Chapter #1

CHAPTER I
LOGISTICS AND CHANNEL MANAGEMENT
1.1 Definitions
The term logistics does not mean the same thing to all persons, even to those who are
actively engaged in the field. A sampling of the membership roster of the National
Council of Physical Distribution Management shows the field represented by job titles
such as transportation, distribution, physical distribution, supply and distribution,
materials management, operations and logistics. For our purpose we use logistics,
business and physical distribution interchangeably.
Logistics or Business Logistics can be defined as the study and management of
goods and services flows and the associated information that sets these into motion.
Thus, the mission of the logistician is to get the right goods or services to the right place
at the right time and in the desired condition at the lowest possible cost.
The other definition of business logistics deal with all move-store activities that
facilitate product flow from one point of raw-material acquisition to the point of
final consumption, as well as the information flows that set the product in motion
for the purpose of providing adequate levels of customer service at a reasonable
cost.
Logistics can also be defined as a single logic to guide the process of planning,
allocating and controlling financial and human resources committed to physical
distribution, manufacturing support and purchasing operations.
In the other definition market logistics involves planning, implementing and
controlling the physical flows of materials and final goods from points of origin to
points of use to meet customer requirements at a profit.
Like logistics the concept channel can also be defined in different ways. Sometimes it is
thought of as the route taken by a product as it moves from the producer to the
consumer or other ultimate user. Some define it as the path taken by the title to
goods as it moves through various agencies. Still others describe the marketing
channel in terms of a loose coalition of business firms that have banded together for
purposes of trade.
According to Kotler marketing channels are sets of interdependent organizations
involved in the process of making a product or service available for use or
consumption.
From the viewpoint of managerial decision-making in producing and manufacturing
firms marketing channel may be defined as the external contactual organization that
management operates to achieve its distribution objectives. Four terms in this definition
should be especially noted:
External - means that the marketing channel exists outside the firm. Management of the
marketing channel therefore involves the use of inter-organizational management
(managing more than one firm) rather than intra-organizational management (managing
one firm).
Contactual organization - refers to those firms or parties who are involved in
negotiatory functions as a product or service moves from producer to its ultimate user.
Negotiatory functions consist of buying, selling, and transferring title to products or
services.
Marketing Distribution and Logistics Management 1

Operates - meant to suggest involvement by management in the affairs of the channel.
This involvement may range from the initial development of channel structure all the way
to day-to-day management of the channel.
Distribution Objectives - means that management has certain distribution goals in mind.
The marketing channel exists as a means for reaching these. The structure and
management of the marketing channel are thus in part a function of a firm's distribution
objectives.
1.2. The Role & Objectives of Logistics
Role - Even the most carefully designed and managed marketing channel must rely on
logistics to actually make products available to customers. The creation of time and
place utilities essential for customer satisfaction is heavily dependent upon logistics. The
essence of the role of logistics in the marketing channel lies on the movement of the right
amount of the right products to the right place at the right time.
Logistics also play an important role on the global scale. Efficient logistics systems
throughout the world economy are a basis for trade and a high standard of living for all of
us.
An efficient logistics system allows a geographical region to exploit its inherent
advantage by specializing its productive efforts in those products in which it has an
advantage and by exporting these products to other regions.
Objectives - In terms of logistical system design and administration, each firm must
simultaneously achieve at least six different operational objectives. These operational
objectives, which are the primary determinants of logistical performance, include rapid
response, minimum variance, minimum inventory, movement consolidation, quality and
life cycle support.
A) Rapid response -- is concerned with a firm's ability to satisfy customer service
requirements in timely manner. Information technology has increased the capability to
postpone logistical operations to the latest possible time and then accomplish rapid
delivery of required inventory.
B) Minimum variance -- variance is any unexpected event that disrupts system
performance. Variance may result from any aspect of logistical operations. Delays in
expected time of customer order receipt, an unexpected disruption in manufacturing,
goods arriving damaged at a customer's location, or delivery to an incorrect location--all
result in a time disruption in operations that must be resolved. Potential reduction of
variance related to both internal and external operations.
C) Minimum inventory -- the objective of minimum inventory involves asset
commitment and relative turn velocity. Total commitment is the financial value of
inventory deployed throughout the logistical system. Turn velocity involves the rate of
inventory usage over time. High turn rates, coupled with inventory availability, mean
that assets devoted to inventory are being effectively utilized. The objective is to reduce
inventory deployment to the lowest level consistent with customer service goals to
achieve the lowest overall total logistics cost.
D) Movement consolidation -- one of the most significant logistical costs is
transportation. Transportation cost is directly related to the type of product, size of
shipment, and distance. Many logistical systems the feature premium service depend on
high-speed, small-shipment transportation. Premium transportation is typically high-cost.
To reduce transportation cost, it is desirable to achieve movement consolidation.
E) Quality -- a fifth logistical objective is to seek continuous quality improvement.
Total Quality Management (TQM) has become a major commitment throughout all facets

of industry. If a product becomes defective or if service promises are not kept, little, if
any, value is added by the logistics. Logistical costs, once expended, cannot be reversed.
In fact, when quality fails, the logistical performance typically needs to be reversed and
then repeated. Logistics itself must perform to demanding quality standards. Logistics
is a prime part of developing and maintaining continuous TQM improvement.
F) Life-cycle support -- few items are sold without some guarantee that the product will
perform as advertised over a specified period. In some situations, the normal value-
added inventory flow toward customers must be reversed. Product recall is a critical
competency resulting from increasingly rigid quality standards, product expiration dating,
and responsibility for hazardous consequences.
1.3. Logistics Systems, Costs, & Components
Prior to World War II logistics was equated mainly with transportation. Hence the field
was narrowly defined in terms of the activities involved in shipping and receiving
products and was given relatively little management attention. But during World War II
developments in military logistics required to move vast amounts of supplies to the
European and Pacific war theaters demonstrated the importance of logistics in winning
the war.
Of particular note was the emergence of the systems concept for dealing with logistical
problems; that is, more note was taken of the various factors involved in the logistical
process and the interrelationships among them. Rather than being thought of as separate
and distinct from one another, such factors as transportation, materials handling,
inventory control, warehousing, and packaging of goods were seen as interrelated
components of a system. Thus decisions or actions affecting one component could have
implications for other components of the logistical system.
This concept of logistics as a system has served as the foundation of modern logistics
management. In essence, those in charge of managing logistics seek to find the optimum
combination of basic logistics components (transportation, materials handling, order
processing, inventory control, warehousing, and packaging) to meet customer service
demands.
In a commercial or profit-making context, which, of course, involves most business
situations, the logistics manager also attempts to achieve the desired level of customer
service at the lowest cost by applying the concept of the total cost approach.
The use of the systems concept and the total cost approach to manage logistics is seen in
the following Figure. View of Logistics Management Based on the Systems Concept
and the Total Cost Approach: The Basic Components of Logistics Systems
Transportation
Systems Concept
Material Handling Total Cost Approach
Order Processing
Management view
logistics as a system of Management attempt to
interrelated components minimize the cost of using
the components taken as a
Inventory Control whole

Warehousing
Packaging
Transportation—is the most fundamental and obviously necessary component of any

logistics system, for clearly, in virtually all cases, products must be physically moved
from one location to another if a transaction is to be completed. Transportation is also
often the component accounting for the highest percentage of the total cost of logistics.
From a logistics management standpoint, the overriding issue facing the firm is choosing
the optimum mode of transportation to meet customer service demand. This can be a
very complex and technical task because there are so many considerations. A few of
these are:
 What are the different rates available?
 What specific transportation services are offered?
 How reliable are various common carriers?
 What modes of transportation are competitors using?
Materials Handling—encompasses the range of activities and equipment involved in the
placement and movement of products in storage areas. Issues that must be addressed
when designing materials handling system include:
 How to minimize the distances products are moved within the warehouse during
the course of:
o Receiving,
o Storage, and
o Shipping;
 What kinds of mechanical equipment (such as conveyor belts, cranes, and
forklifts) should be used; and
 How to make the best use of labor involved in receiving, handling, and shipping
products.
Order Processing—the task of filling customer orders may at first appear to be a minor
part of logistics and a rather routine activity that does not require a great deal of though to
do well. In fact, order processing is often a key component of logistics, and developing
an efficient order processing system can be far from routine.
The importance of order processing in logistics lies in its relationships with order cycle
time, which the time is between when an order is placed and when the customer receives
it.
Inventory Control—refers to the firm’s attempt to hold the lowest level of inventory
that will still enable it to meet customer demand. This is a never-ending battle that all
firms face. It is a critically important one as well.
Inventory carrying costs—including the costs of financing; insurance; storage and lost,
demand, and stolen goods—on average can amount to approximately 25 percent of the
value of the inventory per year.
Unfortunately, there is a conflict between these two objectives. Average inventory
carrying costs rise in direct proportion to the size of the order. Thus, a trade-off must be
made between these two objectives. Average inventory carrying costs rise in direct
proportion to the level of the inventory, while average ordering costs decrease in rough
proportion to the size of the order.

Here, the logistics manager needs constantly to aspire to achieve the lowest total cost by
balancing inventory carrying and ordering costs.
Warehousing—the warehousing or storage component of a logistics system is concerned
with the holding of products until they are ready to be sold. Warehousing can actually be
one of the more complex components of a logistics system because quite often, when
considering options for warehousing, the firm faces several key decisions, each of which
can be difficult and complex to deal with. The most basic of these decisions are:
1) The location of warehouse facilities
2) The number of warehousing
3) The size of the units
4) The design of the units including layout and internal systems, and
5) The question of ownership
Successful decisions in each of the areas requires careful planning and analysis and may
require input from experts in such fields as locations analysis, real estate, operations
research, and industrial engineering, in addition to logistics management. Warehousing
can be an important of a logistics system because it is so closely linked to the ability of
firms to provide high levels of customer service.
Packaging—Packaging and the costs associated with the packaging of products are
relevant as a component of the logistics system because packaging can affect the other
components of the system, and vice versa.
Materials handling and order processing procedures and cots can also be affected by
packaging because well-designed packaging can help to increase efficiencies in these
components of the logistics system.
Effective packaging can also help control inventory carrying costs as well by reducing
product damage. Further, warehouse space and thus costs can be saved if packaging is
designed to be space efficient.
Packaging design is a highly specialized area within the field of industrial design. The
point to be made here is that packaging is far more than a promotional device for
fostering product differentiation and attracting consumer attention.
Packaging has an important logistics dimension that can make a significant difference in
the effectiveness and efficiency of the logistics system. Indeed, a product in distinctive
and attractive packaging will have even more appeal if it is also easy to handle, stacks up
with no problem, and takes minimum space on the channel members’ shelves.
1.4 The Output of the Logistics System: Customer Service
Although good customer service is the end result of virtually all of the efforts of the firm,
logistics is a very important part of this effort. This is particularly true for the types of
services that are a direct function of the logistics system.
Over the years, logistics researchers and practitioners have given a great deal of thought
to the kinds of services that can be provided by a logistics system. A number of attempts
have been made to define and enumerate these services and to measure performance in
terms of what logistics experts refer to as service standards. Heskett, Galskowsky, and
Ivie, for example, stress the following nine categories of logistics service standards:
1) Time from order receipt to order shipment
2) Order size and assortment constraints
3) Percentage of items out of stock
4) Percentage of orders filled accurately
5) Percentage of orders filled within a given number of days from receipt of the
order

6) Percentage of customer orders that arrive in good condition
7) Order cycle time (time from order placement to order delivery)
8) Ease and flexibility of order placement
These logistics service standards are usually quantified in some fashion and then the
manufacturer’s actual performance is measured against these standards.
The second service standard in the list might be set in terms of some minimum quantity
of products, and certain restrictions might be placed on mixing the various products
unless specified minimum quantities of each are ordered.
The third standard—percentage of items out of stock, or stock outs—is almost always set
in terms of percent of items ordered during a given period that cannot be filled from
inventory. The other six service standards in the list can be quantified and used in a
similar fashion.
1.5 Four Key Areas of Interface between Logistics and Channel
Management
Logistics management is subsidiary to the broader area of channel management. In other
words, channel management is a broader more comprehensive element of distribution
strategy than is logistics management. Channel management is involved with the
administration of all of the major channel flows (product, negotiation, ownership,
information, and promotion), whereas logistics is concerned mainly with the product
flow.
But logistics management and channel management are very closely linked and
interdependent because a well-designed and administered marketing channel cannot exist
without an efficient flow of products to the channel members and final target markets, in
the right quantities and at the right times and places. In short, channel management and
logistics management go together hand in hand to provide effective and efficient
distribution.
But such meshing of channel management and logistics management requires good
coordination. This especially applies to four major areas of interface between channel
management and logistics management.
Interfaces between Logistics and Channel Management, Viewed Sequentially
Interface I
Defining what kinds of logistics service standards the channel members want
Interface 2
Making sure the proposed logistics program designed by the manufacturer meets
channel members’ service standards
Interface 3
Selling the channel members on the logistics program
Interface 4
Monitoring the results (in terms of fostering channel member cooperation) once it has been instituted

1.5.1. Defining Logistics Service Standards
In general, the higher the service standards the manufacturer offers, the higher the costs
will be. While well-designed logistics systems and modern technology can keep these
costs under control, it is usually not possible to escape the trade-off of higher costs for
higher service standards completely.
A manufacturer must cover the costs either indirectly in the price it charges for products,
or by passing them along to channel members in the form of service charges.. Thus the
key issue facing the channel manager with respect to defining logistics service standards
is to determine precisely the types and levels of logistics service desired by the channel
members.
In sum, the development of logistics service standards should not be based solely on the
views of the manufacturer; channel members' views should also be incorporated. If this
is done, the set of logistics service standards developed by the channel members actually
want rather than what the manufacturer may think they want. Since channel members in
one way or another way for the logistics services offered by manufacturers, they should
at least have some say in what they are getting for their money.
1.5.2. Evaluating Logistics Program
A logistics program may be offered to channel members as a separate entity or may be
included as a major component of the manufacturer's overall approach for supporting
channel member needs. If the latter is the case, the logistics program may. For example,
be the keystone feature of a channel "partnership" or strategic alliance, or it may play an
important role in a comprehensive distribution programming agreement.
1.5.3. Selling the Channel Members on the Logistics Program
Regardless of how good a manufacturer perceives its logistics program to be, it still must
convince channel members of its value. Stewart made this point succinctly in the decisive
discussion of this topic:
A word of caution! Changes in (physical) distribution must be
palatable (pleasant) to the company's customers (channel members).
Changes which provide cost benefits only to the manufacturer without
corresponding benefits to customers may be more difficult to
implement than those that offer incentives to customers to change.
Stewart went on to suggest several types of appeals, which, if emphasized by the
manufacturer in attempting to sell the logistics program, may help the manufacturer to be
more convincing. Three of theses follow:
A. Emphasize the deduction in out-of-stock occurrences that the new logistics
program will make possible. By minimizing out-of-stock occurrences through an
improved logistics program, sales lost by the channel members will be reduce.
B. Emphasize the reduction in channel member inventories that the new logistics
program will allow. A well-designed and responsive logistics program can mean
shortened channel member order cycles, which in turn can mean lower inventories
carried by the channel members.
C. Emphasize the added manufacturer support for the channel members fostered by
the new logistics program (strengthening the manufacturer-channel member
relationship). A carefully designed logistics program aimed at improving service
to channel members can serve as one of the most tangible signs of the
manufacturer's concern and commitment to the channel members' success. In
presenting a proposed logistics program to the channel members, the

manufacturer should emphasize that the program was conceived to help them (the
channel members) to be more successful.
1.5.4. Monitoring the Logistics System
Clearly, then, logistics systems, once put in place, cannot be simply left alone with the
expectation that they will continue to work well and meet channel member needs
indefinitely. Rather, logistics systems must be continuously monitored, both in terms of
how successfully they are performing for the manufacturer and, just as importantly, how
well they are meeting changing channel member needs.
Thus, as part of an overall attempt to learn about the needs and problems of channel
members, the channel manager should continually monitor the channel members'
reactions to logistics programs. The principal objectives of such monitoring are to
appraise channel members' responses to the program and to find out whether
modifications are needed.
The most effective way of monitoring channel member reactions is to conduct a survey of
a sample of channel members. If the number of channel members is small, it may be
feasible to include all of them.

