CHAIN/CHANNELS OF DISTRIBUTION
Introduction
- Channels of distribution are the paths that goods and/or services follow from the producers to the final users.
- The persons involved in the distribution of goods from the producer to the consumer are called middlemen or intermediaries.
- There are different channels that different products follow. Some of the channels include the following:
- Producer → agent → wholesaler → retailer → consumer.
- Producer → co-operative society → marketing board → wholesaler → retailer → consumer.
- Producer → marketing board → wholesaler → retailer → consumer.
- Producer → wholesaler → retailer → consumer.
- Producer → wholesaler → consumer.
- Producer → retailer → consumer.
- Producer → consumer.
Costs Incurred by Middlemen While Distributing Goods
- Buying costs: They incur this cost by paying for goods from the producers or other middlemen.
- Transport costs: Some middlemen transport goods from the producer to other middlemen or to the final users.
- Storage costs: Middlemen keep goods until demand arises, requiring them to hire or construct warehouses.
- Advertising or marketing costs: Some middlemen carry out marketing of goods on behalf of the producers and other middlemen, paying for such services.
- Insurance costs: Middlemen insure the goods they trade to ensure compensation in case of loss.
- Operation costs: Middlemen incur operating costs such as salaries, electricity, and maintenance.
- Preparation costs: Some middlemen prepare goods before sale, including packing, assembling, and blending, meeting these costs on behalf of the producer, other middlemen, and consumers.
Channels of Distributing Various Products (refer to Inventor book three pages 50 to 53)
Roles of Middlemen
The following are some roles performed by middlemen in the chain of distribution:
- Bulk accumulation (assembling): They collect similar goods from different producers in small quantities and offer the large amount gathered to buyers who want to buy in large volumes.
- Reducing transactions: The interactions between the producers and consumers are reduced since middlemen communicate with consumers on behalf of producers.
- Bulk breaking: They buy in large quantities and sell in small quantities as desired by consumers.
- Risk taking: They assume risks related to the movement of goods from producers to consumers, including theft, damage, and loss due to bad debts.
- Finance provision: Middlemen provide finance to producers by buying goods in large quantities and paying on time.
- Provision of information: Middlemen gather market information from consumers and pass it to producers who then produce goods in line with consumer tastes.
- Marketing/product promotion: Middlemen are involved in marketing goods, stimulating consumer interest.
- Provision of transport: Middlemen transport goods from producers to locations accessible to consumers, relieving both producers and consumers of transport costs.
- Storage
- Variety provision
- Availing goods to consumers
Factors to Consider Before Selecting a Distribution Channel
Factors that influence the choice of a distribution channel include the following:
- Product nature: Perishable products should be sold directly to consumers to avoid losses due to spoilage. Bulky products need direct selling to reduce transportation and stock handling costs.
- Nature of the market: Where the market is concentrated in one area, direct selling is appropriate. Longer channels are preferred where the market is widely spread.
- Role of intermediary: The channel chosen should be able to perform services related to the product, e.g., technical support for technical goods.
- Resources and size of the firm/producer: Small producers should use direct selling. Large firms with sufficient resources can opt for longer channels.
- Channels used by competitors: To compete effectively, firms should use similar channels. To avoid competition, different channels may be used.
- Government policy: The channel must comply with government regulations, e.g., middlemen distributing pharmaceutical products must be recognized by relevant bodies such as the Pharmacy and Poisons Board.
- Marketing risks: Firms wanting to avoid distribution risks may opt to use middlemen.
Questions
- State four channels for distributing imported goods.
- Explain five factors that can influence the choice of a channel of distribution.
- Outline five costs incurred by middlemen in the distribution process.
- Describe the roles played by middlemen in the distribution chain.
- Outline the circumstances under which a producer would sell directly to consumers.
