apparently obtains 40 percent of its supplies from manufacturing facilities in which it has an equity interest; whilst Holiday Inns had evolved a self-supply network that includes a carpet mill, a furniture manufacturing plant, and numerous captive redistribution facilities.

In short many organizations have significant vertically integrated systems and to describe them merely as "retailers", "manufacturers", or "service operators" oversimplifies their operating complexities and ignores the realities of the marketplace.

2. Administered system

An administrated vertical marketing system, by contrast, achieves coordination of successive stages of product supply and distribution not through common ownership, but through the size and power of one of the parties within the system. Thus, suppliers of a dominant product or brand are able to secure strong trade cooperation and support from resellers.

Many dominant companies are able to command unusual cooperation from their resellers and retailers in connection with resources, displays, sales staff, promotions, and price policies.

3. Contractual system

A contractual vertical marketing system consists of independent firms at different levels of supply and distribution integrating their programmes on a contractual basis to obtain greater economies of scale and/or sales impact than they could alone.

Contractual VMSs have expanded amongst most of the competitors of companies in recent years and constitute one of the most significant developments in the industry. The degree of such systems in the industry must be investigated.

Three different types of contractual VMS can be distinguished and managers must isolate which of its products are susceptible to each VMS.


The first is the wholesaler-sponsored voluntary chain, which originated in the efforts of wholesalers to save the independent retailers they served against the competition of large chain organizations. The wholesaler develops a programme in which independent retailers join with him either to standardize their name or practices or to achieve buying economies that enable them to stand as a group against the inroads of the chains.


A second type of contractual VMS are retailer co-operatives. Usually they arise through the efforts of a group of retailers to defend themselves against the corporate chains. The retailers organize an entity to carry on the wholesaling process and possibly a production process as well. Members are expected to concentrate their purchases, and profits from the wholesale operation are passed back to members in the form of patronage refunds. Individual retailers may agree to identify as members of a group and carry on cooperative advertising; in many cases, however, they do not, and only use the cooperative facilities as an economical source of supply.


A third type of contractual VMS is the franchise organization. Here several successive stages in the supply-distribution process are linked under an agreement with one entity of the system, which is considered the franchiser. Franchising has been the fastest growing and most interesting retailing development in recent years. Although the basic idea is an old one, some forms of franchising are quite new. In fact, three different forms can be distinguished.



The first form is the manufacturer-sponsored retailer franchise system, exemplified in the automobile industry, where a car manufacturer licenses dealers to sell its product, the dealers being independent businessmen who are nevertheless obligated to meet various conditions of sales and service.


The second form is the manufacturer-sponsored wholesaler franchise system, which is found in the soft-drink industry. The soft-drink manufacturer licenses bottlers (wholesalers) in various markets who buy its concentrate and then carbonate, bottle, and sell it to retailers in local markets.


The third form is the service-firm sponsored retailer franchise system. Here a service firm organizes a whole system for bringing its service efficiently to consumers. Examples are readily found in the car rental business, restaurant business, and motel business.

It is thus not surprising that durable and programmed networks of suppliers and retailers are rapidly replacing the "opportunistic ad hoc linkages" that have historically prevailed in many lines of trade.

To survive, some companies are joining, together in their own VMSs and some then adopt a role of a specialist operator serving discrete segments of the market that are not available or attractive to the mass merchandisers. Furthermore there are instances where large companies have specifically entered specialist markets, away from their mainstream activities, in order to capture some specific part of the market.

Thus there is a growing polarization in many markets, with large vertical marketing organizations on the one hand and specialty independent companies on the other. This development causes distribution problems for suppliers of national brands as well as high volume products.

The large scale suppliers usually utilize the traditional outlets and channels of distribution which they cannot easily give up. At the same time, they must eventually realign themselves with the high-growth mass- merchandising outlets. When they do, they will probably have to accept poorer terms from these large buying organization.

Vertical marketing systems can always decide to bypass large suppliers and set up their own supply facilities. In general, the new competition in product distribution is no longer between independents but rather between whole systems of centrally programmed networks (corporate, administrative, and contractual) competing against each other to achieve the best economies and customer response.



A significant development amongst the Company’s competitors is the readiness of two or more companies to form alliances to jointly exploit an emerging marketing opportunity. Individually some competitors may not be able to amass the capital, know-how, supply or marketing facilities to venture alone; or they prefer not to because of the high risk; or they foresee substantial synergy in the proposed relationship.

These companies may set up temporary or permanent arrangements to work with each other, or to create a third entity owned by the two parents. Such developments in horizontal marketing systems have been described as symbiotic marketing.



The importance of vertical and horizontal marketing-channel systems underscores the dynamic and changing nature of channels. Both the company and the competitors tend to define their relation to the dominant channel type and pricing policies, advertising, and sales-promotion practices.

There are five types of relationship of the company to the dominant channel and if they seek to be members of the dominant channel who enjoy continuous access to preferred sources of supply and high respect in the market they need to ask themselves the following questions:


Are the company one of the Insiders and do they have a vested interest in perpetuating the existing channel arrangements and are they one of the main enforcers of the market norms?


Are the company one of the Strivers. Do they seek to become insiders but have not yet arrived because they have discontinuous access to preferred sources of supply, which can disadvantage them in periods of short supply. Do they adhere to the market norm because of their desire to become insiders?


Are the company a Complementor in that they neither are, nor seek, to be part of the dominant channel. They perform functions not normally performed by others in the channel, or serve smaller segments of the market, or handle smaller quantities of merchandise. Do they usually benefit from the present system and tend to respect the market norm?


Are the company one of the Transients, who like the complementors, are outside of the dominant channel and do not seek membership. Do they go in and out the market or move around as opportunities arise, but are really members of another channel. Do they have short-run expectations and little incentive to adhere to the market norm?


Finally, are the company an Outside innovator and are thus the real challengers and disrupters of the dominant channels. Do they come with an entirely new system for carrying out the marketing work of the channel; if successful, will they cause major structural realignments?



The preceding discussion demonstrates and underlines that the company marketing channels undergo a high degree of competition and conflict. Channel competition for companies occurs between marketing components or entire marketing channels systems that are trying to serve the same target market.

Channel conflict, on the other hand describes the opposition of interests that exists between different levels making up the same channel. Examples can be cited:

A company might threaten to drop distribution channel members who refuse to comply with their ideas on service, pricing, advertising, and so on.

The distribution channel of a company might boycott their products because they are marketing via other distribution channels who are heavily discounting.

One type of company distribution channel member may object to them attempting to market via parallel markets.

Channel conflict may arise for a company because the members of the distribution channel differ in their goals, roles, perceptions, and power.

A strong supplier may want their wholesalers to sell at low margin, grant credit to retailers, maintain good inventories, provide customer information, push his products aggressively, not carry competing brands, and pay promptly. The wholesalers, on the other hand, may want a wider and deeper line from the supplier, lower prices, extensive consumer advertising, exclusive distribution rights, a liberal returns policy and ample credit terms. Each channel member typically thinks he is in a "zero sum game", and hard feelings develop when the strongest member uses his economic power to settle the issue. An amount of channel conflict is healthy, the problem is not one of eliminating it - but of managing it better.

The solution to channel conflict lies in two possible directions. The first is the effort to develop super-ordinate goals for the system from which everyone would gain . Super-ordinate goals would include trying to minimize the total cost of moving the product through the system improving information flows within the system, and co-operating to increase consumer acceptance of the product. The second is to develop administrative mechanisms that increase participation and trust such as dealer and distributor councils.  



This section analyses the effects of a moderate increase in Advertising and Marketing expenditure in terms of the industry's Financial and Operational results.

Marketing Expenditure includes Sales & Selling costs, Distribution / Warehousing / Handling / Processing costs, Advertising / Promotional costs, After-sales costs and Total Marketing costs.

The Scenario assumes that the industry increases its Marketing spend by 5% above that of the market and competitor average for the countries in which the industry operates.

The Financial and Operational Data forecasts for the Marketing Expenditure Scenario make the following assumptions:-

1. Forecasts are based on an interaction of all factors:
     a. Market Growth (Medium + Long Term)
     b. Competitive Market Factors
     c. Competitor + Industry Environment Factors

2. Forecasts assume ceteris paribus in terms of internal factors with the exception of Advertising and Marketing spend which is assumed to increase by a rate equivalent to 5% greater than the market average.