CHAPTER II
TRANSPORTATION MANAGEMENT
Transportation represents the most important single elements in logistical costs for most
firms. Freight movement typically absorbs two-thirds of the logistics expense. For this
reason, the logistician should have a good understanding of transportation matters.
The five basic transportation modes are Rail, Highway, Water, Pipeline, and Air. The
relative importance of each mode can be measured in terms of:
 System mileage,
 Traffic volume,
 Traffic revenue, and
 The nature of traffic composition.
Generally, an enterprise has three alternative ways to obtain transportation capacity.
9) Private--a private fleet of equipment may be purchased or leased.
10) Contract--specific contracts may be arranged with transport specialists to
provide movement service.
11) Common carriage--an enterprise may engage the services of any legally
authorized transport company that offers point-to – point transfer at specified
charges.
From the logistical system viewpoint, three factors are of primary importance in
establishment of the transport service capability:
a. Cost
b. Speed, and
c. Consistency
The cost of transport accrues from the actual payment for movement between two points,
plus the expenses related to owning in-transit inventory. Logistical systems should be
designed to minimize the transport cost in relation to the total system cost. However, this
does not mean that the most inexpensive method of transportation is always desirable.
Speed of transportation service is the time required to complete a movement between two
locations. Speed and cost are related in two ways:
 Transport specialists capable of providing faster service will charge higher rates.
 The faster the service, the shorter the time interval during which materials and
products are captured in transit.
Consistency of transportation service refers to the variance in time for a number of
movements between the same locations. In essence, how dependable is a given method
of transportation with respect to time? In many ways, consistency of service is the most
important characteristic of transportation.
2.1 Basic Transport Economics & Pricing
Transport economics and pricing are concerned with the factors and characteristics that
determine transport costs and rates. To develop an effective logistics strategy and to
successfully negotiate transport agreements, it is necessary to understand the economics
of the industry. A discussion of transportation economics and pricing required coverage
of three topics:
 The factors that influence transport economics
 The cost structures that influence expense allocation.
 The rate structures that form the foundation for actual customer charges.

2.1.1 Economic Factors
Transport economics is influenced by seven factors. The specific factors are distance,
volume, density, stowability, handling, liability, and markets. In general, the above
sequence reflects the relative importance of each factor.
Distance—is a major influence on transportation cost since it directly contributes to
variable cost, such as labor, fuel, and maintenance. The following figure shows the
general relationship and illustrates two important points.
1. The cost curve does not begin at the origin because there are fixed costs
associated with shipment pickup and delivery regardless of distance.
2. The cost curve increases at a decreasing rate as a function of distance.
This characteristic is known as the tapering principle, which results from the fact that
longer movements tend to have a higher percentage of intercity rather than urban miles.
Generalized relationship between distance and transportation
Volume—like many other logistics activities, transportation scale economies exist for
most movements. This relationship, illustrated in the following figure, indicates that
transport cost per unit of weight decreases as load volume increases. This occurs because
the fixed costs of pickup and delivery as well as administrative costs can be spread over
additional volume. The relationship is limited to the maximum size of the vehicle (such
as a trailer). Once the vehicle is full, the relationship repeats for the second vehicle. The
management implication is that small loads should be consolidated into larger loads to
take advantage of scale economies.
Generalized relationship between weigh and transportation cost/pound.
Price per pound

Density—the third economic factor is product density, which incorporates weight and
space considerations. These are important since transportation cost is usually quoted in
terms of dollars per unit of weight, such as amount per ton or amount per hundredweight
(cwt). In terms of weight and space, an individual vehicle is constrained more be space
than by weight. Once a vehicle is full, it is not possible to increase the amount carried
even if the products is light. Since actual vehicle labor and fuel expenses are not
dramatically influenced by weight, higher density products allow relatively fixed
transport costs to be spread across additional weight. As a result, these products are
assessed lower transport costs per unit weight.
In general, logistics managers attempt to increase product density so that more can be
loaded in a trailer to better utilize capacity. Increased packaging density allows more
units of product to be loaded into the fixed cube of the vehicle. At a certain point, not
additional benefits can be achieved through increased density liquids such as beer or soda
‘weighs out” a highway trailer when it is about half full. As such, the weight limitation is
reached before the volume restriction is met. Nevertheless, efforts to increase product
density will generally result in decreased transportation cost.
Generalized relationship between density and transportation
cost/pound.
Stowability—refers to product dimension and how they affect vehicle (railcar, trailer,
or container) space utilization. Odd sizes and shapes, as well as excessive weight or
length, do not stow well and typically waste space. Although density and stowability are
similar, it is possible to have products with the same density that stow very differently.
Items with standard rectangular shapes are much easier to stow than odd-shaped items.
Stowability is also influenced by the shipment size; sometimes large numbers of items
can be “nested” that might otherwise be difficult to stow in small quantities.
Handling—Special handling equipment may be required for loading or unloading
trucks, railcars, or ships. Furthermore, the manner in which products are physically
grouped together (e.g., taped, boxed, or palletized) for transport and storage also affects
handling cost.
Liability—includes six product characteristics that primarily affect risk of damage and
the resulting incidence of claims. Specific product considerations are susceptibility to
damage, property damage to freight, perishability, and susceptibility to theft,
susceptibility to spontaneous combustion or explosion, and value per pound. Carriers
must either have insurance to protect against possible claims or accept responsibility for
any damage. Shippers can reduce risk, and ultimately the transportation cost, by
improved protective packaging or by reducing susceptibility to loss or damage.
Market Factors—Finally, market factors, such as lane volume and balance, influence
transportation cost. A transport lane refers to movements between origin and destination

points. Balance is also influenced by seasonality such as the movement of fruits and
vegetables to coincide with the growing season. Demand directionality and seasonality
result in transport rates that change with direction and season. Logistics system design
must take this factor into account and add back-haul movement where possible.
2.1.2 Cost Structures
The second dimension of transport economics and pricing concerns the criteria used to
allocate cost components. Cost allocation is primarily the carrier’s concern, but since
cost structure influences negotiating ability, the shipper’s perspective is important as
well. Transportation costs are classified into a combination of categories.
Variable Costs—are those costs that change in a predictable, direct manner in relation
to some level of activity during a time period. Variable costs can be avoided only by not
operating the vehicle. Aside from exceptional circumstances, transport rates must at least
cover variable costs. The variable category includes direct carrier costs associated with
movement of each load. These expenses are generally measured as a cost per mile or per
unit of weight. Typical cost components in this category include labor, fuel, and
maintenance.
Fixed Costs—are those costs that do not change in the short run and must be covered
even if the company is closed down (e.g., during a holiday or a strike). The fixed
category includes carrier costs not directly influenced by shipment volume. For
transportation firms, fixed components include terminals, right-of-way, information
systems, and vehicles. In the short term, expenses associated with fixed assets must be
covered by contributions above variable cost on a per shipment basis. In the long term,
the fixed cost burden can be reduced somewhat by the sale of fixed assets; however, it is
often very difficult to sell rights-of-way or technologies.
Joint Costs—are expenses unavoidably created by the decision to provide a particular
service. For example, when a carrier elects a haul a truckload from point A to point B,
Either the joint cost must be covered by the original shipper from A to B, or a back-haul
shipper must be found. Joint costs have significant impact on transportation charges
because carrier quotations must include implied joint costs based on considerations
regarding an appropriate back-haul shipper and/or back-haul charges against the original
shipper.
Common Costs—this category includes carrier costs that are incurred on behalf of all
shippers or a segment of shippers. Common costs, such as terminal or management
expenses, are characterized as overhead. These are often allocated to a shipper according
to a level of activity like the number of shipments handled (e.g., delivery appointments).
However, allocating overhead in this manner may incorrectly assign costs.
2.1.3 Pricing Strategies
When setting rates to charge shippers, carriers can adopt one or a combination of two
strategies. Although it is possible to employ a single strategy, the combination approach
considers trade-offs between the cost of service incurred by the carrier and the value of
service to the shipper.
Cost-of-Service Strategy—is a “buildup” approach where the carrier establishes a
rate based on the cost of providing the service plus a profit margin. For example, if the
cost of providing a transportation service is Br. 200 and the profit markup is 10 percent,
the carrier would charge the shipper Br. 220. The cost-of-service approach, which
represents the base or minimum transportation charge, is a pricing approach for low-
value goods or in highly competitive situations.

Value-of-Service Strategy—is an alternative strategy that charges a rate based on
perceived shipper value rather than the cost of actually providing the service. For
example, a shipper perceives transporting 1,000 Birr of electronic equipment as more
critical or valuable than 1,000 Br. of coal since the equipment is worth substantially more
than the coal. As such, a shipper is probably willing to pay more to transport it. Carriers
tend to utilize value-of-service pricing for high-value goods or when limited competition
exists.
Combination Strategy—establishes the transport price at some intermediate level
between the cost-of-service minimum and value-of-service maximum. In standard
practice, most transportation firms use such a middle value. Logistics managers must
understand the range of prices and alternative strategies so that they can negotiate
appropriately.
Net Rate Pricing—it is a simplified pricing format. Carriers can replace individual
discount sheets and class tariffs with a single price sheet—and thus make the customer’s
interpretation of the rate-making process much simpler.
Established discounts and accessorial charges are built into the net rates. In other words,
the net rate represents a final price. The goal is to drastically reduce carriers’
administrative costs and directly respond to customer demand to simplify the rate making
process. Carriers thus hope to win over new shippers and solidify current shipper accounts
by taking much of the calculation out of finding a price. Shippers welcome pricing
simplification because it promotes billing accuracy and provides a clear understanding of
how to generate savings in transportation.
 Rating
This section presents the actual pricing mechanics used by carriers and it applies
specifically to common carriers, although contract carriers utilize similar concepts.
Class Rates—in transportation terminology, the price in Birr and cents per
hundredweight to move a specific product between two locations is referred to as the rate.
The rate is listed on pricing sheets or computer files known as tariffs. The term class rate
evolved from the fact that all products transported by common carriers are classified for
pricing purposes. All products legally transported in interregional commerce can be
shipped via class rates.
Determination of common carrier class rates is a two-step process:
The classification or grouping of the product being transported.
The determination of the precise rate (i.e., price) based on the classification of the
product and the origin-destination points of the shipment. Typically, this
procedure is referred to as rate administration.
 Classification—all products transported together are typically grouped into
uniform classifications. The classification takes into consideration the characteristics
of a product or commodity that will influence the cost of handling or transport.
Product with similar density, stowability, handling, liability, and value characteristics
are grouped together into a class, thereby reducing the wide range of possible ratings
to a manageable size. The particular class that a given product or commodity
receives is its rating. The rating is the product's classification placement, which is
used to determine the freight rate. It is important to understand that the classification
does not define the price charged for movement of a product. It refers to a product’s
transportation characteristics in comparison to other commodities.

Products are also assigned different ratings on the basis of packaging. Glass may
have a different rating when shipped loose, in crates, or in boxes than when shipped
in wrapped protective packing.
 Rate Administration—once a classification rating is obtained for a product, the
specific rate must be determined. The rate per hundredweight is usually based on the
shipment origin and destination, although the actual price charged for a particular
shipment is normally subject to a minimum charge and may also be subject to
surcharges or ancillary assessments. Historically, the origin and destination rates
were maintained in notebooks that had to be updated and revised regularly.
In addition to the variable shipment charges on either per hundredweight or a per mile
basis, two additional charges are common for transportation:
D. Minimum charges and
E. Surcharges.
The minimum charge represents the amount a shipper must pay to make a shipment
regardless of weight.
Commodity Rates—when a large quantity of a product moves between two locations
on a regular basis, it is common practice for carriers to publish a commodity rate.
Commodity rates are special or specific rates published without regard to classification.
Exception Rates—exception rates, or exceptions to the classification, are special rates
published to provide shippers lower rates than the prevailing class rate. The original
purpose of the exception rate was to provide a special rate for a specific area, origin-
destination, or commodity when either competitive or high volume movements justified
it.
An aggregate tender rate is utilized when a shipper agrees to provide multiple
shipments to a carrier in exchange for a discount or exception from the prevailing class
rate. The primary objective is to reduce carrier cost by permitting multiple shipment
pickups during one stop at a shipper’s facility or to reduce the rate for the shipper because
of the carrier’s decreased management and marketing expenses.
A limited service rate is utilized when a shipper agrees to perform services typically
performed by the carrier, such as trailer loading, in exchange for a discount. A common
example is a shipper load and count rate, where the shipper takes responsibility for
loading and counting the cases. Another example of limited service is a released value
rate, which limits carrier liability in case of loss or damage. Normally, the carrier is
responsible for full product value if loss or damage occurs in transit.
o Transport Decision Making
Transportation decision making requires the availability of information and the
assignment of knowledgeable, trained individuals to process the information in order to
serve the enterprise’s functional and strategic transportation needs. Information is
provided through a variety of transport documents. Utilization and analysis of the
information are the responsibility of various members of the traffic department.
 Transport Documentation
Several documents are required to perform each transport movement. The three
primary types are bills of lading, freight bills, and shipping manifests.
Bill of Lading—is the basic document utilized in purchasing transport services. It
serves as a receipt and documents commodities and quantities shipped. For this
reason, accurate description and count are essential. In case of loss, damage, or
delay, the bill of lading is the basis for damage claims. According to Charles Taff, the
bill of lading has the following three purposes:

 It serves as a receipt for goods, subject to the classifications and tariffs that
were in effect on the date that the bill of lading was issued.
 It serves as a contract of carriage and identifies the contracting parties and
prescribes the terms and conditions of the agreement.
 It serves as documentary evidence of title.
Freight Bill—represents a carrier’s method of charging for transportation
services performed. It is developed using information contained in the bill of
lading. The freight bill may be either prepaid or collect. A prepaid bill
means that transport cost must be paid prior to performance, whereas a collect
shipment shifts payment responsibility to the consignee.
Shipping Manifest—lists individual stops or consignees when multiple shipments
are placed on a single vehicle. Each shipment requires a bill of lading. The manifest
lists the stop, bill of lading, weight, and case count for each shipment. The objective
of the manifest is to provide a single document that defines the contents of the total
load without requiring a review of individual bills of lading. For single-stop
shipments, the manifest is the same as the bill of lading.

