PART B – DISTRIBUTION PROBLEMS

AS 91381 (3.3)Apply business knowledge to address a complex problem in a given global business context

Distribution is the movement of products from one place to another.  DISTRIBUTION CHANNELS A distribution channel is the route taken by a product as it goes from manufacturer to the end user, the customer. Some common channels of distribution are as follows:

O Direct MarketingSome businesses sell directly to its customers, without any other parties being involved. Examples of direct distribution channels are buying fudge at a Sunday market where you give your payment direct to the fudge maker, or buying directly from a website. Some manufacturers have factory shops from which they sell directly to customers. Services are also usually distributed straight to the customer, e.g. hairdressers and accountants.

O Distribution through intermediaries

 An intermediary is a link between the producer and the customer. Another name for an intermediary is “middle man”.

O Retailers buy large quantities from suppliers and sell in smaller quantities to customers. This is of service to the manufacturers who don’t want to sell in small quantities to many consumers, and to consumers who do not want to buy in bulk. Retailers sometimes provide other services that add value to what they sell, for example, home delivery, gift-wrapping or repair services. The use of retailers is a one-level distribution channel because the retailer is the one intermediary involved.

O A wholesaler buys goods from manufacturers and sells them to retailers. The use of wholesalers is an example of a two-level distribution channel.

O A manufacturer may use an intermediary called an agent or broker. These intermediaries bring buyers and sellers together. Agents are often used when selling into a foreign country. They usually have better knowledge of the laws, needs of consumers and trading conditions in that country.

Best Distribution Channel

Various factors must be considered.O Nature of the productO The businessO The marketO Legal Issues

DISADVANTAGES OF USING INTERMEDIARIES  O Loss of revenueIntermediaries make a profit for their part in the distribution process. They are either made a direct payment by the manufacturer, e.g. shipping costs plus a mark-up, or they sell the products to retailers at a higher price than they bought the goods from the manufacturer (again, by adding a mark-up). The manufacturer therefore sells the product to the intermediaries at costs lower than the price at which the intermediaries sell to the final customers. A greater profit would be made if the manufacturer been able to manage the distribution.

O Loss of communication controlThe manufacturer loses control over what message is being conveyed to the final customers. The reseller may engage in personal selling in order to increase product sales and may possibly exaggerate the benefits of the product. There is potential for miscommunication with end users.

O Loss of product importanceThe importance given to a manufacturer’s product by the members of the distribution channel is not under the manufacturer’s control. A competitor’s product may gain greater importance to the intermediary if that business is offering a higher promotional incentive. 

Inventory IssuesCareful control of stock levels can improve business performance. Having too much stock may mean that money is tied up unproductively, but inadequate stock can lead to delays in production and late deliveries. Efficient inventory control involves finding the right balance between keeping stock levels as low as possible so that costs are minimised, while not allowing stock to run out to the disappointment of customers.

O Demand ~ sufficient stocks need to be kept to satisfy normal demand as well as ‘buffer’ stock held for unforeseen increases in demand or breaks in supply.

O Stockpiling ~ some firms stockpile stock. For example, confectionary businesses build up stocks of Easter eggs in the few months leading up to Easter.

O Costs of stock holding ~ stocks of raw materials, components and finished goods occupy space in buildings. The business will also need to pay heating, lighting, insurance and other associated costs. Some products may need special storage conditions such as refrigerated facilities for certain food items.

O Type of stock ~ only small stocks of perishable items can be held. The stock levels of baked goods should be low; ideally the entire stock will be sold in a day. The ‘life’ of stock does not only depend on its perishability. For example, holding high levels of high-fashion garments would be unwise as fashions may change and the garments may need to be sold below cost.

O Available working capital ~ a business that is short of working capital will not be able to purchase more stock, even if it is needed.

O Lead time ~ this is the amount of time it takes for stock to be ordered, received, inspected and made ready for use. The longer the lead time, the higher the minimum stock level is needed.

Just-in-case and Just-in-timeThese terms refer to two approaches to stock levels.O Just-in-case (JIC) manufacturing is the traditional

model of production, in which products are created in advance and in excess of demand. The firm is always able to respond to orders. The disadvantage is the storage space necessary and funds being tied up in stock that is sitting idle on warehouse shelves.

O In contrast a Just-in-time (JIT) strategy meets the principles of lean production. The firm does not allocate space to the storage of components or finished goods, but instead orders them or manufactures them when required. There is no over-production and the streamlining reduces storage space and therefore costs.

OVERCOMING CULTURAL BARRIERS

Given the scale and growth rate of the global economy, it is essential that businesses wishing to trade in or with overseas countries understand the cultural etiquette of the countries.

The distinct cultures can make navigation through the market more difficult. For example, Chinese business tends to be completed through contacts rather than contracts. Establishing relationships based on mutual respect is a fundamental aspect of both the Chinese culture and business place.

Professional relationships tend to be built through face-to-face social interaction, such as over lunch or dinner. The simple act of shaking hands can be extremely significant. If a Western business doesn’t have an on-the-ground presence in China and communicates solely by telephone, it will be very difficult to build business relationships.

Establishing local relationships with overseas suppliers is, therefore, essential. Having a presence on the ground, either directly or via an intermediary, can help businesses better manage transactions and help develop their reputation with local suppliers. Building local relationships can also help overcome any language barriers. In order to secure business and to negotiate payment terms with China, for example, it is vital to be present with a native language speaker, be it a translator or a business associate. This is not just to assist with translation, but also to help provide guidance on customary practices.