3. Forecasts assume changes in Market Competitors. The forecast assumptions use Competitor databases to forecast changes in competitive situations which will affect the Company and includes the Competitor response (in Advertising & Marketing Terms) to the scenario shown.


Marketing Expenditure



In considering the distribution channel decision problems from the point of view of the company one must realize that, whilst competitors in the marketing system are growing in importance, it is easier to appreciate the major issues in channel design and management by starting from the company vantage point and looking toward the market.

In developing channels of distribution, the company has to compromise between what is ideal and what is available. In the typical case, some new products may start as a local or regional operation seeking sales in a limited market. Since the operation or product line may have a limited budget, it usually utilizes existing distribution channels.

If the new product is successful, it may branch out to new markets and again, a company will tend to work through the existing intermediaries, although this may mean using different types of marketing channels in different areas. In the smaller markets, a company may deal directly with the point of sale; in the larger markets, they may work only through other distribution channels.



The starting point for the company in the effective planning of distribution channels is a determination of which markets are to be reached by the company. In practice, the choice of markets and choice of channels may be interdependent. The company may discover that markets it would like to serve cannot be served profitably with the available channels. Each product supplied shapes specific channel objectives from major situational constraints stemming from the customers, products, intermediaries, competitors, company policies, and the environment.

1. Customer Characteristics

Channel design is greatly influenced by customer characteristics. When the number of customers is large, a company will tend to use long channels with many intermediaries on each level.

The importance of the number of buyers is modified somewhat by their degree of geographical dispersion. It is less expensive for a company to sell directly to a small number of customers who are concentrated in a few geographical centers than to sell them if they are scattered over large number of locations. Even number and geographical dispersion are further qualified by the purchasing pattern of these buyers. Where the ultimate customers purchase small quantities on frequent basis, lengthier marketing channels are desirable. The high cost of filling small and frequent orders leads suppliers of such products to rely chiefly on wholesale channels. At the same time, these same suppliers may also bypass their wholesalers and sell direct to certain larger customers who place larger and less frequent orders. The buyers' susceptibilities to different selling methods also influence channel selection.

2. Product characteristics

Product characteristics also influence channel design. Repeat products require more direct marketing because of the physical nature associated with delays and repeated handling.

Products that have a low unit value usually require channel arrangements that minimize the distance and the number of handlings in the movement from supplier to ultimate customers. Non-standard products are usually sold directly by the company salesforce because of the difficulty of finding distribution channels with the requisite expertise. Products requiring after-sales services and/or maintenance are usually are sold and maintained directly by the company or by distribution channels with exclusive franchises. Products of high unit value are often sold through a company salesforce rather than through independent distribution channels.

Target Company
Base Reference

Customer Strengths

Product Strengths

Competitive Strengths

In-House Strengths

Environmental Strengths

Performance Grid Definitions

3. Distribution Channel characteristics

Channel design must take into account the strengths and weaknesses of different types of intermediaries in handling various tasks delegated by the company. In general, the intermediaries used by the company differ in their aptitude for performing such functions as transit, advertising, storage, and contact, as well as in their requirements for credit, return privileges, training, and frequency of supply. In all events the difference in the distribution channel characteristics for each of the operating units and product groups of the company will tend to be worthy of investigation and thereafter improvement.

4. Competitive characteristics

The channel design used by the company is influenced by the distribution channels used by their competitors. In some, if not all, product and market sectors the company want their products to compete in or near the same outlets carrying the competitors' products. Thus in certain circumstances the company will want their products to be sold adjacent to that of their competitors.

The marketing channels used by competitors sometimes define what the company wants to avoid rather than imitate. In deciding not to compete with some competitors for scarce merchandising and point of sale locations the company must consider using new and innovative methods of distribution and customer servicing.

5. Company characteristics

Company characteristics play an important role in the distribution channel selection. The relative size of companies in relation to the competitors' size determines the extent of its markets, the size of its larger accounts, and its ability to secure the co-operation of intermediaries it elects to use. The financial strength of a company sets limits on which marketing tasks it can handle and which ones to delegate to intermediaries. If certain companies operations are financially weak they will tend to employ commission methods of distribution and try to enlist intermediaries able and willing to absorb some of the inventory, transit, and customer-financing costs.

The company product mix influences its distribution channel patterns. The wider the company's product mix, the greater the ability of the company to deal with its customers directly. The greater the average depth of the company's product mix, the more it is likely to favor exclusive or selective intermediaries. The more consistent the company's product mix, the greater the homogeneity of its marketing channels. The past experience of a company affects channel design as well as present marketing policies.

A policy of speedy delivery and service to ultimate customers affects the functions a company wants intermediaries to perform, the number of final-stage outlets and stocking points, and the type of transportation system used.

A policy of heavy advertising will lead a company to seek intermediaries willing to handle displays and join in co-operative advertising programmes.

6. Environmental characteristics

Company distribution channel design is further influenced by environmental factors.

In markets where economic conditions are depressed, the company will want to move their goods to market in the way that is least expensive for final customers. This often means using shorter channels and dispensing with unessential services that add to the final price of the goods.

Legal regulations and restrictions also affect channel design. The law has sought to prevent channel arrangements that "may tend to substantially lessen competition or tend to create a monopoly". The most sensitive areas have to do with agreements by certain types of suppliers not to sell certain types of outlets, attempts by suppliers to offer his line to distributors on condition they do not carry competitive lines, attempts by suppliers to force his full line through distributors, arbitrary action by suppliers in the withdrawal or refusal to renew distribution franchises, and attempts to set up territorial restrictions which substantially lessen competition.


Distinguishing the major channel alternatives

After specifying distribution channel objectives and constraints, the company should proceed to distinguish the channel alternatives.

A distribution channel alternative for a company specifies four elements:


The basic types of business intermediaries who will be involved in marketing and facilitating the movement of company products to the market.


The number of intermediaries who will be used by the company at each stage of distribution.


The particular marketing tasks delegated to each type of the participating intermediary.


The terms and mutual responsibilities of the company and their intermediaries.

1. Types of intermediaries

A company should first distinguish the alternative intermediaries available to carry on its channel work. Consider the following scenario:

If a firm developed a new product that had considerable appeal; where the product solved a specific market need; and managers felt that the product would have a market in specific customer categories in a variety of market sectors the problem would be how to reach these diverse customers in an effective way.

The following channel alternatives would come out of company management discussions:


Rely mainly on the present salesforce and a heavy programme of direct-mail and advertising.


Expand the salesforce and assign each salesman an area with contact to all user groups.


Rely mainly on several intermediaries, each of whom specializes in a different market sector.


Rely mainly on independent distribution channels who would undertake a limited amount of promotion and carry the product as part of their overall offerings.

In answering these questions company management might take the view that not only do conventional distribution channel arrangements suggest themselves, but so do more innovative possibilities. A progressive management would try as far as possible to explore the innovation rather than the tradition.

In analyzing the effectiveness of company management, one needs to plot the incidence of distribution channel innovation against the instances of reliance on traditional channels. The long term future (and profitability) will be seen as a function of innovation over tradition and the greater that ratio, the more likely the long term growth of the industry.

2. Number of Intermediaries

The number of intermediaries to use at each stage of the distribution system is influenced by the degree of market exposure sought by the industry.

Three degrees of market exposure can be distinguished.


Intensive distribution.

Certain company products may require intensive distribution that is, the supply of that product from as many outlets as possible. The dominant factor in the marketing of these products is their ease of access, and purchase, by the end customer.


Exclusive distribution.

With certain products the company may deliberately limit the number of intermediaries handling the products. The extreme form of this is exclusive distribution, a policy of granting third party distributors exclusive rights to distribute the company's products in their respective territories; it often goes along with exclusive dealing, where the company requires the intermediary not to carry competing products.

This scenario is frequently found at the retail level with respect to the distribution of very competitive, high profile and saturation advertised products which attract significant marketing costs.

The question might be asked as to why the company may wish to limit the market exposure of certain products? Obviously, the company will wish this limiting of exposure to be traded-off by other advantages. Through granting exclusive distribution privileges, the company may hope to gain a more aggressive selling effort and be able to exercise more direct controls over intermediaries' policies on prices, promotion, credit, and various services. Exclusive distribution also tends to enhance the prestige or image of the product and allow higher mark-ups.


Selective distribution.

Between the two extreme policies of intensive and exclusive distribution stands a whole range of intermediate arrangements that have been called selective distribution.

Selective distribution involves the use of more than one but fewer than all of the intermediaries who are willing to carry a particular product. It is mainly used by some for established products with good reputations and/or by new products seeking to get distributors by promising them selective distribution.