CHAPTER III
TRAFFIC MANAGEMENT
Traffic management is typically the transportation-operating arm of the logistics function.
It has the major responsibility for seeing that the transportation operations are carried out
efficiently and effectively on a daily basis. Given the background on transportation
provided in the previous chapter, this chapter concentrates on the typical decisions and
concerns facing the traffic manager.
3.1 Carrier Selection
Perhaps the first major problem confronting the traffic manager is the selection of the
carrier to move the company’s goods. The choices usually are between for-hire services
and privately owned vehicles. The for-hire services, especially those of common carriers,
must be evaluated on the basis of costs for the service balanced against delivery
performance. There are typically multiple services offered within the multiple modes.
That is, a trucking company may offer common-carrier and contract carrier service.
Choice is not a simple matter of selecting the minimum cost carrier or one that is the
cheapest given certain performance requirements. The traffic manager must look at the
indirect effects of the choice. That is, the cheapest mode is frequently the slowest mode
with the largest shipping-size requirement. Use of such a transport mode results, in high
level of inventory at both ends of the shipment. The best choice is to balance the
inventory costs against the transportation costs to find the minimum total cost.
When selecting between for-hire and private carriage, additional considerations come
into play. The reasons for taking on the investment administrative burden of private
transportation ownership would include:
 Lower costs of transportation
 Better transit times
 Better control over loss and damage.
In general, private (or leased) transportation becomes an attractive alternative when an
adequate volume of freight is to be moved on a regular basis so that at least 80% of the
vehicle’s capacity (in the case of trucking) is utilized on a regular basis.
Of course, carriers may be selected based on a number of factors not directly related to
their cost and performance. These include:
 Goodwill
 Credit
 Reciprocity and
 Long-term relationship with the shipper
3.2. For –Hire Carrier Management
The management of the transportation function is different depending on whether the
carriers used are some form of for-hire or privately controlled types. Rate negotiation,
documentation, freight-bill auditing, and shipment consolidation are just a few of the
concerns when the method of transportation is for-hire. Dispatching, load balancing, and
routing and scheduling are some of the concerns when a privately controlled fleet must be
managed. Often the traffic manager must manage a mixture of both. Consider for-hire
carrier management first.
Rate Negotiation—negotiating favorable rates with carriers is an activity that is
likely to consume a major portion of the traffic manager’s time. Published rates by
common and contract carriers should never be considered as firm. Many of them are

average rates derived from average conditions. There are at least four typical
circumstances under which lower rates might be negotiated with for-hire carriers.
Competition—when there are significant rate differences between competing
transport modes or competing services within the same mode, the traffic manager may
use the threat of switching carriers to gain a more favorable rate. The carrier may be
willing to take a lower margin in order to retain the business.
Similar Products—where there is a difference in rates between essentially
similar products moving between the same points even by the same carrier, the traffic
manager may argue that his or her product deserves the same rate. The products should
be similar as to weight, cube, fragility, and risk. Comparing similar products is also a
useful way of setting a rate where one doesn’t otherwise exist.
Increased Volume—when the traffic manager can argue that a lower rate
will result in increased volume for the carrier because the company is in a better
competitive position, the rate reduction may be granted if the total profits for the carrier
will be higher than at the previous rate.
Large Volume—one of the convincing arguments for rate reduction is that the
company can offer the carrier a substantial volume in trade for a lower-than-average rate.
The rate reduction is usually argued on the basis of a high volume flowing between
specific points. The carrier may grant the rate reduction if it can be demonstrated that all
costs can be covered and it does not create a problem with other customers that may want
the same low rate but do not have the high movement volume to justify it.
DOMESTIC DOCUMENTATION
Three documents play a key role in the movement of domestic freight. These are:
 The bill of lading,
 The freight bill, and
 The freight claim form.
These documents facilitate the movement of freight, as well as establish liability for it.
Bill of lading and freight bill were discussed in the previous chapter; here we see the
freight claim form.
Freight claims—generally, two types of claims are made on for-hire carriers. The
first arises from the carrier’s legal responsibilities as a common carrier, and the second
occurs because of overcharges.
Loss, damage, and delay claims—a common carrier is responsible for moving freight
with “reasonable dispatch” and without loss or damage. The bill of lading specially
defines the limits of carrier responsibility.
Overcharges—a claim against a carrier for overcharges results from some form of
misbilling. A number of reasons for misbilling have been cited:
application of incorrect classification,
failure to use the correct rates,
use of incorrect distance factors or basing points,
simple arithmetic errors,
carrier misrouting of joint-line shipments,
duplicate collection of freight charges,
errors in determining item weights, and
differences in interpretations of rules and tariffs.

Normal bill auditing may detect these errors before payment is made, and a corrected
freight bill may be issued. Otherwise, up to 3 years is allowed for overcharge claims on
inter-region shipments.
The reparation claim results from a type of overcharge. Because common carriers are
required by law to charge reasonable rates, the published rate paid by the shipper may
later be declared by the regulatory agency or the court to be unreasonable.
INTERNATIONAL DOCUMENTATION
Importing and exporting goods requires many more documents than domestic shipments
since multiple carriers, languages, governments, and currencies are often involved. A
listing of the more popular documents and their purposes follows:
Exporting
Bill of lading—receipt for the cargo and a contract for transportation between the shipper
and the carrier.
Dock receipt—used to transfer accountability for cargo between domestic and
international carrier.
Delivery instructions—provide specific instructions to the inland carrier regarding
delivery of the goods.
Letter of credit—financial document guaranteeing payment to the shipper for the cargo
being transported.
Consular invoice—used to control and identify goods shipped to particular countries.
Commercial invoice—bill for the good from the seller to the buyer.
Certificate of origin—used to assure the buying country precisely in which country the
goods were produced.
Insurance certificate— A document issued by an insurance company/broker that is used
to verify the existence of insurance coverage under specific conditions granted to listed
individuals. Insurance certificate issued by an insurer to a shipper as evidence that a
shipment of merchandise is covered under a marine policy.
Transmittal letter—a list of the particulars of the shipment and a record of the
documents being transmitted, together with instructions for disposition of the documents.
Importing
Arrival notice—informs the party receiving the shipment of the estimated arrival time of
the shipment along with some details of the shipment.
Customs entries—a number of documents describing the merchandise and its origin and
duties that aid in expediting clearance of the goods through customs, with or without the
immediate payment of duties.
Carrier’s certificate and release order—certifies to customs the owner or consignee of
the cargo.
Delivery order—issued by the consignee to the ocean carrier as authority to release the
cargo to the inland carrier.
Freight release—evidence that the freight charges for the cargo have been paid.
Preparation of this paperwork is facilitated by the many foreign-trade specialists who can
aid the shipper and the receiver of goods moving internationally.
Auditing Freight Bills
For-hire carriers have a responsibility not to overcharge or undercharge shippers for their
services. The traffic manager is especially concerned that his company not be
overcharged. Errors in computing rates can occur due to incorrect rates, product
descriptions, weights, and routing.

Traffic departments may audit their own freight bills. They justify this effort based on
the projected rebates that can be found. Companies are now aided in this effort by
elaborate rating and routing computer programs. Alternately, companies may contract
with an outside agency to audit the bills. The outside firm will typically work on a
percentage of the overcharges that are found.
Tracing and Expediting
At times the traffic manager may have a need to know where a shipment is while in
transit. A common reason is that a shipment has not arrived by a promised delivery time
and a customer is anxious for delivery. Many common carriers now have extensive
computer networks to locate shipments anywhere within their transport systems. Tracing
is usually part of the regular service offered by common carriers to their customers.
Expediting is an action taken by a traffic department to move a shipment through the
transportation system more rapidly than normal. Carriers may either provide rush service
on shipments free of charge or offer expedited service for premium.
Small Shipments
The traffic manager is usually looking for ways that he or she can reduce the total
transportation bill for the company. Small shipments represent an area of opportunity.
As small shipments are consolidated into large shipments, substantial cost reductions can
be achieved. The smaller the shipment size, the greater the benefit from consolidation.
However, there is typically a disadvantage to consolidating shipments. That is, in order
to build large quantities to ship at one time, orders must be held. This may degrade
customer service and cause some loss in revenue to the company.
3.2 PRIVATELY CONTROLLED TRANSPORTATION
A company typically acquires the means of transportation by outright equipment
ownership or through leasing. Not all modes are likely to be privately controlled. Few
companies would consider owning or leasing a pipeline or a railroad. Some companies
do have their own ships or aircraft that are used primarily for freight movement. Usually
the firm that controls its own transportation is controlling a fleet of trucks. Because of
this, our attention will mainly be directed at the problems associated with trucking
operations.
One of the primary reasons for fleet ownership or leasing is to realize lower costs and
better delivery performance than is possible through the use of common carriers.
Decision problems of the traffic manager generally focus on fleet utilization. Improved
utilization translates into fewer trucks and lower fleet-operating costs.
Routing--is the problem of directing vehicles through a network of highways, rivers,
or airways. Movement is by the shortest distance, time, or combination of these.
Although various route combinations can be tested by manual methods, when the
problem involves many possible routes and/or the problem must be solved frequently,
mathematical approaches that can be computerized are attractive. One popular method is
called the shortest-route method, and it lends itself to either hand calculation or computer
programming.
The routing problem may also involve multiple origin and destination points. It then
must be solved considering the supply-capacity restrictions of the origin points, the
demand requirements of the destination points, as well as the costs associated with the
various routes.

Vehicle Scheduling--when a firm owns transport equipment, it frequently encounters
the problem of dispatching the equipment from a home-base point to a series of stop off
points and then returning to the home base. Such a problem is common to local-airline
freight-delivery operations, school-bus routing, and replenishment deliveries to
supermarkets from a central warehouse.
The planning problem involved is one of determining:
F. The number of vehicles needed,
G. Their sizes,
H. The stop off/pick up points on a given vehicle's route, and
I. The sequences of stop off/pick up points.
For the typical scheduling problem involving many points and many vehicles, the number
of ways in which the vehicles can be used is enormous. Because of this, principles that
result in good solutions can be very useful.
Practical designs can usually be achieved by applying the following rules:
 Begin with the points farthest from the depot.
 Find the next available point that is nearest to the center of the points in the
cluster. Add this point to the cluster (vehicle) if the vehicle capacity is not
exceeded.
 Repeat step 2 until the vehicle capacity is reached.
 Sequence the stops in the form of a teardrop.
 Find the next farthest unassigned stop from the depot and repeat steps 2-4.
 Continue until all points are assigned.
Forming routes in this manner can give consistently good route designs.
Dispatching--dispatching trucks to make pickups and deliveries might be
considered the same problem as vehicle scheduling. The primary difference is that in
vehicle scheduling it is assumed that the volume and the stops are known before the
schedule is developed. In practice, this is not always the case.
Route Sequencing--at times the traffic manager may be less concerned about
the route design than about minimizing the number of trucks needed to meet a schedule.
This requires sequencing routes in a manner that will minimize the idle time in the
schedule and therefore the number of trucks needed.
Load Balancing--a common concern when managing a private fleet is the
balancing of the forward hauls with back haul. A truck may be loaded to full capacity
outbound from its depot to make deliveries and return empty once deliveries are made.
For better utilization of equipment, traffic managers have become aware of using the
back haul to move goods back to the depot, usually from the company's own vendors.

CHAPTER IV
MARKETING CHANNEL SYSTEMS
4.1 Marketing Channel Concepts

Individual consumers and corporate/organizational buyers are aware that literally (kale
bekal) thousands of goods and services are available through a very large number of
diverse channel outlets. What they might not be as well aware of is the fact that the
channel structure, or the set of institutions, agencies, and establishments through which
the product must move to get to them, can be amazingly complex. Usually, combinations
of institutions specializing in manufacturing, wholesaling, retailing, and many other areas
join forces in marketing channel arrangements to make possible the delivery of goods to
industrial users or customers and to final consumers.
From the outset, it should be recognized that not only do marketing channels satisfy
demand by supplying goods and services at the right place, quantity, quality, and price:
but they also stimulate demand through the promotional activities of the units (e.g.,
retailers, manufacturers’ representatives, sales offices, and wholesalers) constituting
them. Therefore, the channel should be viewed as an orchestrated network that creates
value for end-users by generating form, possession, time, and place utilities.
Channels of distribution evolve to serve customer needs. Furthermore, channel
members’ roles and the context of their cooperation may vary from one context to
another.
A major focus of marketing channel management is delivery. It is only through
distribution that public and private goods and services can be made available for use or
consumption. Producers of such goods and services are individually capable of
generating only form or structural utility for their products and services.
As marketers continue to face hostile, unstable, and competitive environments,
distribution will play an increasingly important role. Companies are already moving into
new distribution channels that match up with market segments more precisely and
effectively.
Growing Importance of Marketing Channels—as a strategic marketing tool, the field
of marketing channels had, for many years, taken something of a “back seat” to the other
three strategic areas of the marketing mix: product, price, and promotion. Many firms
marketing channel strategy as somewhat of a “leftover” after the more “important”
product, price, and promotional strategies had been considered.
But in recent years this relative neglect of marketing channels has been changing—in
many cases to a keen interest in the area. Why has this happened? At least five
developments underlie this shift in emphasis:
Greater difficulty of gaining a sustainable competitive advantage
Growing power of distributors, especially retailers in marketing channels
The need to reduce distribution costs
The new stress on growth
The increasing role of technology
a. Functions & Flows in Marketing Channels
Functions in Marketing Channels

