Chapter 14 Summary

A channel of distribution is an organized network of agencies and institutions than perform all the functions required to link producers with end users to accomplish the marketing task. These agencies are referred to as intermediaries or middlemen. Intermediaries perform transactional (buying and selling products), logistical (movement of products), and facilitating (financing, grading, and research) functions. They increase the efficiency and effectiveness of a channel by reducing the number of sales contacts.

Products/services can be divided in the industrial sector and the consumer sector. In the consumer channel, the producer can sell directly to the consumer or have middlemen perform this task. Likewise, in the industrial channel the supply can sell directly to the producer or use middlemen. There are also reverse channels of distribution which basically flow products/services back up through the channel. This has become especially important with the increased emphasis on recycling. But they can also be used for product recalls and damaged goods.

In conventional channels, each company acts relatively independent of the others. However, in recent years, vertical marketing systems (VMS) have developed. A VMS is a distribution system that is centrally managed to achieve greater efficiency and marketing impact. There are three types of VMS: 1) administered, 2) corporate, and 3) contractual. In an administered VMS, separate firms develop a comprehensive program for distributing products and one firm is the dominant channel member who acts for entire group. A single firm owns and controls all or most of the channel in a corporate VMS. The firm owns and operates production facilities, warehouses, and retail outlets. The final VMS system is contractual wherein channel members have formal contracts with each other specifying the rights and duties of everyone.

No matter the channel type, there are a number of areas that must be managed for the channel to operate efficiently and effectively. One area of management is selecting the correct channel. In doing so, customer, product, intermediary, competitor, environmental, and organizational characteristics must be analyzed. A second management area is the relationships within the channel which includes solving conflict, developing a channel captain, and building trust.

Legal, political, and ethical issues must be addressed in channel management. Certain types of legal issues such as exclusive dealings, tying agreements, and closed sales territories must be avoided. Many times politics cause channel problems especially globally. An example of an ethical issue is slotting allowances where manufacturers pay a retail store fees for product space on the shelves. In some cases, this practice can push small manufacturers out because they just do not have the money to pay the necessary fees.