Companies do not have to dissipate their marketing resources and efforts over a range of outlets, many of which would be marginal. They can develop a good working understanding with the selected intermediaries and expect a better than average selling effort. In general, selective distribution enables the firm to gain adequate market coverage with more control and less cost than intensive distribution.

3. Specific marketing tasks of channel members

The company faces a certain set of tasks in taking their products to the target customers. The role of intermediaries is not to increase the number of these tasks but to perform them more efficiently. Looking at a channel as a sequence of tasks rather than a linkage of business entities makes it immediately apparent that managers are confronted with a large number of alternatives, even when there is little choice regarding the basic types of intermediaries and the best degree of market exposure.

Assume that the following four tasks have to be performed:


Transit: the work of transporting the goods toward the target markets


Advertising: the work of informing and influencing buyers through advertising media


Storage: the logistics of handling and supplying the product


Keep Control and Contact: the work of the control and contact of potential customers

Assume that there are three channel members - Company (C),  Wholesaler (W), and Retailer (R)  - and each can perform one or more of these tasks. Consider some possible patterns of task allocation to the various members of the channel.

The first scenario is:




TA _  _



In this distribution channel scenario, managers limit their marketing work to the supply of the products and to advertising the product. (An "_" means the absence of the corresponding task).

The products are held by the marketing intermediary W, who also takes responsibility for further distribution. W is therefore a facilitating intermediary rather than a full-service intermediary. The final intermediary R is responsible for further advertising (perhaps on a co-operative basis with the company) and the control and contact of the final customer.

A different marketing channel scenario is implied by the pattern:





_  _  _  _


Here the company undertakes to provide the product, handle and supply to order. The W intermediary is eliminated, and the R intermediary assumes the complete selling function. This is the marketing channel developed by for many directly marketed products.

Company management's task is to identify the feasible alternatives and select the one that promises the highest degree of effectiveness in serving customers relative to competition.

4. Terms and responsibilities of channel members

In conceiving the tasks to be performed by different types of intermediaries in the distribution channel, managers must also determine the mix of conditions and responsibilities that must be established among the channel members to get the tasks performed effectively and enthusiastically. The 'trade-relations mix' is capable of many variations and introduces a still further dimension of alternatives.

There are four main elements in the trade-relations mix:
  i.   pricing policies
  ii.   conditions of sale
  iii.   territorial rights
  iv.   specific performance of each party


Price policy is one of the major elements in the trade-relations mix.

Managers will usually establish an end user price and then will allow discounts from it to various types of intermediate customers and possibly for various quantities purchased. In developing their schedule of discounts, one must proceed carefully.

Firstly, because different types of intermediate customers have strong feelings about the discounts they and others are entitled to. For example, small retailers who buy through wholesalers resent a producer who allows the large retailers to buy direct at the wholesaler's discount; whereas the larger retailers resent not being allowed better terms on the basis of their quantity purchases. Thus the discount schedule is a potential source of channel conflict. Secondly, legislation may forbid price discrimination between different buyers of the same products where the discrimination may tend to lessen competition, except where the price differences are proportional to bona fide differences in the costs of selling to the different buyers. Therefore companies must be able to justify the discounts they offer to different buyers.


Conditions of sale are the second element of the trade-relations mix.

The most important conditions relate to the payment terms and to the guarantees or other assurances provided by the company. For example one might grant a discount from the distributor's invoice price for early payment or conversely impose an interest penalty for late payment.

The particular terms can play an important role in the costs incurred by the company and influence the distributor's motivation, because they indicate the extent to which the company will finance the distributor's business activities. Managers may also extend certain guarantees to the distributor regarding price increases. The offer of a guarantee against price variations may be necessary to induce the distributors to promote more and sell larger volumes.


Distributors' territorial rights are a third element in the trade-relations mix.

A distributor wants to know where the company intends to enfranchise other distributors. He also would like to receive full credit for all sales taking place in his territory, whether or not they were stimulated through his own efforts.


Mutual services and responsibilities are a fourth element of the trade-relations mix.

These are likely to be comprehensive and well defined in franchised - and exclusive - agency channels where the relations between the company and certain distributors are close. In contrast, where the company goes after more intensive distribution, they may supply distributors only occasionally with some promotional materials and some technical services and the distributor in turn is less willing to furnish an accounting of his efforts, an analysis of customer buying differences, or co-operation in distributing promotional materials.

Target Company
Base Reference

Type of Intermediaries

Numbers of Intermediaries

Marketing Effectiveness of Channels

Trading Terms of Channel Members

Responsibilities of Channel Members

Performance Grid Definitions



The industry have obviously identified and are utilizing several major channel alternatives for reaching the market, yet their problem now is to decide which of the alternatives would satisfy best the long-run objectives of the firm. For this, they weigh the alternatives against:

  1. Economic Factors
  2. Control Factors
  3. Adaptive Factors

1. Economic criteria

Of the three, Economic Factors is the most important, since managers are not pursuing Channel Control or Adaptability per se, but ultimately, are pursuing profits.

Whilst Channel Control and Adaptability have implications for long-run profit, yet the more outstanding a channel alternative seems from an economic point of view, the less important seem its potentialities for conflict and rigidity.

The basic question the company must ask of each of their operating units and product groups, is if it is economically better, i.e. more profitable, for the company to use company owned routes to the market or to use third party routes? Clearly, the answer might be that the most profitable route may be a mix of the two.

To illustrate the economic analysis, a concrete and familiar pair of channel alternatives can be examined with the following scenario. A company wish to distribute their products in a new national market; the choice being between a company salesforce or the use of a sales agency.

Assume that the company wishes to reach a large number of sales outlet opportunities in the country. Suppose an adequate company salesforce would require hiring and training ten salesmen who would operate out of a branch office in the country. They would be given a good base pay along with the opportunity for further earnings through a commission plan.

The exercise is to estimate the cost of this alternative - then estimate the cost of the other alternative:

The other alternative would be to use an established firm of sales agents (in the countries) who have developed extensive contacts within the markets, through the other lines they carry. The agents have thirty salesmen in their organization and would receive a fixed percentage of the sales price of each unit sold.

Each alternative will produce a different level of sales and costs. The better system is not the one producing the greater sales or the one producing the lesser cost, but rather the one that produces the best profit.

2. Control criteria

The evaluation of the economics of the various routes to the market will provide a rough guide to the probable economic superiority of one channel over the other. The evaluation must now be broadened by a consideration of the motivational, control and conflict aspects of the two channel alternatives.

The use of sales agents can give rise to a number of control problems. The central fact is that the sales agent is an independent entity. He is primarily interested in maximizing his own profits. This sometimes can lead to sub-optimization from the company point of view. The sales agent is more concerned with promoting the image of his organization than that of the company. He often does not co-operate with the company sales agent in an adjacent territory, although the co-operation may benefit the client. He concentrates his calls on the customers who are most important to him in terms of his total assortment of goods rather than on the customers who are most important to the client. He may not take the time to master the technical details concerning the company product or show care in using the promotional material. Altogether, the use of sales agents comes at the price of creating certain problems of control.

The control aspects of a channel are broader than suggested in reviewing the sales agent example. Where the firm are considering a complex channel alternative, the ensuing issues should be evaluated :


Vertical relations in the channel. How will the various levels in the channel interact? Here there are two opposing dangers. At one extreme, the self-interests of two or more levels may be so diametrically opposed that they are always in conflict at the expense of the company. At the other extreme, the self-interest of two or more channel levels may be so alike that they collude to force concessions from the company.


Horizontal relations in the channel. How will the members located at a particular level in the channel interact? At one extreme, their self-interests may clash, as when territorial or business boundaries are not clear. At the other extreme, they may form an association to gain power at the expense of the company. 


Inter-channel conflict. Will the different marketing channels established by a producer be in too much conflict ? For example, watch manufacturers have a difficult time pleasing both small retailers and discount outlets.


Legal conflict. Will the channel contain any questionable features that might involve the company in a legal action? For example, should the company plan to set up exclusive distribution, they should first determine its legal status in respect of the other distributors.


3. Adaptive criteria

Suppose a particular channel alternative appears superior from an economic point of view and poses no particular problem of control. One other criterion should be considered - that of the freedom of the company to adapt to changing conditions.

Each channel alternative involves some duration of commitment and loss of flexibility. If the company decides to use a sales agent they may have to offer a ten-year contract; during this period, other means of selling might become more efficient, but alas the company will not be free to drop the sales agent.