Manufacturers, wholesalers, and retailers as well as other channel members exist in
channel arrangements to perform one or more of the following generic functions:
 Carrying of inventory
 Demand generation, or selling
 Physical distribution
 After sale service and
 Extending credit to customers.
In getting its goods to end-users, a manufacturer must either assume all these functions or
shift some or all of them to channel intermediaries.
The foregoing discussion underscores three important principles in the structure of
marketing channels:
J. One can eliminate or substitute institutions in the channel arrangement.
K. The functions these institutions perform, however, cannot be eliminated.
L. When institutions are eliminated, their functions are shifted either forward or
backward in the channel and, therefore, are assumed by other members.
To the extent that the same function is performed at more than one level of the marketing
channel, the workload for the function is shared by members at all levels. For example,
manufacturers, wholesalers, and retailers may all carry inventory. This duplication and
redundancy in the channel may increase the distribution cost. However, the increase in
cost is justifiable to the extent that it may be necessary in order to provide goods to
customers at the right quantity, time, and place. If the increase in cost cannot be justified,
then redundancy is wasteful and inefficient
Flows in Marketing Channels

A flow is a set of functions performed in sequence by channel members. Therefore, the
term flow is descriptive of movement. There are eight universal flows or functions.
Physical possession, ownership, and promotion are typically forward flows from
producer to consumer. Each of these moves”down” the distribution channel—a
manufacturer promotes its product to a wholesaler, which in turn promotes it to a retailer,
and so on. The negotiation, financing, and risking flow move in both directions whereas
ordering and payment are backward flows.
Negotiations are prevalent throughout the channel. Manufacturers, wholesalers, and

retailers negotiate product assortments, prices, and promotions. Some channel members,
such as manufacturer representatives and sales representatives, specialize in negotiations.
They do not carry title or take physical possession of the goods.
It is important to note that one member of the channel system holds any time inventories;
a financing operation is under way.
Channel Member Specialization in Marketing Functions and Participation in
channel Flows—all of the flows or functions in the distribution channel are
indispensable—at least one institution or agency within the system must assume
responsibility for each of them if the channel is to operate at all. But it is not necessary
that every institution participate in the furtherance of all of the flows. Certain agencies
specialize in one or more of the flows, as indicated in the following figure.
CHANNEL INSTITUTIONS PARTICULAR TO SELECTED

MARKETING FLOWS

The use of these and other intermediaries largely boils down to their superior efficiency
in the performance of basic marketing tasks and functions. Marketing intermediaries,
through their experience, specialization, contacts, and scale, offer other channel members
more than they can usually achieve on their own in terms of their superior efficiency in
the performance of basic marketing tasks and functions.
From a managerial perspective, participation by channel members in different flows is
akin to their being members of a number of different channels, such as an ownership or
title channel, and a promotions channel. The task of channel member coordination
should be extended to these different channels. Often, new product introduction by
manufacturers fails as a result of lack of synchronization of physical and promotional
flows or channels. Although national promotion may vigorously proceed on schedule,
delays in transportation and lack of distribution warehouse space may impede the
availability of the product at retail outlets.
The key to coordination of the channel flows is information sharing among channel
members. Information exchange is inherent in each channel flow. Manufacturers,
wholesalers, retailers, banks, and other channel members deploy information and
telecommunication systems technology to ensure the exchange of information required to
coordinate the channel and enhance customer service.
b. Analyzing Marketing Channel Structures

Marketing channels evolve over time in response to forces of change, and this evolution
process is continuous. The basic economic rationale for the emergence of channel
intermediaries and institutional arrangements can be understood in terms of the need for
exchange and exchange efficiency, minimization of assortment discrepancies, and the
facilitation of search procedures. But such a rationale provides little information as to
why channels are structured one way or another to satisfy this need. More specifically,
how can one account for the variations in channel structure in terms of the number of
levels and the extent of specialization of functions or flows?
i. Channels as a Network of Systems
Channels consist of interdependent institutions and agencies, in other words, that their
members are interdependent relative to task performance. A channel can be viewed as a
system because of this interdependency—it is a system of interrelated and interdependent
components engaged in producing an output. A distribution channel comprises two
major sectors:
 Commercial and
 End user
The commercial subsystem includes a set of vertically aligned marketing institutions and
agencies, such as manufacturers, wholesalers, and retailers. Each commercial channel
member is dependent on other institutions for achieving its goal(s). A producer is
dependent on others in getting its product to the end-user and, thereby, in gaining its
objectives.
The marketing channel has boundaries, as all systems do. These include:
1 Geographic (market area),
2 Economic (the capability to handle a certain volume of goods or services), and
3 Human (the capability to interact)
Furthermore, a channel, like other systems, is part of a larger system that provides it with
inputs and imposes restrictions on its operation. A channel exists as part of an economy’s
distribution structure that encompasses other channels. The economy’s distribution
structure is a subsystem of the national environment, which is a subsystem of the
international environments. Both the national and international environments encompass
physical, economic, social, cultural, and political subsystems that influence the
development of and impose constraints on the focal channel system.
It is important here to recognize that marketing channels evolve and function in dynamic
environments. A channel structure is determined in part by the environment in which the
channel operates.
The survival and growth of certain channel members and the demise of others is best
explained by viewing the channel as an open system. Channel members must adapt to a
changing environment. As they alter their functions and adjust their organizations and
programs to cope with the changing environment, they impact the entire channel
organization. Therefore, the evolution of channel systems is an ongoing adaptation of
organizations to economic, technological, and sociopolitical forces both within the
channel and in the external environment.
ii. Service Outputs as Determinants of Channel Structure

To explain the key elements that determine how channels are structured, Bucklin has
developed a rather elaborate theory, the rudiments of which are outlined briefly here. In
essence, Bucklin argues that channel members perform various marketing functions to
meet expressed demand for service outputs. In order to remain viable in the long run,
channel members must perform these functions and participate in channel flows in a
manner conducive to the reduction of consumers’ search, waiting time, storage, and other
costs. Other things being equal (especially price), end-users will prefer to deal with a
marketing channel that provides a higher level of service outputs.
Bucklin has specified four generic service outputs:
Spatial convenience (or market decentralization),
Lot size,
Waiting or delivery time, and
Product variety (or assortment depth and breadth).
Spatial Convenience—provided by market decentralization of wholesale and/or retail

outlets increases consumers’ satisfaction by reducing transportation requirements and
search costs.
Community shopping centers and neighborhood supermarkets, convenience stores,
vending machines, and gas stations are but a few examples of channel forms designed to
satisfy consumer’s demand for spatial convenience.
Lot Size— the number of units to be purchased at each transaction is dependent on the
customers’ buying power.
Waiting Time—the third service output identified by Bucklin, is defined as the time
period that the industrial or household consumer must wait between ordering and
receiving goods.
Product Variety—the wider the breadth of assortment or the greater the product variety
available to the consumer, the higher the output of the marketing channel and the higher
the distribution cost, because greater assortment entails carrying more inventory
The main goal underlying all of these service outputs is the delivery of service quality.
Service quality is defined as the gap between the consumers’ expectations and
perceptions; that is, the quality of a service will be rated high when the service delivered
exceeds the consumer’s expectations, and it will be rated poor when it does not meet
them. High quality should be designed into the channel service system in response to the
customer or end-user’s expectations in designing each elements of the service.
These service outputs are achieved through the performance of the marketing functions or
flows. The decisions on the amount of output to be delivered by channel members are
directly influenced by:
 The resource base,
 Capabilities of channel members to perform various marketing functions, and
 The kind of service outputs desired by the end-users.
he result of the interaction between channel member resources and end-user requirements
is a channel structure or arrangement that is capable of satisfying the needs of both
channel members and end-users. Under reasonably competitive conditions and low
barriers to entry, the channel structure that evolves over the long run should comprise a
group of institutions so well adjusted to the structure’s task and environment that no other
type of arrangement could create greater returns (e.g., profits or other goals), or more
end-user satisfaction per Birr of product cost. This arrangement is called the normative

structure. The determination of channel structure by service output is illustrated in the
following figure.
The Determination of Channel Structure

Lot Size
Service Waiting Time End-User Demand
Output Market Decentralization for
Levels Product Variety Service Outputs
Organization of
The Marketing
Functions or
Flows
Channel Structure
(institution and
establishment
arrangement)
The more service outputs required by end-users, the more likely it is that intermediaries
will be included in the channel structure. Thus, if end-users wish to purchase in small
lots, then there are likely to be numerous intermediaries performing sorting operations
between mass producers and the final users. If waiting time is to be reduced, then
decentralization of outlets must follow, and, therefore, more intermediaries will be
included in the channel structure. The same type of reasoning can be applied to all of the
service outputs. As service outputs increase, however, costs will undoubtedly increase,
and these higher costs will tend to be reflected in higher prices to end-users.
End-users are usually faced with a choice between channel structures that provide few
service outputs bet relatively low prices and structures in which both service outputs and
prices are high. The more the end-users participate in the marketing flows (in terms of
search, physical possession, financing, and the like), the more they should be
compensated for their efforts. Where channel service outputs are low, end-users are
supposedly compensated for their additional efforts through the lower relative prices
provided by such channel structures.
Thus, when construction machinery manufacturers purchase brake parts in carload

quantities from firms and are willing to wait several months for delivery from distant
plants, they can expect to pay lower prices than if they were to order the same parts from
a local warehouse distributor who is willing to ship in smaller quantities and to deliver
the parts much more quickly. The lower the level of service outputs provided, the greater
the economy that can be achieved by channel members, and vice versa.
The final structure that emerges is, therefore, a function of the desire of channel members
to achieve economies of scale relative to each of the marketing flows and the demand of

consumers for various service outputs. An optimal structure is one that minimizes the
total costs of the system (both commercial and end-user) by appropriately adjusting the
level of the service outputs. Within a channel, members can attempt to shift the degree of
their participation in each flow in order to provide the greatest possible service output at
the lowest possible cost. But such shifting calls for a tremendous amount of coordination
and cooperation. This is one reason the management of channel systems is so critical.
4.4 Channel Management, Channel Relationships, and Competitive

Dynamics
Channel Management
Economic battles involving producers versus producers or intermediaries versus
intermediaries will not, in long run, determine the ultimate victors in the marketplace.
Rather, the relevant unit of competition is an entire distribution system comprising a
network of interrelated institutions and agencies.
What do Hallmark, Bata Shoe, Caterpillar Tractor, Sony, and Compaq Computer all have
in common? What these companies all share are solid ties to distribution channels that
distinguish them from competitors and allow them to exploit their product lines and
individual brand advantages. By cleverly managing their chosen channels, these
companies have successfully differentiated themselves in their respective markets.
Now for the million-dollar question—how can a firm distinguish itself with distribution
channel that will set it apart from its rivals? The following are strategies that can furnish
this kind of competitive advantage.
THE EXCLUSIVITY ROUTE
Exclusivity provides the supplier with tighter “image control,” that is, display, sale
installation, or repair. It also regulates the number and type of intermediaries, which is a
key advantage in managing the network. Exclusivity may put the channel in financial
jeopardy if insufficient demand exists to sustain a typical dealer’s cash flow. Moreover,
if some end-users defect to new or different channels to buy the same category of
product, this route may also fail.
ENTER THE SECOND BRAND
Another classic differentiation strategy is for a supplier to develop unique second brands
for distribution channels with markedly different price positions in a market.
Unfortunately, if the second brand is not noticeably different from the primary brand, this
strategy can backfire. Obviously, people will buy the discount brand believing that they
are getting the same thing for less, thus biting into the primary brand sales.
LET’S BE UNIQUE
Another way to differentiate is by using nontraditional channels. Although unique
channels may limit a brand’s coverage, for niche marketers in a market they can represent
a way to gain market access and customer attention. Going through distribution channels
where competitors are not present can powerfully differentiate a company from rivals and
will often avoid head-to-head price wars.
CALL THE EXPERTS
A way to rise above adversaries in an industry is to create and nurture dealers,
distributors, or agents who are rated a cut above the rest in regard to customer-service
quality. This nurturing requires time, commitment, and follow-up. Developing these
relationships within the distribution channel allows for differentiation from competitors

because the distribution partners work together cooperatively to ultimately meet customer
needs.
Channel Relationships: From Transactions to Partnerships and
Strategic Alliances
In every marketing channel, the members that do business together have some kind of
working relationships.
TYPOLOGY OF RELATIONSHIP MARKETING
Relationship
Nature
Ad Hoc Ongoing
Strategic Alliance Partnering

Relationship Relationship
Relationship
Purpose
Transaction Cooperative
Operational Relationship Relationship
The dichotomy is helpful in defining the range of relationship types in the channels
according to their nature (ad hoc or ongoing), and purpose (strategic or operational).
Transactional relationships occur when the customer and supplier focus on the timely
exchange of basic products for highly competitive prices. Partnering relationships, or
partnerships, occur through extensive social, economic, service, and technical ties over
time. The intent in a strategic partnership is to lower total costs and/or increase value for
the channel, thereby achieving mutual benefit. Partnering relationships require
communication, cooperation, trust, and commitment among channel members.
Channel partnership is an in-depth collaboration between suppliers and their

intermediaries or between suppliers and their customers. Parties must agree on
objectives, policies, and procedures for ordering and physically distributing products.
They must experiment with, and in some cases, zealously adopt radically new ways of
sharing responsibilities for order fulfillment, inventory management, distribution,
purchasing, and post-sales service.
Generally strategic alliances and partnerships require certain conditions in order to be
effective:
 Recognition of the interdependence of channel members,
 Close cooperation between channel members,
 Careful specification of the roles and functions, that is, joint rights and
responsibilities each play in the marketing channel,
 Coordinated effort focused on a common goal(s), and

 Trust and communication between channel members.
Competitive Dynamics
Viewing channels as competitive units is significant for all companies, including those
that market their products through a number of different channels and those that develop
assortments of goods and services by purchasing from a variety of supplies. The way
individual manufacturers coordinate their activities with the various intermediaries with
whom they deal, and vice versa, will determine the viability of one type of channel
alignment versus other channel alignments made up of different institutions and agencies
handling similar or substitutable merchandise.
If, within a given marketing channel, an institution or agency does not see fit to
coordinate effectively and efficiently with other members of the same network, but rather
pursues its own goals in an independent, self-serving manner, it is possible to predict the
eventual demise of the channel alignment.
Myopic channel members are most concerned about the dealings that take place with
those channel members immediately adjacent to them, from whom they buy and to whom
they sell. In this sense, such channel intermediaries are not, in fact, functioning as
enlisted components of a distribution system, but rather are acting individually as
independent markets, with each one choosing those products and suppliers that best help
him serve the target groups for whom he acts as a purchasing agent.
This notion of each channel intermediary acting as an independent market must be
qualified and analyzed with regard to total channel performance. Although an
“independent” orientation on the part of any channel member may indeed be warranted at
times, it is put into effect only at the risk of sacrificing the levels of coordination
necessary for overall channel effectiveness, efficiency, growth, and long-run survival.
CHAPTER V
CHANNEL PARTICIPANTS

