Marketing Channels and Supply Chain Management
A marketing channel, or channel of distribution, is a group of individuals and organizations that direct the flow of products from producers to customers. The major role of marketing channels is to make products available at the right time at the right place and in the right amounts. In most channels of distribution, producers and consumers are linked by marketing intermediaries, or middlemen. The two major types of intermediaries are retailers, which purchase products and resell them to ultimate consumers, and wholesalers, which buy and resell products to other wholesalers, retailers, and business customers.
Marketing channels serve many functions. They create time, place, and possession utility by making products available when and where customers want them and providing customers with access to product use through sale or rental. Marketing intermediaries facilitate exchange efficiencies, often reducing the costs of exchanges by performing certain services and functions. Although critics suggest eliminating wholesalers, someone must perform their functions in the marketing channel. Because intermediaries serve both producers and buyers, they reduce the total number of transactions that otherwise would be needed to move products from producer to ultimate users.
Marketing channels also form a supply chain, a total distribution system that serves customers and creates a competitive advantage. Supply chain management refers to long-term partnerships among channel members working together to reduce inefficiencies, costs, and redundancies and to develop innovative approaches to satisfy customers. The supply chain includes all entities - shippers and other firms that facilitate distribution, as well as producers, wholesalers, and retailers - that distribute products and benefit from cooperative efforts. Supply chains start with the customer and require the cooperation of channel members to satisfy customer requirements.
Channels of distribution are broadly classified as channels for consumer products and channels for business products. Within these two broad categories, different marketing channels are used for different products. Although consumer goods can move directly from producer to consumers, consumer product channels that include wholesalers and retailers are usually more economical and efficient. Distribution of business products differs from that of consumer products in the types of channels used. A direct distribution channel is common in business marketing. Also used are channels containing industrial distributors, manufacturers' agents, and a combination of agents and distributors. Most producers have multiple or dual channels so the distribution system can be adjusted for various target markets.
Selecting an appropriate marketing channel is a crucial decision for supply chain managers. To determine which channel is most appropriate, managers must think about customer characteristics, the type of organization, product attributes, competition, environmental forces, and the availability and characteristics of intermediaries. Careful consideration of these factors will assist a supply chain manager in selecting the correct channel.
A marketing channel is managed such that products receive appropriate market coverage. In choosing intensive distribution, producers strive to make a product available to all possible dealers. In selective distribution, only some outlets in an area are chosen to distribute a product. Exclusive distribution usually gives a single dealer rights to sell a product in a large geographic area.
Each channel member performs a different role in the system and agrees to accept certain rights, responsibilities, rewards, and sanctions for nonconformance. Although many marketing channels are determined by consensus, some are organized and controlled by a single leader, or channel captain. A channel captain may be a producer, wholesaler, or retailer. Channels function most effectively when members cooperate; when they deviate from their roles, channel conflict can arise.
Integration of marketing channels brings various activities under one channel member's management. Vertical integration combines two or more stages of the channel under one management. The vertical marketing system (VMS) is managed centrally for the mutual benefit of all channel members. Vertical marketing systems may be corporate, administered, or contractual. Horizontal integration combines institutions at the same level of channel operation under a single management.
Federal, state, and local laws regulate channel management to protect competition and free trade. Courts may prohibit or permit a practice depending on whether it violates this underlying principle. Various procompetitive legislation applies to distribution practices. Channel management practices frequently subject to legal restraint include dual distribution, restricted sales territories, tying agreements, exclusive dealing, and refusal to deal. When these practices strengthen weak competitors or increase competition among dealers, they may be permitted; in most other cases, when competition may be weakened considerably, they are deemed illegal.