In general, the less certain the future seems to be, the less favorable are channel alternatives involving long commitments.

A channel alternative involving a long commitment must appear to be greatly superior on economic or control grounds in order to be considered.

Target Company
Base Reference

Channel Evaluation: Direct to End User

Channel Evaluation: Via Sales-Force

Channel Evaluation: Via Sales Outlet

Channel Evaluation: Via Wholesaler

Channel Evaluation: Via Jobber

Performance Grid Definitions

Target Company
Base Reference

Vertical Relations

Horizontal Relations

Inter-channel Conflict

Legal Conflict


Performance Grid Definitions

Target Company
Base Reference

Probability of Channel Change

Easy of Exit from existing channels

Penalties in Exit from existing channels

Flexibility of Existing Channels

Potential for developing Existing Channels

Performance Grid Definitions



After a company has evaluated and monitored its basic channel design, individual intermediaries must be:

  1. Selected
  2. Motivated
  3. Periodically evaluated

1. Selecting channel members

The firm will always find itself somewhere between two extreme positions in respect of the recruitment of intermediaries for their proposed channel operation.

Sometimes one will have no trouble finding specific businesses to join the channel. Some product proposals attract more than enough potential distribution members, either because of the prestige enjoyed by a firm or because the specific product (or line) appears to be a good money-maker. In some cases the promise of exclusive or selective distribution will influence a sufficient number of intermediaries to join the channel. The main problem is one of the selection. One must decide on what characteristics of intermediary prospects provide the best indication of their competence. The other extreme position is where one chooses a channel alternative for which they have to work hard to line up the desired number of qualified intermediaries. For example, if a firm cannot find the right type of distribution members, with the right attributes, they may have to accept whatever intermediaries they can get - although in the medium term they should start a recruitment effort among the more suited potential distribution members.

In many instances one has the task of marketing products to intermediate customers and this means one must study how potential distribution members make their buying decisions; specifically, how much weight they give to gross margin, planned advertising and promotion, guarantees, and so on.

Whether or not one finds it easy or difficult to recruit distribution channels in various markets, one clearly must determine what characteristics distinguish the better intermediaries from the poorer ones. Even where the aim of a company is intensive distribution, they may not want a particular product associated with weak or faltering distributors.

One needs to look at each operation and each product group and evaluate the distribution members. One must ask basic questions, like, years in business, growth record, solvency, co-cooperativeness and reputation. If the distributor is a sales agent, one will also want to evaluate the number and character of other lines the distributor carries, whether they are adequately staffed to give sufficient attention and know-how to the new line, and the turnover record of their salesforce. If the distributor has exclusive distribution, then one will want to evaluate their location, future growth potential and type of clientele.

2. Motivating channel members

Members of the distribution channels must be motivated to do their best job. The factors and terms that led them to join the channel provided some of the motivation, but these must be supplemented by continuous supervision and encouragement from the company. The company must sell not only through the distribution channels but also to them. The question of motivation is a complex one, since there are grounds for both co-operation and conflict between the company and their distributors. The job of stimulating channel members to good performance must start with the psychology and behavioral characteristics of the particular distributor.

Management may echo the typical criticism of the distributor, being, the failure to stress a given product, the poor quality of the salesforce product knowledge, the disuse of suppliers' advertising materials, the neglect of certain customer (who may be prospects for individual items but not the assortment) and even for the unrefined systems of record keeping, in which the company's product designation may be lost. However, what are shortcomings from the point of view of the company may be quite understandable from the distributor's point of view. Four propositions to help understand the distributor's viewpoint:


The distributor is not a hired link in a chain forged by the company, but rather an independent market member which, after some experimentation, has settled upon a method of operation, performing those functions he deems inescapable in the light of his own objectives, forming policies for wherever he have freedom to do so.


The distributor often acts primarily as a purchasing agent for his customers, and only secondarily as a selling agent for the company and they are thus interested in selling any product which their customers desire to purchase.


The distributor attempts to weld all of his offerings into a family of items which he can sell in combination, as a packaged assortment, to individual customers. His selling efforts are directed primarily at obtaining orders for the assortment, rather than for individual items.


Unless given incentive to do so, the distributor will not maintain separate sales records by product sold even if that information that could be used in product development, pricing, packaging, or promotion-planning. Data may be buried in non-standard records which are often purposely secreted from suppliers.

These propositions serve company managers as a provocative departure from otherwise stereotyped thinking about the purpose and performance of their distributors. The first step in motivating others is to see the situation from their viewpoint.

One must steer a careful course between over-motivating and under-motivating the distribution channel. Over-motivation occurs when the terms offered by the company are more generous than they have to be to secure a particular level of co-operation and effort. The result may be high sales for the company - but low profits. Under-motivation occurs when the company's terms are too anaemic to stimulate more than a token effort by distributors. The result is low sales and low profits. The problem is to determine the optimal level and kind of motivation to provide the trade.

The basic level of motivation is established by the original trade-relations mix. If the distribution members are still under-motivated, then one has two alternatives. One can improve the margins, extend better credit terms, or do any one of a number of things that alter the trade-relations mix in favor of the distributors. Or one can stimulate greater distributor effort by using any of a host of familiar devices, ranging from nagging the distributors, pep rallies, sales contests and increased advertising.

Some managers may find it easier to use the stick than the carrot to motivate their distributors, notably if they enjoy having power. Perhaps the firm might be tempted to discriminate against certain distributors by forcing sub-standard products on them, or use disincentives or prejudicial discounts. These policies can breed deep ill will in the distribution channels and will someday return to haunt the firm.

3. Evaluating channel members

One must periodically evaluate the performance of one's distribution channels. Where a channel member's performance is seriously below standard, it is necessary to determine the underlying causes and to consider the possible remedies. One may have to tolerate unsatisfactory performance, if dropping or replacing the distributor would lead to even worse results. Albeit if there are attractive alternatives to the use of this distributor, then one should require the distributor to reach a certain level of sales by a stated time or be dropped from the channel.

Much grief can be avoided if standards of performance and sanctions are agreed upon at the very beginning between the company and the channel members. The areas posing the greatest need for explicit agreement concern, sales intensity and coverage; average product handling levels; customer delivery; promotional treatment; co-operation in company promotional and training programmes; and distributor services owed to the customer.

One might issue periodic sales quotas to define current performance expectations and/or specify the product lines quotas. In some cases these quotas are treated only as guides; in others, they represent serious standards. One may list the sales of various distributors and send the rankings out. This device is intended to motivate distributors at the bottom of the list to do better for the sake of self-respect (and continuing the relationship). Distributors at the top to maintain their performance out of pride.

Yet a simple ranking of the distributors by level of sales is not necessarily the best measure. Distributors face varying environments over which they have different degrees of control; the importance of the company product line in their assortments also varies. One useful measure is to compare each distributor's sales performance against the preceding period. The average percentage improvement (or decline) for the group is used as the norm. One can also compare each distributor's performance against a quota based on an analysis of the sales potential in his territory. After each sales period, distributors are ranked according to the ratio of their actual sales, as opposed to their sales potential. Investigatory and motivational effort can then be focused on those distributors who have under-achieved.

Target Company
Base Reference

Channel Selection Screening

Channel Motivation Programmed

Channel Evaluation & Rating

Channel Monitoring procedure

Channel Troubleshooting procedure

Performance Grid Definitions



The industry must do more than design a good distribution channel system and set it into motion. Every so often the system requires modification to meet new conditions in the marketplace.

Often if a particular supplier has been marketing exclusively through franchised dealers a relative loss in market share would make the company take stock of several distributional developments that had taken place since their original channel was designed. New scenarios in distribution channels may include:

1. Developments in new forms, or evolving forms, of point of sale outlets.
2. Developments in the nature and structure of the various components of the distribution channels.
3. Changes in the products and services offered by competitors which alter the relative selling of the distribution channels.
4. Changes in the attitudes of some channel members in terms of their requirements from suppliers.
5. Developments in the promotional methods and channels used by competitors and their Distributors.
6. Changes in the nature and type of the end customer and the reflection of this on the distributors.

These and other developments in the ever-changing distribution scene will lead the company to undertake a major review of possible channel modifications.

Three different levels of channel change should be distinguished.

1. The change could involve adding or dropping individual channel members.
2. Adding or dropping particular market channels.
3. Developing a totally new way to sell products in all markets.

The decision to add or drop particular distributors usually requires a linear incremental analysis. The economic question is: What would the company profits look like without the specific distribution member?