5.1 An Overview of the Channel Participants
The basic dichotomy between channel memberships is based on performance or
nonperformance of the negotiatory functions (buying, selling, and transferring title).
Participants who engage in these functions are linked together by the flows of negotiation
or ownership and are therefore members of the contactual organization (the marketing
channel).
The three basic divisions of the marketing channel are depicted as;
 Producers and manufacturers,

 Intermediaries,
o Wholesale and
o Retail intermediaries
 Final users
o Consumer and
o Industrial users
In the context of the management perspective we are using, it is more appropriate to view
final users as target markets that are served by the commercial subsystem of the channel.
The commercial channel, then, by definition excludes final users.
Since facilitating agencies do not perform negotiatory functions, they are not members of
the channel. They do, however, participate in the operation of the channel by performing
other functions. Six of the more common types of facilitating agencies are:
 Transportation firms
 Storage firms
 Advertising agencies
 Financial firms
 Insurance firms
 Marketing research firms.
5.2 Producers and Manufacturers
For our purpose producers and manufacturers consist of firms that are involved in
extracting, growing, or making products. This category includes forestry and fishing,
mining, construction, manufacturing, and some service industries.
The range of producing and manufacturing firms is enormous, both in terms of the
diversity of goods and services produced and the size of the firms. It includes firms that
make everything from straight pins to jet planes and that vary in size from a one-person
operation to giant multinational corporations with many thousands of employees and
multibillion-Birr sales volumes.
But even with all this diversity, a thread of commonality runs through producing and
manufacturing firms: All exist to offer products that satisfy the needs of markets. For
the needs of those markets to be satisfied, the products of producing and manufacturing
firms must be made available to those markets. Thus, producing and manufacturing
firms must somehow see that their products are distributed to their intended markets.
Most producing and manufacturing firms, both large and small, however, are not in a
favorable position to distribute their products directly to their final user markets. Quite
often, they lack the requisite expertise and the economies of scale (and/or scope) to

perform all of the distribution tasks necessary to distribute their products effectively and
efficiently to their final users.
5.3 Intermediaries
Intermediaries (or middlemen) are independent businesses that assist producers and
manufacturers and final users in the performance of negotiatory functions and other
distribution tasks. Intermediaries thus participate in the negotiation and/or ownership
flows. They operate basically at two levels:
 Wholesale and
 Retail.
5.3.1 Wholesale Intermediaries
Wholesalers consist of businesses that are engaged in selling goods for resale or business
use to retail, industrial, commercial, institutional, professional, or agricultural firms, as
well as to other wholesalers. Also included are firms acting as agents or brokers in either
buying goods for or selling them to such customers.
Types and Kinds of Wholesalers—the most comprehensive and commonly used
classification of wholesalers is:
M. Merchant wholesalers
N. Agents, brokers, and commission merchants
O. Manufacturers’ sales branches and offices
The following figure provides a schematic diagram of these three types of wholesalers.
Schematic Overview of the Three Major Types of Wholesalers
All
wholesale
firms
Independent Manufacturer
Middlemen owned
Merchant Agents, brokers, Manufacturers’

Wholesalers and sales branches
Commission and offices
merchants
Merchant Wholesaler—are firms engaged primarily in buying, taking title to,

usually storing, and physically handling products in relatively large quantities and then
reselling the products in smaller quantities to retailers, to industrial, commercial, or
institutional concerns, and to other wholesalers.
They go under many different names, such as:
Wholesalers,

Jobber,
Distributor,
Industrial distributor,
Supply house,
Assembler,
Importer,
Exporter, and others.
Agents, Brokers, and Commission Merchants —are also independent
middlemen who do not, for all or most of their business, take title to the goods in which
they deal, but who are actively involved in negotiatory functions of buying and selling
while acting on behalf of their clients. They are usually compensated in the form of
commissions on sales or purchases.
Some of the more common types are known in their industries as:
 Manufacturers’ agents,
 Commission merchants,
 Brokers,
 Selling agents, and
 Import and export agents.
Manufacturers’ Sales Branches and Offices —are owned and operated by
manufacturers but are physically separated from manufacturing plants. They are used
primarily for the purpose of distributing the manufacturer’s own products at wholesale.
Some have warehousing facilities where inventories are maintained, while others are
merely sales offices. Some of them also wholesale allied and supplementary products
purchased from other manufacturers.
DISTRIBUTION TASKS PERFORMED BY MERCHANT
WHOLESALERS
Merchant wholesalers serve manufacturers as well as retailers and other customers. They
have survived as intermediaries in the marketing channel because, as specialists in the
performance of distribution tasks, they can operate at higher levels of effectiveness and
efficiency.
Modern, well-managed merchant wholesalers are especially well suited for performing
the following types of distribution tasks for manufacture
6) Providing for market coverage
7) Making sales contacts
8) Holding inventory
9) Processing orders
10) Gathering market information
11) Offering customer support
Market Coverage—is provided by merchant wholesalers to manufacturers because the
markets for the products of most manufacturers consist of many customers spread over
large geographical areas. To have good market coverage so that their products are
readily available to customers when needed, manufacturers have relied increasingly on
merchant wholesalers to secure the necessary market coverage at reasonable cost.
Sales Contact—is a valuable service provided by merchant wholesalers. For
manufacturers, the cost of maintaining an outside sales force is quite high. If a
manufacturer’s product is sold to many customers over a large geographical area, the cost
of covering the territory with its sales force can be prohibitive. By using wholesalers to
reach all or a significant portion of their customers, manufacturers may be able to reduce

substantially the costs of outside sales contacts because their sales force would be calling
on a relatively small number of wholesalers rather than the much larger number of
customers.
Holding Inventory—is another crucial task performed by wholesalers for manufacturers.
Merchant wholesalers take title to, and usually stock, the products of the manufacturers
whom they represent. By doing so, they can reduce the manufacturers’ financial burden
and reduce some of the manufacturers’ risk associated with holding large inventories.
Moreover, by providing a ready outlet for manufacturers’ products, wholesalers help
manufacturers to better plan their production schedules.
Order Processing—performed by wholesalers is very helpful to manufacturers because
many customers buy in small quantities. Yet manufacturers both large and small find it
extremely inefficient to attempt to fill large numbers of small orders from thousands of
customers. Wholesalers, on the other hand, are specifically geared to handle small orders
from many customers. By carrying the products of many manufacturers, wholesalers’
order processing costs can be absorbed by the sale of a broader array of products than that
of the typical manufacturer.
Gathering Market Information—is another task of substantial benefit to manufacturers.
Wholesalers are usually quite close to their customers geographically and in many cases
have continuous contact through frequent sales calls on their customers. Hence, they are
in a good position to learn about customers’ product and service requirements. Such
information, if passed on to manufacturers, can be valuable for product planning, pricing,
and the development of competitive marketing strategy. Some wholesalers have even
begun to use the Internet to provide information to link suppliers and customers together.
Customer Support—is the final distribution task that wholesalers provide for
manufacturers. Products may need to be exchanged or returned, or a customer may
require setup, adjustment, repairs, or technical assistance. For manufacturers to provide
such services directly to large numbers of customers can be very costly. Instead,
manufacturers can use wholesalers to assist them in providing these services to
customers. These extra support by wholesalers, often referred to as value added services,
plays a crucial role in making wholesalers vital members of the marketing channel from
the stand points of both the manufacturers who supply the and the customers to whom
they sell.
In addition to performing the six distribution tasks for manufacturers, merchant
wholesalers are equally well suited to perform the following distribution tasks for their
customers:
 Assuring product availability
 Providing customer service
 Extending credit and financial assistance
 Offering assortment convenience
 Breaking bulk
 Helping customers with advice and technical support
Product Availability--providing for the ready availability of products, is probably the
most basic distribution task performed by wholesalers for customers. Because of the
closeness of wholesalers to their customers and/or their sensitivity to customers’ needs,
they can provide a level of product availability that many manufacturers could not easily
match.

Customer Service—customers often require services
such as delivery, repairs, or warranty work. By
making these services available to their customers,
wholesalers save their customers effort and expense.
Credit and Financial Assistance—are provided by wholesalers in two ways. First, by
extending open account credit to customers on products sold, wholesalers allow
customers to use products in their business before having to pay for them. Second, by
stocking and providing ready availability for many of the items needed by their
customers, wholesalers significantly reduce the financial inventory burden their
customers would bear if they had to stock all the products themselves.
Assortment Convenience—refers to the wholesaler’s ability to bring together from a
variety of manufacturers an assortment of products, greatly simplifying customers’
ordering tasks. Instead of having to order separately from dozens or even hundreds of
manufacturers, customers can turn to one or a few general line or specialist wholesalers
who can provide them with all or most of the products they need.
Breaking Bulk—many customers do not use large quantities of products, or they may
prefer to order only a small quantity at a time. Many manufacturers find it uneconomical
to fill small orders and will establish minimum order requirements to discourage them.
By buying large quantities from manufacturers and breaking down these “bulk” orders
into smaller quantities, wholesalers provide customers with the ability to buy only the
quantity they need.
Advice and Technical Support--many products, even those that are not considered
technical, may still require a certain amount of technical advice and assistance for proper
use, as well as advice on how they should be sold. Wholesalers, especially through a
well-trained outside sales force, are able to provide this kind of technical and business
assistance to customers.
DISTRIBUTION TASKS PERFORMED BY AGENT WHOLESALERS
Agent wholesalers do not take title to the products they sell. Also, as a rule, they do not
perform as many distribution tasks as a typical merchant wholesaler. Manufacturers’
agents (also referred to as manufacturers’ representatives or “reps”), for example,
specialize mainly in performing the market converge and sales contact distribution tasks
for manufacturers. In effect, the manufacturers’ agents substitute for the manufacturer’s
outside sales force. Thus, they are especially valuable to manufacturers who are not
capable of fielding their own sales forces, or to supplement the selling efforts of those
manufacturers who do have their own sales forces but who find it uneconomical to use
them for certain product categories or territories.
Manufacturers’ agents generally represent several manufacturers at the same time and
operate in a wide range of product and service categories such as house wares, hardware,
chemicals, food-processing equipment, electronics and electrical components, steel, and
packaging. Services sold by manufacturers’ agents include painting, planting services,
machinery rebuilding, and a variety of business services.
DISTRIBUTION TASKS PERFORMED BY MERCHANT WHOLESALERS AND THEIR EFFECT ON THE MARKETING
CHANNEL
Distribution tasks performed Distribution task performed

For manufacturers for customers

Market coverage Product availability
Sales contact Merchant Customer service

Credit and
Inventory holding wholesale financial assistance
rs Assortment
Order processing perform convenience
All of these
Market information Breaking bulk
Distributi Advice and technical
Customer support on tasks support
Result?
More effective and

Efficient marketing channels
(Reflected in margins
earned by wholesalers)
Selling Agents—another
type of agent wholesaler, usually perform more distribution tasks
than manufacturers’ representatives. In fact, they may handle virtually the entire
marketing and sales effort for the manufacturers they represent. Thus, although selling
agents usually do not physically hold inventory or take title, they may perform many if
not most of the other distribution tasks, such as providing for market coverage, sales
contact, order processing, marketing information, product availability, and customer
services.
Brokers—is usually defined as a go-between, or a party who brings buyers and sellers
together so that a transaction can be consummated. In the strictest definition sense, then,
a broker would only perform one distribution task—providing market information. Yet,
in practice, some brokers may perform many if not most of the distribution tasks, so that
for all practical purposes there is little to distinguish them from manufacturers’
representatives or selling agents.
of significance mainly in agricultural markets. They actually perform a
Commission Merchants
wide range of distribution tasks including physically holding inventory (though not
taking title), providing market coverage, sales contact, breaking bulk, credit, and order
processing. These distribution tasks are performed in the course of the commission
merchant’s acting on behalf of his or her principal (producers or manufacturers).
5.3.2 Retail Intermediaries
Retailers consist of business firms engaged primarily in selling merchandise for personal
or household consumption and rendering services incidental to the sale of goods.

RETAILERS’ GROWING POWER IN MARKETING CHANNELS—the power and
influence of retailers in marketing channels have been growing. This trend follows three
major developments:
 Increase in size and buying power
 Application of advanced technologies
 Use of modern marketing concepts and techniques
Increase in size and buying power—since size translates into power, as retailers become
larger; their capacity to influence the actions of other channel members (wholesalers and
manufacturers) also becomes greater.
Giant retailers with their enormous buying power, large market shares, and sophisticated
managements have been referred to as power retailers and category killers, terms that
convey the dominant positions these retailers enjoy.
Application of advanced technologies—the many technological innovations of recent
years have not gone unnoticed by retailers. Indeed, retailers have become astute
followers and (more important) ardent users of many new technologies that have made
them more sophisticated and demanding channel members.
Use of modern marketing concepts and techniques—stressing customer orientation
whereby the firm that tries to adapt its offerings to more precisely meet the needs of
customers, has been around since the 1950s. But it was not until the 1990s that the
marketing concept really caught on in retailing. Retailers had traditionally been more
supplier (vendor) driven than market driven. As the 1990s unfolded, however, more and
more retailers in many lines of trade discovered the marketing concept and the power of
modern marketing methods for surviving and prospering in fiercely competitive retail
markets.
DISTRIBUTION TASKS PERFORMED BY RETAILERS
The role of retailers in performing distribution task is summarized by Charles Y.Lazarus:

The role of the retailer in the distribution channel,
regardless of his size or type, is to interpret the demands of
his customers and to find and stock the goods these
customers want, when they want them, and in the way they
want them. This adds up to having the right assortments at
the time customers are ready to buy.
Elaborating on Lazarus’s list, we may specify the distribution tasks for which retailers are
especially well suited, as follows:
 Expanding market coverage and increasing sales contact. Offering manpower and
physical facilities that enable producers/manufacturers and wholesalers to have
many points of contact with consumers close to their places of residence.
 Promotion. Providing personal selling, advertising, and display to aid in selling
suppliers’ products.
 Communication. Interpreting consumer demand and relaying this information
back through the channel.
 Bulk breaking. Dividing large quantities into consumer-sized lots, thereby
providing economies for suppliers (by accepting relatively large shipments) and
convenience for consumers.