The incremental analysis could be complex if the decision would have many consequences on the rest of the system. A decision to grant another franchise in a region or country will require taking into account not only that dealer's probable sales, but the possible losses or gains in the sales of the other dealers.

Sometimes the company might contemplate dropping not an isolated distributor but all distributors who fail to bring their sales above a certain level within a certain time period as it may cost the company more to service these distributors than the marginal revenue they actually contribute.

If the issue were a matter of dropping a few of these weak distributors, then an incremental analysis would probably indicate that company profits would rise. Yet the decision to drop most of these distributors could have such large repercussions on the system as a whole that an incremental analysis would not suffice. Such a decision would raise the unit costs of products, since the overhead would have to be spread over sales; some resources would be idle; some business in the markets where the smaller distributors were cut out would go to competitors; and other company distributors might be made insecure by the decision. Nothing short of a detailed, total systems simulation would be adequate for comprehending all the effects.

The industry may sometimes face the question of whether their distribution channel for reaching a particular geographical area or customer type is still optimal.

A break-even or rate-of-return analysis could be made of the present and alternative systems.

The most difficult "channel change" decision involves the revision of the overall system of distribution.

For example, a company may consider replacing independent dealers with company-owned dealers; a firm may consider replacing local franchised distribution with centralized distribution and direct sales.

These are decisions that can only be made at the highest level of the company, decisions that not only change the channels but necessitate a revision of most of the marketing-mix elements and policies to which the firm is accustomed. Such decisions have so many ramifications that any quantitative modelling of the problem can only be a first approximation.

In analyzing the desirability of changing a channel, the company will find that the task is one of determining whether the distribution channel is in equilibrium. A channel is in equilibrium when there is no structural or functional change that would lead to increased profits.

A structural change is one involving the addition or elimination of some intermediary level in the channel.

A functional change is one embracing the re-allocation of channel tasks among the channel members.

A channel is ripe for change when it is in disequilibrium, i.e. when it provides an opportunity for gain through a structural or functional modification.

A simple example will convey the concept of channel disequilibrium.

Assume there is a channel of the

Retailer type

( CWR )


Each channel member makes a set of decisions on

Advertising, and

( P,  A,  D )


For simplicity, assume that these decisions mainly affect the succeeding stage.

Thus the company makes decisions ( P,  A,  D ), which influence the quantity (Q1) ordered by the wholesaler.

The producer calculates his net profits (Z1) by subtracting his costs from his revenue from the wholesaler.

In the same fashion, each channel member makes an independent set of decisions that influence his revenue and cost and bring about a particular net profits.

Looking at the channel as a whole, a set of independent decisions is made [( P,  A,  D )1, ( P,  A,  D )2, ( P,  A,  D )3]   that results in some total channel profit (Z1+Z2+Z3).

The concept of channel disequilibrium can now be defined precisely.

The channel is in disequilibrium if there exists an alternative set of decisions [( P,  A,  D )1, ( P,  A,  D )2, ( P,  A,  D )3]   that would result in a different total channel profit (Z1+Z2+Z3) that is greater than (Z1+Z2+Z3).

If this is the case, the channel presents an opportunity for increased profit.

But the alternative decisions are unlikely to be made as long as the channel members make their decisions independently.

The greater the difference between (Z1+Z2+Z3) and (Z1+Z2+Z3), the greater will be the incentive of the channel members to pursue joint planning or for some channel member to absorb one or more of the others to achieve the extra profits from integrated decision making.



 Financial Definitions





The DISTRIBUTION + MARKETING CHANNELS FINANCIAL SCENARIOS BALANCE SHEET FORECASTS section gives a series of Forecasts for the Company and the industry using a number of assumptions relating to the distribution decisions available to the management of the Company.

The Balance sheet forecast given shows the effects of distribution improvements which Financial Management is likely to recommend:


  • Base Forecast : Median Market Scenario

  • Distribution & Product Delivery Cost Objectives

  • Customer / Order Processing Systems Investment

  • Systems Investment

  • Customer Handling Improvements

Managers in the Company will, in both the short-term and the long-term, have vital decisions to make regarding the distribution improvements, margins and profitability and these decisions will need to be evaluated in light of the customers, markets, competitors, products, industry and internal factors. The scenarios given isolate a number of the most important factors and provide balance sheet forecasts for each of the scenarios.

The data provides a short and medium term forecast covering the next 6 years for each of the Forecast Financial and Operational items. The Financial and Operational Data sections show each of the items listed below in terms of forecast data and covers a period of the next 6 years.



Financial Comparisons: Scenarios


Target Company

Base Reference Industry



MEDIAN  FORECAST : Margins & Ratios


MEDIAN  FORECAST : Margins & Ratios



 Financial Definitions





Physical Distribution & Customer Handling:



Just as the marketing concept is receiving increasing recognition by the industry there needs to be a similar awareness of the physical distribution concept. When managers of various departments make decisions only with reference to their own framework, they affect each other's costs and demand creation influences but do not take them into consideration. The physical distribution concept calls for treating all these decisions within a unified total systems framework. Then the important task becomes that of designing physical distribution arrangements that minimize the cost of providing a given level of customer service.

To improve performance, the Company can choose from a number of alternative physical distribution strategies, ranging from direct customer handling to local and remote outlets, to local sub-processing to local complete customer processing. It must develop product supply policies that reconcile the value of a high level of customer service with the need to economies on product carrying costs. It must find more accurate ways to evaluate alternative general areas and specific sites for marketing expansion. It must review the whole question of organizational responsibility for physical distribution, particularly how to co-ordinate the various decisions and where leadership should be located in the organization.

In this part of the report one must deliberately emphasize the planning rather than the operations aspects of physical distribution. Physical distribution is an area where good systems design counts for as much as or more than good operations management. Nevertheless, many of the potential economies come from improved management of the existing system.

In the industry, the term "marketing" has connoted two different but related processes, the first dealing with the search for and stimulation of buyers and the second with the physical distribution of the product. With the increased competition for markets, marketing executives in the company have devoted the bulk of their time to the search and stimulation function. Their attention has been given over to developing a mix of products, prices, promotion, and channels that would keep demand high and growing. They have viewed physical distribution, or the logistics of getting products to the buyers, as a supportive and subsidiary activity.

More recently, several developments have awakened the company management's interest in the logistics problem and led them to wonder whether they were not overlooking many opportunities, not only for cost saving but also for improved demand stimulation.

One of the alerting factors is the increase in the cost for such physical distribution services as transport, storage & handling and customer servicing. Transport, storage and handling bills are rising as a result of increased labor and equipment costs. The customer servicing bill is rising because buyers are tending to place smaller orders more frequently, and suppliers are tending to expand the width and depth of their lines. Many company executives have been shocked to learn that the total costs of storing, handling, and moving their products are anywhere between 5 and 30 percent of sales.

Increasing numbers of company managers argue that substantial savings can usually be effected in the physical-distribution area, which has been accurately described as "the last frontier for cost economies". There is much evidence of un-coordinated physical-distribution decisions resulting in sub-optimization. Not enough use is being made of modern decision tools for determining economic levels of customer service, efficient modes of handling, and sound process, handling, and storage locations.

Furthermore, physical distribution is a potent instrument in the demand-stimulation process. Companies can gain by offering more in the way of service or by cutting prices through successfully reducing physical-distribution costs.




Distribution Planning & Accounting

Input Supplies & Handling

Supply + Process Management

Order Processing

Packaging & Print

In-House Process

Handling & Storage

Physical Distribution

Point of Sale

Customer Service



There is a broad and narrow view of the scope of physical distribution.

In the Broad View, physical distribution starts with the location of original materials and labor inputs required in the productive process and stretches to the location of final consumer markets.

This perspective is particularly pertinent to the Company when planning to enter a new-product market. Having as yet no investment in suppliers, processes, handling & storage, distributors, or final markets, they are in a position to consider all of them as variables in designing its physical-distribution system.

Final markets are generally the best starting point for planning the new system. The company selects its final target markets and then works backward to an appropriate set of distributors, handling and process locations.

In most instances the industry must adopt a Narrow View of physical distribution which recognizes that the company is already established in the marketplace and has commitments to a set of processes, suppliers, distributors and final markets.

The company's problem is to find efficient arrangements for locating, stocking and handling its products to meet the service requirements of the marketplace. This is the point of view taken in this manual.

A useful conception of the component activities of the physical distribution can be seen as a flow-chart (above). Ten different activity blocks make up the physical-distribution system.

The whole system centers on the inventory-management block.

Inventory is the link between the customers' orders and the company's process activity. Customers' orders draw down the product supply, and the process builds it up.

Process activity requires an inflow of raw materials into the company, and this involves inbound freight and receiving operations.

Finished products then flow off the process line, involving packaging, in-house storage, handling activities, outbound transportation, field warehousing, and customer delivery and service.

Target Company
Base Reference

Distribution Planning & Accounting

Process Management & Handling

Physical Distribution Efficiency

Point of Sale & Customer Service Efficiency

Order Handling & Processing

Performance Grid Definitions



The industry will state their physical distribution objective as getting the right goods to the right places at the right time for the least cost. Unfortunately, this provides little actual guidance.

No physical distribution system can simultaneously maximize customer service and minimize distribution cost. Maximum customer service implies such policies as large product availability, premium transportation and handling, and many location points, all of which raise distribution cost. Minimum distribution cost implies such policies as slow, cheap transportation and handling, limited product availability and few location points.

The physical-distribution objective can be defined more carefully by introducing the notion of an efficient system.

System efficiency is a matter of the ratio of a system's output to its input. By clarifying what the outputs and inputs are in a physical-distribution system, one can come closer to defining a clear objective for such a system.

1. Level of Service

A basic output of a physical distribution system is the level of customer service. Customer service represents one of the key competitive benefits that a company can offer potential customers in order to attract their business.

From the customer's view, customer service takes several forms :

1. The speed of filling and delivering normal orders

2. The supplier's willingness to meet emergency product needs of the customer

3. The care with which products are delivered

4. The supplier's readiness to rectify complaints

5. The availability of after-sales services

6. The number of options on order handling

7. The supplier's willingness to improve product availability

8. The additional charges, or prices, policy

From the company’s point of view, they set certain service-level goals. The service level should set minimum standards and time limits, for order delivery - or at least - define the level of service as the "percentage of customers who should get their orders processed in x days". Companies thinking in terms of a system that holds down backorders to a certain level will not survive in the long-term.

    How can the Company determine a desirable level of customer service?

In many cases one uses the standard set by competitors. If the company offers a lower level of service than the prevailing one, it is in danger of losing patronage unless there is some compensatory element in its marketing mix. If the company offers a higher level of service than the prevailing one, the competitors may increase their service level in self-defence, and all companies would be stuck with higher costs. Any advantage will be temporary, especially if it is an effective advantage.

The company decision on the service level must rest ultimately on an analysis of probable customer and competitor response to alternative levels of service. Sometimes a slight increase in customer service can produce a good gain in customer patronage - say 5-15 percent, whereas a major costly increase may produce only a slightly higher gain - say 10-20 percent. The value customers place on service is admittedly one of the hardest things to evaluate in marketing. Nevertheless, it can sometimes be measured with a little ingenuity.

    For example, one might try to correlate the levels of customer complaints with the length of delay in order processing.

Even where the estimates are rough, one can use sensitivity analysis to find out how much difference any estimate would make in the choice between physical-distribution alternatives.





2. Cost of service

The industry bears certain costs, of which transport, product availability and handling are the main ones, in providing its present level of customer service. Often the total bill is not known because the company may typically lack centralized management and accounting of their physical distribution activities. These costs, however, must be measured as a prerequisite for distribution planning and control.

The present system can be said to be efficient if no reorganization of logistical inputs could reduce the costs while maintaining the present service level.

The industry may think their physical-distribution system is efficient because each decision centre - product availability, handling, and traffic - appears to do a good job of keeping down its own costs. However, this is an area where the sum of distributional costs is not necessarily minimized by a set of un-coordinated efforts to minimize the separate costs.

It may well be that pressures are applied by top management which encourage the separate functional units to control and reduce their costs of operation. Cost reduction becomes the primary way for these functional units to call attention to themselves and as a result, when decisions are made about handling, storage, packaging, product availability levels, et cetera, they are based on an analysis of alternatives within that specific function, without regard for the possible effects upon other closely related functions.

Functional costs are considered, but the all-important total cost of the related functions is ignored.

Various physical distribution costs interact, often in an inverse way:

A functional manager might favor one method of transport over another because this reduces that department's transport bill; however, because cheaper methods of transport are usually slower and less reliable, this ties up company capital longer, delays customer payment, and may cause customers to buy from competitors offering more rapid service.

Similarly a decision to use cheap packaging to minimize supplies costs will lead to a high damage rate of products in transit, the perception of a lesser quality product and thus the loss of customer goodwill.

The importance of these points are that since physical distribution activities are highly interrelated, decisions must be made on a total system basis.

3. Service objective

One can now define the objective of physical distribution design.

A physical-distribution system consists of a set of decisions on the number, location, and size of handling facilities; transport policies; and product availability policies.

Each possible physical distribution system implies a total distribution cost, as given by the expression :

D = T  +  FW  +  VW  +  S


D =

total distribution costs

T =

total transport costs

FW =

total fixed handling costs

VW =

total variable handling costs

S =

total cost of lost sales due to average delivery delay

The choice of a physical distribution system calls for examining the total distribution cost associated with different proposed systems and selecting the system that minimizes total distribution cost.

Target Company
Base Reference

Level of Service: Responsiveness

Level of Service: Problem Solving

Level of Service: Product / Price / Service Factors

Cost of Service: Functional Costs

Cost of Service: Physical Handling Costs

Performance Grid Definitions

Target Company
Base Reference

Distribution & Storage Fixed Costs

Distribution & Storage Variable Costs

Physical Handling & Process Fixed Costs

Physical Handling & Process Variable Costs

Total Distribution Costs

Performance Grid Definitions



The industry face a large number of alternatives in the designing or redesigning of its physical distribution system. The variety increases in number and complexity as one goes from an operation with a single process location serving a single market to an operation with multiple process locations and multiple markets.

1. Single Location, Single Market

The vast majority of companies are single location firms doing business in single markets. The single markets served may be a small city, as in the case of small service firms, or a region, as in the case of local suppliers of consumable products.

Does the single location firm generally locate in the midst of its market?

It often does, for the cost of serving a market increases with the distance. The distant firm has to absorb higher customer handling costs and is normally at a competitive disadvantage.

Yet in some cases there are offsetting economies in locating a plant at some distance from the market. The higher market customer handling cost may be offset by lower costs of property, labor, energy, or supplies.

The merits of locating process facilities near the market or near its sources depend mainly on relative transfer or processing costs. A substantial change in certain costs could upset the balance of advantages. The firm choosing between two alternative process sites must carefully weigh not only present alternative costs but forecast alternative costs.

2. Single Location, Multiple Markets

An operation having a single process location and selling in a dispersed set of markets has a choice of several physical distribution strategies.

In this scenario there are at least four alternatives:

i. Direct Handling of customers

 ii. Bulk Handling of customers via a local handling facility

iii. Part processing at a local or remote location

iv. Full processing at a local or remote location.


Direct handling of customers

Any proposed system of physical distribution must be evaluated in terms of customer service and cost. The direct handling scenario leaves the impression that it would score poorly on both of these counts. In the first place, direct handling would seem to imply a slower service than the handling of the customer from a local facility. Further, direct handling would seem to imply more cost because the typical customer order may be relatively small.

Whether direct handling does involve these disadvantages depends upon a number of things. It is conceivable that direct handling from a distant process location could effect faster delivery than handling from a nearby service location. Furthermore, direct handling of small value orders must be measured against the cost of maintaining local or remote locations. The decision on whether to use direct handling depends on such factors as the nature of the product (its unit value, perishability and seasonality), the required speed & cost of delivery, the physical characteristics of the typical customer order, the physical distance and direction.

This analysis is incomplete because each handling alternative implies a different average delivery time and one can assume a higher cost of lost sales for longer delivery delays. Thus the slower modes of customer handling cost less - but adversely effect sales revenue.

These two diverging cost functions of delivery time are shown below:

By adding the two cost curves vertically, we can find a total-cost curve. The total-cost curve tends to be U-shaped, and by projecting its minimum point down to the Handling Delay axis, we can estimate the optimum handling delay. This delay has the property that the marginal savings in costs from a slightly longer delay would just equal the marginal cost of lost patronage.


Bulk handling of customers from a local handling facility

The company may find it less expensive to do bulk handling of customers via a local handling facility.

The savings would arise mainly because of the substantial difference between bulk handling costs and small value order costs. From this, one has to subtract the cost of local customer handling from the location to the customer and the cost of premises.