 Storage. Offering storage, so that suppliers can have widely dispersed inventories
of their products at low cost and enabling consumers to have close access to the
products of producers/manufacturers and wholesalers.
 Risk bearing. Removing substantial risk from the producer/manufacturer (or
wholesaler) by ordering and accepting delivery in advance of the season.
CHAPTER VI
DEVELOPING THE MARKETING CHANNEL DESIGHN
6.1 Channel Design

There is wide variation in the use of the term design as it applies to the marketing
channel. Some authors use the term as a noun to describe channel structure. Others use
it to denote the formation of a new channel from scratch, while still others use it more
broadly to include modifications to existing channels. Finally, design has also been used
synonymously with the term selection, with no distinction made between the two.
Such variations in usage can lead to confusion. Therefore, before proceeding further we
will define more precisely what we mean by design as it applies to the marketing
channel:
Channel design refers to those decisions involving the development of new
marketing channels where none had existed before, or to the modification of
existing channels.
The first key point to note in this definition is that channel design is presented as a
decision faced by the marketer. In this sense channel design is similar to the other
decision areas of the marketing mix, namely, product price, and promotion. In other
words, when viewed from a management perspective, the marketer must make decisions
in each of these areas of the marketing mix.
A second point is that channel design is used in the broader sense to include either setting
up channels from scratch or modifying existing channels. In fact, modification or
redesign of existing channels sometimes referred to in recent jargon, as reengineering the
marketing channel, is actually in practice a more common occurrence than setting up
channels from scratch.
Third, when used in its verb form, the term design implies that the marketer is
consciously and actively allocating the distribution tasks in an attempt to develop an
efficient channel structure. The term is not used to refer to channel structures that have
simply evolved. In short, design means that management has taken an active role in the
development of the channel.
Fourth, the term selection, as we will be using it, refers to only one phase of channel
design—the selection of the actual channel members.
Finally, the term channel design also has a strategic connotation because channel design
should be used as an integral part of the firm’s attempt to gain a differential advantage in
the market. The using channel design as a strategic tool for gaining a differential
advantage should be uppermost in the channel manager’s thinking when designing
marketing channels.
6.2 A Paradigm of the Channel Design
The channel design decision can be broken down into seven phases or steps.
3. Recognizing the need for a channel design decision
4. Setting and coordinating distribution objectives
5. Specifying the distribution tasks
6. Developing possible alternative channel structures
7. Evaluating the variables affecting channel structure
8. Choosing the “best” channel structure
9. Selecting the channel members
Phase 1: Recognizing the Need for a channel Design Decision
Many situations can indicate the need for a channel design decision. Among them are the
following:

 Developing a new product or product line. If existing channels for other
products are not suitable for the new product or product line, a new channel may
have to be set up or the existing channels modified in some fashion.
 Aiming an existing product at a new target market. A common example of
this situation is a firm’s introduction of a product in the consumer market after it
as sold in the industrial market.8
 Making a major change in some other component of the marketing mix. For
example, a new pricing policy emphasizing lower prices may require a shift to
lower-price dealers such as discount mass merchandisers.
 Establishing a new firm, from scratch or as a result of mergers or
acquisitions.
 Adapting to changing existing intermediaries might make their policies so as
to inhibit the attainment of the firm’s distribution objectives. For example, if
intermediaries begin to emphasize their own private brands, then the manufacturer
may want to add new distributors who will promote the company’s products more
enthusiastically.
 Dealing with changes in availability of particular kinds of intermediaries.
 Opening up new geographic marketing areas (territories).
 Facing the occurrence of major environmental changes. These changes may
be in the economic, sociocultural, competitive, technological, or legal spheres.
 Meeting the challenge of conflict or other behavioral problems. For example,
in some instances conflict may become so intense that it is not possible to resolve
it without modifying the channel. A loss of power by a manufacturer to his or her
distributors may also foster the need to design an entirely new channel. Further,
changing roles and communication difficulties may confront the marketer with
channel design decisions.
 Reviewing and evaluating. The regular periodic reviews and evaluations
undertaken by a firm may point to the need for changes in the existing channels
and possibly the need for new channels.8
This list, although by no means comprehensive, offers an overview of the more common
conditions that may require the channel manager to make channel design decisions. It is
important to be familiar with this list because channel design decisions are not
necessarily obvious, especially those involving modification rather than the setting up of
new channels.
Phase 2: Setting and Coordinating Distribution Objectives

Having recognized that a channel design decision is needed, the channel manager should
try to develop a channel structure, whether from scratch or by modifying existing
channels that will help achieve the firm’s distribution objectives efficiently. Yet quite
often at this stage of the channel design decision, the firm’s distribution objectives are not
explicitly formulated, particularly since the changed conditions that created the need for
channel design decisions might also have created the need for new or modified
distribution objectives. It is important for the channel manager to evaluate carefully the
firm’s distribution objectives at this point to see if new ones are needed. An examination
of the distribution objectives must also be made to see if they are coordinated with
objectives and strategies in the other areas of the marketing mix (product, price, and
promotion), and with the overall objectives and strategies of the firm.

In order to set distribution objectives that are well coordinated with other marketing and
firm objectives and strategies, channel managers need to perform three tasks:
P. They should familiarize themselves with the objectives and strategies in the other
marketing mix areas and any other relevant objectives and strategies of the firm.
Q. They should set distribution objectives and state them explicitly.
R. They should check to see if the distribution objectives they have set are congruent
with marketing and other general objectives and strategies of the firm.
Becoming Familiar with Objectives and Strategies.

Whoever is responsible for setting distribution objectives should also make an effort to
learn which existing objectives and strategies in the firm may impinge on the distribution
objectives to be set. In practice, often the same individual(s) who set(s) objectives for
other components of the marketing mix will do so for distribution. But even in this case,
it is necessary to “think through” the interrelationships of the various marketing
objectives and policies.
Setting Explicit Distribution Objectives

Distribution objectives are essentially statements describing the part that distribution is
expected to play in achieving the firm’s overall marketing objectives. That is, to make
products available to the chosen/targeted market at the lowest possible cost.
Checking for Congruency

A congruency check in the context of channel design involves verifying that the
distribution objectives do not conflict with objectives in the other areas of the marketing
mix (product, price, and promotion) or with the overall marketing and general objectives
and strategies of the company. In order to make such a check, it is important to examine
the interrelationships and hierarchy of objectives and strategies in the firm.
Interrelationships and Hierarchy of Objectives and Policies in

the Firm

Firm’s overall objectives
And strategies
General marketing objectives

And strategies
Product Pricing Promotion Distribution

Objectives
Objectives objectives Objectives
And and and and
Strategies Strategies Strategies Strategies
In the above figure, objectives and strategies for the four components of the marketing
mix are connected via two-way arrows. This meant to convey the idea that these areas
are interrelated. Hence, objectives and strategies pursued in any of these areas must
generally be congruent with the other areas.
The above figure also suggests a hierarchy of objectives and strategies in the sense that
objectives and strategies in each area of the marketing mix must also be congruent with
higher-level marketing objectives and strategies. These in turn must be congruent with
the even higher set of overall objectives and strategies of the firm.
Checking for congruency in this fashion is particularly important when setting

distribution objectives because distribution objectives can have a substantial long- term
impact on the firm, especially if the distribution objective departs significantly from
established objectives and strategies.
Phase 3: Specifying the Distribution Tasks

After the distribution objectives have been set and coordinated, a number of distribution
tasks (functions) must be performed if the distribution objectives are to be met. The
channel manager should, therefore, specify explicitly the nature of these tasks.
Over the years marketing scholars have discussed numerous lists of marketing tasks
(functions). These lists generally included such activities as buying, selling,
communication, transportation, storage, risk taking, financing, breaking bulk, and others.
The kinds of tasks required to meet specific distribution objectives must be precisely
stated, such as the following to make the products readily available:
 Gather information on target market shopping patterns
 Promote product availability in the target market
 Maintain inventory storage to assure timely availability
 Compile information about product features
 Provide for hands-on tryout of product
 Sell against competitive products

 Process and fill specific customer orders
 Transport the product
 Arrange for credit provisions
 Provide product warranty service
 Provide repair and restringing service
 Establish product return procedure
Phase 4: Developing Possible Alternative Channel Structures

Having specified in detail the particular distribution tasks that need to be performed to
achieve the distribution objectives, the channel manager should then consider alternative
ways of allocating these tasks. The allocation alternatives (possible channel structures)
should be in terms of the following three dimensions.
Number of levels in the channel
Intensity at the various levels, and
Types of intermediaries at each level
Number of Levels
The number of levels in a channel can range from one levels—which is the most
direct (manufacturer---user)—up to four levels and occasionally even higher.
The number of alternatives that the channel manager can realistically consider for
this structural dimension is often limited to no more than two or three choices. For
example, it might be feasible to consider going direct (one-level), using one
intermediary (two-level), or possibly two intermediaries (three-level).
These limitations result from a variety of factors such as the particular industry practices,
nature and size of the market, availability of intermediaries, and other variables.
Intensity at the Various Levels
Intensity refers to the number of intermediaries at each level of the marketing channel.
Traditionally this dimension has been broken into three categories:
1 Intensive-- (sometimes termed saturation) means that as many outlets as possible
are used at each level of the channel. Many consumer convenience goods and
industrial operating supplies fit this category.
2 Selective—means that not all possible intermediaries at a particular level are
used, but rather that those included in the channel are carefully chosen.
Consumer shopping goods are often in this category.
3 Exclusive—is actually a way referring to a very highly selective pattern of
distribution? In this case only one intermediary in a particular market area is
used. Specialty goods often fit this category.
The intensity of distribution dimension is a very important aspect of channel structure

because it is often a key factor in the firm’s basic marketing strategy and will also reflect
the firm’s overall corporate objectives and strategies.
Generally, if a firm’s basic marketing strategy emphasizes mass appeal for its products it
will most likely have to develop a channel structure that stresses intensive distribution,
whereas a marketing strategy that stresses more narrow segmented marketing will most
probably call for a more selective channel structure.
Types of Intermediaries

The third dimension of channel structure deals with the particular types of intermediaries
to be used (if any) at the various levels of the channel. In the previous chapter we
discussed different types of intermediaries available. The emphasis of the channel
manager’s analysis at this point should focus on the basic types of distribution tasks
performed by these intermediaries.
Phase 5: Evaluating the Variables Affecting Channel
Structure
Having laid out several possible alternative channel structures, the channel manager
should then evaluate a number of variables to determine how they are likely to influence
various channel structures.
Although there are a myriad of such variables, six basic categories can be formed in the
analysis of alternative channel structures:
 Market variables
 Product variables
 Company variables
 Intermediary variables
 Environmental variables
 Behavioral variables
In the course of discussing the variables in these categories, we will often cite a number
of heuristics (rules of thumb) that relate these variables to channel structure. An example
of one such heuristic is as follows:
If a product is technically complex, the manufacturer should sell directly to its user
instead of through intermediaries.
Here a product variable (technical complexity) seemingly yields a simple prescription for
channel structure. It would be nice if things were this simple, but unfortunately such is
not the case.
With this caveat in mind, we turn to a discussion of these six categories of variables and
some of the related heuristics relevant to choosing channel structure.
Market variables
All of modern marketing management including channel management is based on the
underlying philosophy of the marketing concept, which stresses customer (market)
orientation. In developing and adapting the marketing mix, then, marketing managers
should take their basic cues from the needs and wants of the target markets at which they
are aiming. Hence, just as the products a firm offers, the prices it charges, and the
promotional messages it employs should closely reflect the needs and wants of the target
market, so too should the structure of its marketing channels. Market variables are
therefore the most fundamental to consider when designing a marketing channel.
Four basic subcategories of market variables are particularly important in influencing

channel structure. They are:
Market Geography - refers to the geographical size of markets and their physical
location and distance from the producer or manufacturer. From a channel design
standpoint, the basic tasks that emerge when dealing with market geography are the
development of a channel structure that adequately covers the markets in question and
provides for an efficient flow of products to those markets.
A general heuristic for relating market geography to channel design can be stated at this
point:

The greater the distance between the manufacturer and its markets, the higher the
probability that the use of intermediaries will be less expensive than direct distribution.
Market Size - the number of customers making up a market (consumer or industrial)
determines the market size. From a channel design standpoint, the larger the number of
individual customers, the larger the market size.
The usual operational measures of market size are the actual number of potential
consumers or firms in the consumer and industrial markets, respectively. Birr volume is
typically not a good measure of market size because of the wide variations in Birr
volume; that is, it is possible to have high Birr volumes from a small number of
customers and vice versa. Only if Birr volume is highly correlated with the number of
customers will it serve as a reliable measure of market size.
A very general heuristic about market size relative to channel structure is as follows:
If the market is large, the use of intermediaries is more likely to be needed. Conversely,
if the market is small, a firm is more likely to be able to avoid the use of intermediaries.
Market Density - the number of buying units (consumers or industrial firms) per unit
of land area determines the density of the market. A market having 1,000 customers in
an area of 100 square miles is denser than one containing the same number of customers
in an area of 500 square miles.
In general, the less dense the market, the more difficult and expensive is distribution.
This is particularly true for the flow of goods to the market, but it also applies to the flow
of information. Consequently, a typically cited heuristic for market density and channel
structure is as follows:
The less dense the market, the more likely it is that intermediaries will be used. Stated
conversely, the greater the density of the market, the higher the likelihood of eliminating
intermediaries.
Market Behavior - refers to the following four types of buying behaviors:
 How customers buy,
 When customers buy,
 Where customers buy, and
 Who does the buying?
Each of these patterns of buyer behavior may have a significant effect on channel
structure. The following table provides some examples. Here again we should keep in
mind that the heuristics shown in the table are merely rough indicators of what is typical.
There are many exceptions to these heuristics under differing sets of circumstances. The
material in the table should be seen as providing illustrative examples only; and not as a
source of reference for choosing a channel structure.
Buying Habits Corresponding Channel Structure Heuristics

How
Customers typically buy Use long channels (perhaps several levels
in of intermediaries) to reach the market.
very small quantities.
When Add intermediaries to the channel to perform

Buying is highly seasonal. the storage function, thereby reducing peaks
and valleys in production.