To this possible handling savings should be added another advantage accruing from the use of a market-located customer handling point which is likely to increase the attractiveness of the product and thereby increase customer patronage. In general, the optimizing rule for adding regional locations is simple enough. A regional location should be added if the handling savings and increased patronage resulting from faster delivery exceed the incremental costs of operating the warehouse.

But an extensive regional system raises a number of new problems:

    What is the best number of points? Where should they be located?

    What is the best level of service to supply at each ?

Paper-and-pencil analysis is exceedingly inadequate to answer these questions and thus one needs to turn to computer models.


Part processing at a local or remote location

A third alternative is to establish a process location near the market. The presence of a regional plant also stimulates the increased interest of local distribution channels and the community at large.

Against this the company must consider the fixed investment cost in additional facilities.


Full processing at a local or remote location

The decision to acquire a regional process facility requires the most detailed factual information and analysis of the local scene.

Many factors are involved, including the availability and costs of manpower, energy, land, transportation and, not the least important, the legal and political environment.

One of the most important factors is the nature of economies of scale . In operations requiring a relatively heavy fixed investment, a location has to be quite large in order to achieve cost economies. If the unit costs of process decrease continuously with the scale of plant, then one plant could logically supply the entire company volume at minimum process costs; however, it would be fallacious to ignore distribution costs, because they tend to be higher at higher volumes.

3. Multiple Locations, Multiple Markets

Many of the large operations that do not require extremely large processes to achieve economies of scale utilize a physical distribution system consisting of many process locations and many handling points.

These companies face two optimization tasks:


The first is to set a process-to-point of sale shipping pattern that minimizes total handling costs, given the present process and handling locations.


The second is to determine the number and location of facilities that will minimize total distribution costs.

Here system simulation is a potent technique.

The physical distribution system must be designed not for maximum economy for the present so much as maximum flexibility for the future, even if present costs must be a little higher in order to gain this flexibility. The company's plans for entering new product markets, for introducing new product revisions, and for changing the number of distributors should all count in designing the system.

The system should be planned with an awareness of environmental developments, particularly in the areas of communications, transportation, and automation. Such innovations as automated handling, joint venture transportation, electronic hookups between computers in different locations, containerization, and rapid handling are all factors to consider.

Target Company
Base Reference

Single Location / Single Markets

Single Location / Multiple Markets: Direct Handling

Single Location / Multiple Markets: Bulk Handling

Single Location / Multiple Markets: Split Processing

Multiple Location / Multiple Markets

Performance Grid Definitions



While a company’s marketing management generally does not have control over product availability policy, it is inclined to seek a strong voice in the making of product supply policy. The marketing management’s chief concern lies in providing a high level of service for his customers. Product supply policy is viewed by him as an instrument in the demand creation and demand satisfaction process.

However, it is not realistic from a cost point of view for a company to increase product availability to a level that would guarantee complete supply to all customers. A major reason is that product supply cost increases at an increasing rate as the customer service level approaches 100 percent.

The acceleration of product supply cost does not mean that increases in customer service are never warranted. Increases in service, results in increases in patronage and sales. One needs to know whether sales and profits will increase enough to justify the higher investment.

1. Types of Product Supply & Availability decisions

Product Supply & Availability decision making can be thought of as a two-step decision process:

                i.  Supply Timing
               ii.  Supply Quantity


Supply Timing

The basic characteristic of Product Supply is that it is consumed over time.

This calls for a determination of the level at which the remaining product availability justifies the placement of product supply capacity.

The determination of the product supply capacity replacement point depends upon the process lead time, the usage rate and the service standard.

The higher the process lead time, the customer usage rate and the company service standard, the higher the replacement point.

Furthermore, if the process lead time and customer usage rate are variable, the replacement point would have to be higher by a safety margin. The final order point is set on the basis of balancing the risks of being unable to supply against the costs of oversupply.


Supply Quantity

The decision the company makes on Supply Quantity directly influences Supply Timing. The larger the Supply Quantity, the less (usually) the Supply Timing.

Order processing costs are somewhat different for the distributor and the supplier. The distributor's processing costs consist of whatever materials, computer time and labor are used up every time an order is placed, received and checked.

Order processing costs for a supplier consist of setup costs and running costs for the product. If setup costs are very low, the supplier can process the product often and the cost per order is pretty constant and equal to the running costs. However, if setup costs are high, the supplier can reduce the average cost per unit order by producing a long process run and carrying more supply availability.

Order processing costs must be compared with the costs of maintaining the Supply Quantity, called carrying costs. The larger the average product availability carried, the higher the supply carrying costs. These carrying costs fall into four major categories:

               a. Handling and Storage charges
               b. Cost of capital
               c. Taxes and insurance
               d. Depreciation and obsolescence

Carrying costs may run as high as 25% of the product value. This may be higher than the estimate used by many managers, but there is growing recognition that the cost is very high. This means that managers who want their companies to carry larger product availability must be able to convince top management that the higher product supply will yield new sales with an incremental gross profit that would more than cover the incremental carrying costs.

The optimal supply quantity can be determined by observing how order processing costs and carrying costs sum up at different possible order levels.

Order processing costs per product unit can be shown to fall with the number of units ordered, as the order costs are spread over more units. Carrying charges per unit are shown to rise with the product units ordered, because each unit remains longer unsold.



Marketing management in the industry has a keen interest in location decisions made by the firm. Point of Sale outlets must be carefully located near the greatest number of potential customers, because of the importance of convenience. Even handling locations should be located near the customer concentration points to ensure faster and cheaper delivery to customers.

1. Types of Location Decisions

Location decision making can be thought of as two-step decision process:

               i.  Selecting a general area
               ii. Selecting a specific site


Selecting the area

It is usually a distribution management responsibility to identify and evaluate the profit potential of various areas in each of the countries in which the company operates. The areas might be cities, standard metropolitan areas, or some other geographical unit.

Suppose a set of  areas  (1,2,3,..., i, ...., n)  is to be evaluated.

        Let  Z i  represent the expected profit potential of the i th area.

        Let X i  be a proposed company investment in developing area i.

        The expected profit potential will vary with development expenses. That is,  Zi  =  f(Xi )

A larger outlet, a better distributor, or a larger promotion budget invested in a particular area would create higher profits, although the rate of profit increase can be expected to diminish beyond some level investment.

The company has the task to estimate, for each candidate area, how profits would behave at different levels of investment. Once it derives a set of area profit functions, it can allocate its total "new locations" budget to these areas in such a way that the marginal profits is the same in all areas.

Although the area investment problem turns out to be simple to solve in principle, everything hinges on being able to estimate expected profits as a function of investment:

Zi  =  f(Xi )

Area profits are a complex function of area cost and area characteristics. The relevant cost characteristics of an area, such as premises costs and advertising rates, are fairly easy to determine. It is the area's demand potential that is usually hard to determine.

One can initially identify several hundred variables that could influence area sales. On closer examination of the logical rationale for each variable, one is able to reduce the set to perhaps fifty.

One needs to use such a formula for both existing locations as well as proposed new locations.


Selecting the site

After determining the areas of high potential, the firm must decide how many outlets to maintain and/or establish and where they should be specifically situated. If one city or region appears to be a high-potential market, the firm could establish, for about the same investment one large outlet in a central location or a few smaller outlets in separate parts of the city. The perception of the customer about the relative positioning of the product or service will affect consumer behavior; for example if customers believed the product to be a specialty, they would be willing to travel longer distances, and this would favor one large, centrally located location. If customers regarded products as convenience products or services, this would favor establishing a few smaller outlets.

A location’s trading area or reach is affected by a number of other factors besides the type of product. One is the number of different products or services carried by the location.

One model develops an analysis in which one can visualize each consumer as calculating his net gain from patronizing a location with N items at a distance D.

One assumed that increases in N more than compensated for increases in D up to a point.

Beyond this point, the cost of traveling to the location became dominant.

The utility expected by a customer in location i of buying at an outlet in location j is affected by many variables in addition to N and D.

Included are such factors as image, delivery, credit, service policies, promotion, parking facilities, et cetera. If consumer utility as a function of these variables could be measured, the choice of the best site and outlet size from a list of alternatives is solvable in principle.

Suppose there are three alternative proposed sites - 1, 2, and 3 - offering utilities 40, 30, and 10, respectively, to a customer in location i.

The probability that this customer would buy at site 1 is the ration of the utility of site 1 to the total utility, in this case .50 ( = 40/80).

If there are 1,000 similar customers clustered at location
i, then half of them, or 500, can be expected to patronize proposed site 1.

In a more advanced analysis, it would be desirable to distinguish major socioeconomic types or buyer profiles of customers at location
i, because there are strong interaction of customer type and outlet type.

In practice, firms vary considerably in how analytically they investigate the trade potential of proposed sites. Small firms rely on basic customer data and on simple traffic counts. Large firms carry out expensive surveys of customer buying habits and make extensive calculations of expected sales volume.

The expanding firm often develops explicit criteria to guide its search for sites and cut down its search time.

For example typical criteria for the location of sites may include:

  a. Annual sales volume target per location
  b. Site and support infrastructure
  c. Demographic data
  d. Customer profiles and growth prospects
  e. Geographic siting in relation to company's other sites
  f. Ownership and terms of location
  g. Trading area data and growth prospects

While these heuristic principles may lead the company to overlook a very good site, they save the company the expense of considering a great number of potentially poor sites.

In undertaking a detailed commercial analysis for a proposed site, the firm must first prepare area maps indicating density and the location of competitive intercepting facilities. An overlay on this map indicates major arteries to pinpoint traffic flows.

One can then determine the availability and cost of potential sites within the general area. The trade potential of each site is then evaluated. A series of circles is drawn around each site at varying distances to indicate the primary trading area, the secondary trading area, and the fringe trading area. The secondary and fringe areas are further away from the new site and closer to competitive sites; they can be expected to contribute a progressively smaller amount of per capita sales. - Use can be made of a formula which supplies a means for estimating the sales volume drawn by competing sites as a function of location size and customer access and time taken.











   Bi = the proportion of trade from the immediate town attracted by city i

   Pi = the population of city i

   Di = the distance from the intermediate town to city i

   a, b = the particular cities being compared

One may develop and utilize elaborate site location checklists in their evaluation of sites. The checklist would contain factors, each of which has to be rated excellent, good, fair, or poor in evaluating a proposed site. These factors relate to the site's trading area potential accessibility, growth potential, competitive interception and site economics.



1. Divided Authority

It should be abundantly clear that decisions on transport, handling, product availability and location require the highest degree of co-ordination. Yet it may be the case that in a company’s, physical distribution responsibilities tend to be divided in an ill-coordinated and often arbitrary way among several company departments. Furthermore, each department tends to adopt a narrow view of the company's physical distribution objective.

One manager may seek to minimize one departmental bill at the cost of another department. One operational unit may adopt physical distribution objectives and policies which will disadvantage other units up-stream or down-stream. Each operational manager jealously guards his prerogatives and this inevitably results in system sub-optimization.

2. Organizational Alternatives

Companies are increasingly recognizing the potential benefits of developing some coordinating mechanism and have generally chosen one of two forms; firstly, the establishment of a team composed of personnel responsible for different physical distribution activities, that meets periodically to work out policies for increasing the efficiency of the overall distribution system; or secondly, the centralization of their physical distribution activities in the hands of a single department or manager.

When a company establishes a separate department with responsibility for physical distribution, the major issue is whether the new department should have separate status or be placed within one of the major existing departments. For example, a company might create a new department of co-ordinate stature with Marketing and Production which was headed by a Director of Distribution; thereby hoping that this arrangement would guarantee respect for the department, develop a greater degree of professionalism and objectivity, and avoid partisan domination by Marketing or Production.

On the other hand, a company may place its new Distribution Service Department within the Marketing Department. By this move, expressing the great importance it attached to good customer service relative to the costs of providing it. Wherever marketing is the crucial factor in competitive success, physical distribution is usually placed under the marketing department. This is especially true in very competitive markets where marketing and physical distribution must be coordinated not only to minimize costs but also to harmonies with frequent advertising campaigns and customer and distributor promotions.

The location of the department, or even its creation, is a secondary concern. The important thing is the recognition by the company that if it does not co-ordinate the planning and operation of its physical distribution activities, it is missing the opportunity for often sizable cost savings and service improvements. When this fundamental awareness takes place, each company can then make a determination of what would constitute the most appropriate coordinative mechanism.

Target Company
Base Reference

Product Availability Timing Efficiency

Product Availability Quantity Efficiency

Locations Efficiency

Organizational Efficiency

Organizational & Decision Flexibility

Performance Grid Definitions



This section analyses the effects of a Distribution Channel Improvement programme and its inferred expenditure in terms of the industry's Financial and Operational results.

Distribution Channel Investments can bring almost immediate results in terms of turnover and profitability and in general terms the investment involves both short-term tactical projects as well as medium-term expenditure on equipment and capital projects.

The Financial and Operational Distribution Channel Investment Scenario Data forecasts given make the following assumptions:-

1. Forecasts are based on all external factors:

  a. Market Growth (Medium + Long Term)
  b. Competitive Market Factors
  c. Competitor + Industry Environment Factors

2. Forecasts assume ceteris paribus in terms of internal factors with the exception of a Distribution Channel Improvement programme and its expenditure which is assumed to increase by a rate equivalent to 5% greater than the competitor average

3. Forecasts assume changes in Market Competitors. The forecast assumptions use Competitor databases to forecast changes in competitive situations which will affect the Company and includes the Competitor response (in Distribution Channel Terms) to the scenario shown.

Distribution Channel Improvement Scenario



 Financial Definitions




The PHYSICAL DISTRIBUTION + CUSTOMER HANDLING FINANCIAL SCENARIOS BALANCE SHEET FORECASTS section gives a series of Forecasts for the Company and the industry using a number of assumptions relating to the distribution and customer handling decisions available to the management of the Company.

The Balance sheet forecast given shows the effects of distribution and customer handling improvements which Management is likely to recommend:


  • Fixed Marketing Cost Objectives

  • Distribution & Product Delivery Cost Objectives

  • Order Taking Improvements

  • Customer / Order Processing Systems Investment

  • Systems Investment

  • Profit Impact From Distribution Cost Reduction

  • Profit Impact From Customer Handling Cost Reduction

  • Capital Investments Options: Distribution / Handling

  • Capital Investments Options: Customer Handling Systems

  • Customer Handling Improvements

Managers in the Company will, in both the short-term and the long-term, have vital decisions to make regarding the distribution and customer handling improvements, margins and profitability and these decisions will need to be evaluated in light of the customers, markets, competitors, products, industry and internal factors. The scenarios given isolate a number of the most important factors and provide balance sheet forecasts for each of the scenarios.

The data provides a short and medium term forecast covering the next 6 years for each of the Forecast Financial and Operational items. The Financial and Operational Data sections show each of the items listed below in terms of forecast data and covers a period of the next 6 years.



Financial Comparisons: Scenarios


Target Company

Base Reference Industry



FIXED MARKETING Cost Objectives: Financials

FIXED MARKETING Cost Objectives: Margins & Ratios







SYSTEMS Investment: Financials

SYSTEMS Investment: Margins & Ratios

Profit Impact from DISTRIBUTION Cost Reduction: Financials

Profit Impact from DISTRIBUTION Cost Reduction: Margins & Ratios

Profit Impact from CUSTOMER HANDLING Cost Reduction: Financials

Profit Impact from CUSTOMER HANDLING Costs: Margins & Ratios

Capital Investment Options: DISTRIBUTION / HANDLING: Financials

Capital Investment Options: DISTRIBUTION / HANDLING: Margins & Ratios

Capital Investment Options: CUSTOMER HANDLING SYSTEMS: Financials

Capital Investments: CUSTOMER HANDLING SYSTEMS: Margins & Ratios




FIXED MARKETING Cost Objectives: Financials

FIXED MARKETING Cost Objectives: Margins & Ratios







SYSTEMS Investment: Financials

SYSTEMS Investment: Margins & Ratios

Profit Impact from DISTRIBUTION Cost Reduction: Financials

Profit Impact from DISTRIBUTION Cost Reduction: Margins & Ratios

Profit Impact from CUSTOMER HANDLING Cost Reduction: Financials

Profit Impact from CUSTOMER HANDLING Costs: Margins & Ratios

Capital Investment Options: DISTRIBUTION / HANDLING: Financials

Capital Investment Options: DISTRIBUTION / HANDLING: Margins & Ratios

Capital Investment Options: CUSTOMER HANDLING SYSTEMS: Financials

Capital Investments: CUSTOMER HANDLING SYSTEMS: Margins & Ratios




 Financial Definitions



Back Home Up Next