Where Eliminate wholesale and retail intermediaries
Consumers increasingly and sell direct.
tend to shop at home.
Who Distribute through retailers who successfully
Consumer market: cater to both spouses
Husband and wife are
generally both involved in
the purchase Direct distribution for greater control of sales
Industrial market: Many force to successfully reach all parties
individuals influence the Responsible for making purchase decisions.
purchasing decision.
Product Variables
Product variables are another important category to consider in evaluating alternative
channel structures. Some of the most important product variables are:
Bulk and Weight—heavy and bulky products have very high handling and shipping
costs relative to their value. The producer of such products should therefore attempt to
minimize these costs by shipping only in large lots to the fewest possible points.
Consequently, the channel structure for heavy and bulky products should, as a general
rule, be as short as possible—usually direct from producer to user. The major exception
to this occurs when customers buy in small quantities and need quick delivery. In this
case it may be necessary to use some form of intermediary.
Perishability—products subject to rapid physical deterioration (such as fresh foods)
and those that experience rapid fashion obsolescence are considered to be highly
perishable. The necessary condition of channel design in this case is rapid movement of
the product from production to its final user to minimize the risks attendant to high
perishability. The following heuristic is appropriate;
When products are highly perishable, channel structures should be designed to provide
for rapid delivery from producers to consumers.
When producers and consumers are close, such channel structures can often be short.
When greater distances are involved, however, the only practical and economical way to
provide the necessary speed of delivery may be by using several intermediaries in the
channel structure.
Unit Value—In general, the lower the unit value of a product, the longer the channels
should be. This is because the low unit value leaves a small margin for distribution costs.
Such products as convenience goods in the consumer market and operating supplies in
the industrial market typically use one or more intermediaries so that the costs of
distribution can be shared by many other products that the intermediaries handle, thus
creating economies of scale and scope.
Degree of Standardization—custom-made products go directly from the producer
to the user, but as products become more standardized, the opportunity to lengthen the
channel by including intermediaries increases.
Technical Versus Nontechnical—in the industrial market, a highly technical
product will generally be distributed through a direct channel. The overriding reason for
this is that the manufacturer needs sales and service people who are capable of
communicating the product’s technical features to potential customers and who can

provide continuing liaison, advice, and service after the sale is made. In consumer
markets, relatively technical products such as personal computers are usually distributed
through short channels for the same reasons.
Newness—many new products in both consumer and industrial markets require
extensive and aggressive promotion in the introductory stage to build primary demand.
Usually, the longer the channel, the more difficult it is to achieve this kind of promotional
effort from all of the channel members. Consequently, in the introductory stage, a shorter
channel is generally viewed as an advantage for gaining product acceptance. Further, the
degree of selectivity also tends to be higher for new products because a more carefully
selected group of intermediaries is more likely to provide more aggressive promotion.
Company Variables
The most important company variables affecting channel design are:
Size—in general, the range of options for different channel structures is a positive
function of a firm’s size. The power bases available to large firms—particularly those of
reward, coercion, and expertise—enable them to exercise a substantial amount of power
in the channel. This gives large firms a relatively high degree of flexibility in choosing
channel structures, compared to smaller firms. Consequently, the larger firm’s capacity
to develop channel that at least approach an optimal allocation of distribution tasks is
typically higher than for smaller firms.
Financial Capacity—generally, the greater the capital available to a company, the
lower is its dependence on intermediaries. In order to sell directly to ultimate consumers
or industrial users, a firm often needs its own sales force and support services or retail
stores, warehousing, and order processing capabilities. Larger firms are better able to
bear the high cost of these facilities. There are, of course, exceptions to this pattern,
particularly when direct mail-order channels are used or more recently in the case of
electronic channels utilizing the Internet. In both of these cases, even small firms with
very limited financial capacities can find it feasible to sell directly to ultimate consumers.
Managerial Expertise—some firms lack the managerial skills necessary to perform
distribution tasks. When this is the case, channel design must of necessity include the
services of intermediaries, which may include wholesalers, manufacturers’
representatives, selling agents, brokers, or others. Over time, as the firm’s management
gains experience, it may be feasible to change the structure to reduce the amount of
reliance on intermediaries.
Objectives and Strategies—Marketing and general objectives and strategies (such
as a desire to exercise a high degree of control over the product and its service) may limit
the use of intermediaries. Further, such strategies as an emphasis on aggressive
promotion and rapid reaction to changing market conditions will constrain the types of
channel structures available to those firms employing such strategies.
Intermediary Variables
The key intermediary variables related to channel structure are:
Availability—in a number of cases, the availability of adequate intermediaries will
influence channel structure.
Costs—the cost of using intermediaries is always a consideration in choosing a channel
structure. If the channel manager determines that the cost of using intermediaries is too
high for the services performed, the channel structure is likely to minimize the use of
intermediaries.

Services—the services offered by intermediaries, is closely related to the problem of
selection.
Environmental Variables
Environmental variables may affect all aspects of channel development and management.
Economic, sociocultural, competitive, technological, and legal environmental forces can
have a significant impact on channel structure. Indeed the impact of environmental
forces is one of the more common reasons for making channel design decisions.
Behavioral Variables
When choosing a channel structure, the channel manager should review the behavioral
variables. For example, developing more congruent roles for channel members can
reduce a major cause of conflict. Giving more attention to the influence of behavioral
problems that can distort communications fosters a channel structure with a more
effective communications flow.
By keeping in mind the power bases available, the channel manager ensures that the final
choice of a channel structure is more likely to reflect a realistic basis for influencing
channel members. A channel manager who needs a very high level of control to achieve
his or her distribution objectives may find that the legitimate power base should serve as
the basis for the channel structure. These and many other implications of behavioral
variables may in particular instances be relevant for choosing an appropriate channel
structure.
Phase 6: Choosing the “Best” Channel Structure

In theory, the channel manager should choose an optimal channel structure alternative.
Such a structure would offer the desired level of effectiveness in performing the
distribution tasks at the lowest possible cost. If the firm’s goal is to maximize its long-
term profits, an optimal channel structure would be completely consistent with that goal.
In reality, choosing an optimal channel structure, in the strictest sense of the term, is not
possible. To do so would require the channel manager to have considered all possible
alternative channel structures and to be able to calculate the exact payoffs associated with
each alternative structure in terms of some criterion (usually profit). The channel
manager would then choosing the one alternative offering the highest payoff.
Why is this not possible? First, as we pointed out in the section on Phase 4, management
is not capable of knowing all the possible alternatives. The amount of information and
time necessary to develop all possible alternative channel structures for achieving a
particular distribution objective would be prohibitive. Moreover, even if management
were willing to expend this time and effort, it would have no way of knowing when it had
actually specified all of the possible alternatives.
Second, even if it were possible to specify all possible channel structures precise
methods do not exist for calculating the exact payoffs associated with each of the
alternative structures.
Approaches for Choosing Channel Structure
1. Characteristics of Goods and Parallel Systems Approach
First laid out in the late 1950s by Aspinwall, this approach places the main emphasis for
choosing a channel structure on product variables, arguing that all products may be
described in terms of the following five characteristics;

 Replacement rate—the rate at which a good is purchased and consumed by users in
order to provide the satisfaction a consumer expects from the product.
 Gross margin—the difference between the lain-in cost and the final realized sales
price. (This includes the sum of all gross margins as products move through the
channel.)
 Adjustment—services applied to goods in order to meet the exact needs of the
consumer.
 Time of consumption—the measured time of consumption during which the product
gives up the utility desired.
 Searching time—a measure of average time and distance from the retail store.
2. Financial Approach
Lambert offers another approach, developed in the 1960s, which argues that the most
important variables for choosing a channel structure are financial:
Examination of the process of choosing a trade channel leads to the conclusion that the
choice is determined primarily by financial rather than what are generally thought of as
marketing considerations. This is shown to be the case regardless of whether the firm has
adequate or limited financial resources to expand marketing operations. It is equally true
whether the firm is contemplating shortening the channel, which requires more capital, or
lengthening the channel, which will make funds formerly used in distribution available for
other employment.
According to Lambert, choosing an appropriate channel structure is analogous to an
investment decision of capital budgeting. Basically this decision involves comparing
estimated earnings on capital resulting from alternative channel structures in light of the
cost of capital to determine the most profitable channel.
3.Transaction Cost Analysis Approach
Transaction cost analysis (TCA), based on the work of Williamson, has become the
focus of much attention in the marketing channels literature since the mid 1970s. TCA
addresses the choice of marketing channel structure only in the most general case
situation of choosing between the manufacturer performing all of the distribution tasks
itself through vertical integration versus using independent intermediaries to perform
some or most of the distribution tasks.
The main focus of TCA is on the cost of conducting the transactions necessary for a firm
to accomplish its distribution tasks. Transaction costs are essentially the costs associated
with performing tasks such as gathering information, negotiating, monitoring
performance, and a variety of others.
4.Management Science Approaches
It would certainly be desirable if the channel manager could take all possible channel
structures, along with all the relevant variables, and “plug” these into a set of equations,
which would then yield the optimal channel structure. Such an approach is possible in
theory. In fact, some pioneering attempts have been made to use management science
methods, such as operations research, simulation, and decision theory, in an effort to
design optimal marketing channels.
5.Judgmental—Heuristic Approaches
As the name suggests, these approaches to choosing channel structure rely heavily on
managerial judgment and heuristics, or rules of thumb. There are, however, variations in
the degree of precision of judgmental-heuristic approaches. Some attempt to formalize
the decision-making process to some degree, whereas others attempt to incorporate cost
and revenue data.

Phase 7: Selecting the Channel Members
The actual selection of firms that will become marketing channel members is the last
phase of channel design. We should point out, however, that selection decisions are
frequently necessary even when channel structure changes have not been made; that is,
selection decisions may or may not be the result of channel design decisions.
Two other points about the relationship of channel design to selection should also be
mentioned. First, an obvious point that is sometimes forgotten is that firms with a direct
(manufacturer—user) channel structure do not have to worry about selection decisions.
Because their allocation of the distribution tasks did not specify the use of intermediaries,
they need not select any. The second point deals with the relationship between the
structural dimensions of intensity. As a general rule, the greater the intensity of
distribution, the less the emphasis on selection.
The Selection Process
The channel member selection process consists of the following three basic steps:
 Finding prospective channel members
 Applying selection criteria to determine the suitability of prospective channel
members
 Securing the prospective channel members as actual channel members
CHAPTER VII
CONFLICT IN THE MARKETING CHANNEL
7.1 Conflict versus Competition

Conflict in the marketing channel should not be confused with competition, which also
occurs in the channel. Competition is behavior that is object-centered, indirect, and
impersonal. Conflict, on the other hand, is direct, personal, and opponent-centered
behavior. Thus, in a conflict situation it is not the forces of the impersonal market that
firms attempt to overcome, but other firms in the system with whom they are in conflict.
Schmidt and Kochan make this distinction quite well:
In the process of both competition and conflict the goals (of the various
units) are perceived to be incompatible, and the units are striving
respectively to attain these goals. In this context, competition occurs
where, given incompatible goals, there is no interference with one
another’s attainment. The essential difference between competition and
conflict is in the realm of interference or blocking activities.
7.2 Courses of Channel Conflict
Analysis and research have pointed to many possible causes of channel conflict. Such
causes as misunderstood communications; divergent functional specializations and goals
of channel members, as well as failings in joint decision-making processes have been
cited. Other causes include differing economic objectives, ideological differences of
channel members and inappropriate channel structure. Still other studies found conflict
associated with such factors as differing perceptions, leadership styles, financial terms of
sale, and goals.
Although the research just cited appears to suggest that the causes of channel
conflict are extremely diverse, in essence most can be placed into one or more of
the following seven categories of underling causes of channel conflict:
Role incongruities,
Resource scarcities,
Perceptual differences,
Expectational differences,
Decision domain disagreements,
Goal incompatibilities, and
Communication difficulties.
Role Incongruities—a role is a set of prescription defining what the behavior
of position members should be. When applied to the marketing channel any given
member of the channel has a series of roles that he or she is expected to fulfill.
Resource Scarcities—sometimes conflict stems from a disagreement between
channel members over the allocation of some valuable resources needed to
achieve their respective goals.
A common example of this is the allocation of retailers between a manufacturer

and wholesalers. The retailers are viewed by both the manufacturer and the
wholesaler as valuable resources necessary to achieve their distribution
objectives. Frequently the manufacturer will decide to keep some of the higher
volume retailers as house accounts (stores to which the manufacturer will sell
direct). This leads to objections by the wholesaler over what is considered to be
an unfavorable allocation of this resource (the retailers). This kind of dispute
often leads to conflict.
Another important example of resource scarcity as a cause of conflict involves
site selections in franchised channels. In this case, the resource is the market in
which particular franchisees operate.

Perceptual Differences—perception refers to the way an individual selects
and interprets environmental stimuli. The way such stimuli are perceived,
however, is often quite different from objective reality. In a marketing channel
context, the various channel members may perceive the same stimuli but attach
quite different interpretations to them.
A common example of this in the marketing channel is in the use of point-of –
purchase (POP) displays. The manufacturer who provides these usually perceives
POP as a valuable promotional tool needed to move products off retailer’s
shelves. The retailer, on the other hand, often perceives point-of-purchase
material as useless junk that serves only to take up valuable floor space.
A manufacturer of hardwood floors, for example, produced what it thought were
beautiful four-color brochures illustrating the use of its floors in magnificent
homes. These were meant to be given to customers at the point of purchase as a
way of conveying the quality, beauty, and range of applications for the flooring.
Several thousands of these brochures were sent to a major home center retailer
along with a floor display. But rather put the brochures out with the display, the
retailer used them mainly to crumple up as carton packing material for
merchandise returns!
Expectational Differences—various channel members have expectations
about the behavior of other channel members. In practice, these expectations are
predictions or forecasts concerning the future behaviors of other channel
members. Sometimes these forecasts turn out to be inaccurate, but the channel
member who makes the forecast will take action based on the predicted outcomes.
By doing so, a response behavior can be elicited from another channel member,
which might not have occurred in the absence of the original action. In effect, a
self-fulfilling prophecy is created.
Decision Domain Disagreements—channel members explicitly or
implicitly carve out for themselves an area of decision making that they feel is
exclusively theirs. In contractual channel systems, such as franchise, these
decision domains are quite explicit and are usually spelled out meticulously in the
franchise contract.
A traditional and pervasive example of this has been in the area of pricing
decisions. Many retailers feel that pricing decisions are in their decision-making
domain. Some of the manufacturers supplying these retailers, however, believe
that they should have a say in price-making decisions.
Goal Incompatibilities—each member of the marketing channel has his or
her own goals. When the goals of two or more of the members are incompatible,
conflict can result. Incompatible goals often arise between channel members.
Communication Difficulties—communication is the vehicle for all
interactions among the channel members, whether such interactions are
cooperative or conflicting. A foul-up or breakdown in communications can
quickly turn a cooperative relationship into a conflicting one.
Channel Conflict and Channel Efficiency

Channel analysts have postulated several possible relationships between channel
conflict and channel performance. The most common view is that the effects of
conflict on channel performance are generally negative and even a threat to the
survival of the channel while others have discussed possible positive effects.

The key question about the effects of conflict from the channel manager’s point of
view is how conflict affects channel efficiency. Does conflict reduce the
efficiency with which distribution objectives are achieved? Can it increase
efficiency? Might it not have any effect at all? While little empirical data on
these questions are available, some conceptual models have been presented on
how conflict can affect channel efficiency. Before discussing these relationships,
however, we will define more precisely what we mean by channel efficiency.
Channel efficiency may be defined as the degree to which the total investment in
the various inputs necessary to achieve a given distribution objective can be
optimized in terms of outputs.
The greater the degree of optimization of inputs in carrying out a distribution
objective, the higher the efficiency is, and vice versa. These inputs can include
any thing necessary to achieve the distribution objective.
Negative Effect—Reduced Efficiency---A negative relationship indicates that
the level of conflict increases when channel efficiency declines.
No Effect—Efficiency Remains Constant---The existence of conflict has caused
no change in channel efficiency. Hence, the effect of conflict on input levels
necessary to achieve distribution objectives is insignificant.
Positive Effect—Efficiency Increased---Here conflict is shown to cause an
increase in channel efficiency. The conflict might serve as an impetus for either
or both of the channel members to reappraise their respective policies.
7.3 Managing Channel Conflict
Our previous discussion on conflict in the marketing channel points to the
following four generalizations:
 Conflict is an inherent behavioral dimension in the marketing channel.
 Given the numerous causes from which conflict may stem, it is a pervasive
phenomenon in marketing channels.
 Conflict can affect channel efficiency.
 Various levels of conflict may have both negative and positive effects on channel
efficiency, or possibly no effect.
Some approaches for managing conflict have been discussed in the literature.
These will be discussed in terms of helping the manager to:
o Detect conflict or potential conflict,
o Appraise the possible effects of conflict, and
o Resolve channel conflict.
Detecting Channel Conflict—In practice, conflict is usually spotted after it is
well developed and obvious. This “after the fact” approach to the detection of
channel conflict is unsatisfactory because the potentially negative effects of the
conflict may have gotten a head start and may already be festering. So, it is better
if the channel manager has some kind of “early warning system.”
In what was perhaps the first study aimed at finding a method for early detection
of channel conflict, Foster and Shuptrine suggest that a channel member can help
spot potential conflict areas by surveying other channel member’s perceptions of
his or her performance. The research on which their suggestion is based
measured retailers’ perceptions of wholesalers’ and manufacturers’ performances
in five distribution related tasks. In order to be of real value, however, the study
noted that these perceptual measurements would have to be taken on a regular and

continuing basis. Such regular surveys of channel members to help spot potential
conflict are just as relevant today as they were when Foster and Shuptrine
suggested this approach over a quarter of a century ago. But today with the
availability of the internet and widespread use of e-mail, such surveys can be done
much more quickly and easily electronically.
Independent research firms can also conduct surveys of channel members to
identify areas of conflict. Not only might the outside research firms or consultant
have greater expertise in designing and executing this type of study, but also the
independence of the outside party helps to avoid bias.
Surveys of channel members’ perceptions of potential conflict areas can also be
performed by outside parties such as trade associations or trade magazine
publishers.
Appraising the Effect of Conflict—a growing body of literature has been
emerging to assist the channel manager in developing formal methods for
measuring conflict and its effects on channel efficiency. Shortly thereafter,
Rosenberg and Stern investigated a channel for household durable goods and
developed a scale for measuring the intensity of channel conflict measure to the
performance of the channel.
For the present, most attempts to measure conflict and appraise its effects on
channel efficiency will still be made at a conceptual level that relies on the
manager’s subjective judgment.
Resolving Conflict—when conflict exists in the channel, the channel manager
should take action to resolve the conflict if it appears to be adversely affecting
channel efficiency.
7.4 Resolving Conflict
There is only a limited body of empirical work to guide the channel manager in
attempting to resolve channel conflict, but the literature does suggest some
approaches and recommendations.
Some 25 years ago, Rosenberg made several suggestions for dealing with channel
conflict, which are just as relevant today:
 A channel wide committee might be established for periodic evaluations of
emerging problems related to conflict. Such a committee could function in a
crisis management capacity by providing a forum for the diverse points of view of
the various channel members. Rosenberg suggests that some committee members
could be appointed as representatives by the manufacturer, while distributors and
retailers could elect their own representatives to the committee.
 Joint goal setting by the committee (or some other vehicle), which takes into
account the goals and special capacities of the various channel members, the
needs of consumers, and environmental constraints—would help to mitigate the
effects of conflict. Even if it is not possible to develop joint goals that are in
perfect harmony, the dialogue attendant to the attempt would in itself be
beneficial in reducing conflict.
 A distribution executive position might be created for each major firm in the
channel. The individual (s) filling this position would be responsible for
exploring the firm’s distribution related problems. Further, this individual could
try to make other executives in the firm more aware of the potential impact of
conflict on the firm’s efficiency.
Finally, he or she could seek to identify the current shape of conflict issues
in the channel.

Another approach for resolving channel conflict, suggested by Weigand and
Wasson, is to have the parties involved submit to arbitration. Weigand and
Wasson point to the following five advantages of arbitration for resolving channel
conflicts.
 Arbitration is fast. The parties to a dispute can be quickly informed that
a quarrel exists and told the time of a hearing; the evidence can be heard
by a panel and the decision rendered—all within a few weeks.
 Arbitration preserves secrecy. Outside parties can be barred from the
hearings. Decisions that are not matters of public record can be kept
secret.
 Arbitration is less expensive than litigation. There is an element of
“corner cutting” That takes place, which reduces the cost of a tolerable
decision.
 Arbitration confronts problems in their incipient stage when they are
easier to resolve. The attitude can become: “We have a potential problem
here; let us solve it before positions and options get too fixed.”
 Arbitration often takes place before industry experts. In many
instances, the arbitrator or the arbitration panel is composed of those who
know the industry and its practices. Some argue that this produces a fairer
decision.
An approach, suggested by Stern and Heskett, is for the channel to set up a special
organization for planned information gathering. Such an organization would be
charged with providing all of the channel members with information relevant to
all aspects of the channel.
Finally, the most recent research on conflict resolution, conducted by Dant and
Schul in franchised channels for fast food, suggests that direct interaction between
channel members that focuses on joint problem solving can be effective in
resolving conflict. However the authors also found that when the conflict
involves high stakes, complexity, or major policy issues, and if the franchisee
dependency level on the franchiser is high, resolution of the channel conflict is
likely to require the intervention of an outside (third) party.
The feasibility and applicability of any of these approaches for resolving conflict
will vary for different kinds of channels and under differing sets of circumstances.
What is more important than the specifics of any of these particular approaches,
however, is the underlying principle common in all of them. It may be stated as
follows: Creative action on the part of some party to the conflict is needed if the
conflict is to be successfully resolved.
Thus, it is up to the channel manager to develop approaches for doing this,
whether it be through arbitration, a channel wide committee, organizational
development, bargaining processes, or even a “peace conference” between
channel members.
CHAPTER VIII
MOTIVATING THE CHANNEL MEMBERS
In this chapter we begin with the premise that a channel structure with channel members
capable of serving the target markets effectively and efficiently has already been
developed. At this point, then, the channel manager needs to stress the realization of this

potential. Thus, managing the marketing channel becomes the main focus of attention.
Channel management can be defined as the administration of existing channels to
secure the cooperation of channel members in achieving the firm’s distribution
objectives. Three points should be particularly noted in this definition.
First, note that channel management deals with existing channels; that is, we are
assuming that the channel structure has already been designed (or it has evolved) and that
all of the members have been selected. Channel design decisions are therefore viewed as
separate from channel management decisions. In practice, this distinction may be
obscured at times. This is particularly the case when a channel management decision
quickly lapses into a channel design decision.Perhaps this distinction can be grasped best
by thinking of channel design decisions as concerned with “setting up” the channel,
whereas channel management deals with “running” what has already been set up.
The second point covers the phrase secures the cooperation of channel members. Implied
in this is the notion that channel members do not automatically cooperate merely because
they are members of the channel. Rather, administrative actions are necessary to secure
their cooperation. If a manufacturer enjoys substantial cooperation from channel
members without having to administrate, this is not managing—it is simply a matter of
being lucky.
Third, distribution objectives are statements describing the part that the distribution
comment of the marketing mix is expected to play in achieving the firm’s overall
marketing objectives. In the context of managing the channel, carefully delineated
distribution objectives are needed to guide the management of the channel.
Clearly, without knowing what the objectives are, it is difficult for the channel manager
to know what direction to pursue in managing the channel.
In this chapter we will examine one of the most fundamental and important aspects of
channel management—motivation refers to the actions taken by the manufacturer to
foster strong channel member cooperation in implementing the manufacturer’s
distribution objectives.
The discussion is structured around three basic facets involved in motivation
management in the channel. These are:
 Finding out the needs and problems of channel members

 Offering support to the channel members that is consistent with their needs and
problems
 Providing leadership through the effective use of power
8.1 Finding out the Needs and Problems of Channel Members
Before the channel manager can successfully motivate channel members, an attempt must
be made to learn what the members want from the channel relationship. They may
perceive needs and face problems quite different from those of the manufacturer. McVey
has pointed to these differences with several classic propositions that can be summarized
as follows:
 The middleman does not consider himself a “hired link in a chain forged by the
manufacturer.”
 The middleman acts first and foremost as a purchasing agent for his customers,
and only secondarily as a selling agent for suppliers. His interest is in selling
whatever products his customers wish to buy from him.

 The middleman views all the products he offers as a “family” of items that he
sells as a packaged assortment to individual customers. He directs his selling
efforts primarily at obtaining orders for the assortment, rather than for individual
items.
 Unless given some incentive to do so, the middleman will not maintain separate
sales records by brands sold. Information that might be useful to manufacturers in
product development, pricing, packaging, or promotion planning is “buried” in
the middleman’s own records, sometimes even purposely kept from suppliers.
Approaches for learnings about channel member needs and problems
All marketing channels have a flow of information running through them as part of the
formal and informal communication systems that exist in the channel. The following
figure provides an overview of most of the major components that go into making up a
typical channel communications system.
Ideally, such a channel communications system would provide the manufacturer with all
of the information needed on channel member needs and problems. Given the many
sources in the channel communications system from which information can be generated,
one might think it unlikely that any important information can be generated; one might
think it unlikely that any important information would be missed. In practice, however,
this is far from true. Most marketing channel communication systems have not been
formally planned and carefully constructed to provide a comprehensive flow of timely
information. Rather, in many cases they have evolved haphazardly over a period of years
with little thought given to correcting imperfections in the systems. And even those
channel communication systems that have been carefully planned and improved are a
long way from being perfect. Consequently, the channel manager should not rely solely
on the regular flow of information coming from the existing channel communication
system for accurate and timely information on channel member needs and problems.
Rather, there is a need to go beyond the regular system and make use of one or all of the
following four additional approaches for learning about channel member needs and
problems:
 Research studies of channel members conducted by the manufacturer,
 Research studies by outside parties,
 Marketing channel audits, and
 Distributor advisory councils.
MODEL OF A CHANNEL COMMUNICATION SYSTEM
Merchandise
Direct flow Source Indirect flow

of channel of channel
communications communications
Direct-flow Information Indirect-flow

Information media categories information media
Salespersons Physical inventory situations Trade association

visits to trade shows, publications
factories, dealers Promotional data Personal contact with
third parties at social
Company magazines Product characteristics and trade meeting.
Product specifications, Pricing structure Governmental

catalogues, service publications and
manuals. Market conditions individuals
Merchandise displays at Services available Marketing research

show rooms and sales agencies
floors. Organizational changes
Libraries of
Electronic links businesses,
universities
Label tags, warranty Advertising agencies
cards.
Credit and financial
reporting agencies
Private investigating
agencies
Direct flow Indirect flow
of channel of channel
communications Merchandise communications
Reseller
Research Studies of Channel Members—while it has become fairly common for

manufacturers to conduct research studies dealing with their ultimate customers—to learn
the kinds of products that customers want, what their brand preferences are, the kinds of
shopping behaviors they engage in , and many other types of information—research
studies of channel member needs and problems are much rarer. Indeed, most
manufacturers—even large and sophisticated ones—never conduct such research at all.
Marketing Channel Audits—as with the periodic accounting audit, which virtually
all firms have performed, the channel manager can conduct a marketing channel audit
periodically. The basic thrust of this approach should be aimed at gathering data on how
channel members perceive the manufacturer’s marketing program and its component

parts, where the relationships are strong and weak, and what is expected of the
manufacturer to make the channel relationship viable and optimal. For manufacturer may
want to gather data from channel members on what their needs and problems are in such
areas as:
S. Pricing policies, margins, and allowances

T. Extent and nature of the product line
U. New products and their marketing development through promotion
V. Servicing policies and procedures such as invoicing, order dating,
W. Sales force performance in serving the accounts.
Further, the marketing channel audit should identify and define in detail the issues
relevant to the manufacturer-wholesaler and/or manufacturer-retailer relationship.
Another point to note involves cross-referencing. Whatever areas and issues are chosen
for a particular marketing channel audit, ideally they should be cross-tabulated or
correlated as to kind of channel members, geographical location of channel members,
sales volume levels achieved, and any other variables that might be relevant.
Finally, for the marketing channel audit to work effectively, it must be done on a periodic
and regular basis so as to capture trends and patterns. Only in this way will it be possible
to keep track of those issues that remain constant, those that dissipate, or those that
enlarge in scope. Emerging issues are also more likely to be spotted if the audit is
performed on a regular basis.
Distributor Advisory Councils—another effective approach for learning about
channel member needs and problems is to set up a distributor advisory council. These
councils should consist of top management representatives from the manufacturer as well
as representatives of the principals from the Channel members. The top management
people might consist of the vice president of marketing, general sales manager, and other
top members of sales management.
The distributor members should consists of a representative sample of distributors such as
5 to 10 percent of the total. However, all parties should limit the total number to allow
for full participation and exchange of dialog. In setting up a distributor advisory council
provides a vehicle for identifying and discussing mutual needs and problems that are not
transmitted through the regular channel information flow.
Three significant benefits emerge from the use of a distributor advisory council:
 It provides recognition for the channel members.
 It provides a vehicle for identifying and discussing mutual needs and problems
that are not transmitted through the regular channel information flow
 It results in an overall improvement of channel communications, which in turn
helps the manufacturer to learn more about the needs and problems of channel
members, and vice versa.
8.2 Offering Support to Channel Members
Support for channel members refers to the manufacturer’s efforts in helping channel
members to meet their needs and solve their problems. Such support, if properly applied,
should help to create a more highly motivated group of channel members.
Unfortunately, support for channel members is all too often offered on a disorganized and
ad hoc basis. When channel members appear to lack motivation they are “pumped up”
with an extra price incentive, advertising allowance, dealer contest, or even a pep talk by
the manufacturer. Or if they are having a problem in a particular area, the manufacturer

may attempt to “patch it up” and hope that the problem will not come back again—at
least for a little while.
McCammon implied the attainment of a highly motivated cooperating “team” of channel
members in an inter-organizational setting requires carefully planned programs. Such
programs for providing channel member support can generally be grouped into one of the
following three categories:
Cooperative,
Partnership or strategic alliance, and
Distribution programming.
While all three of these approaches should emphasize careful planning, the level of
sophisticated and comprehensiveness of the approaches varies greatly. The cooperative
approach represents the least sophisticated and comprehensive approach to channel
member support, whereas distribution programming is the most sophisticated and
comprehensive. The partnership or strategic alliance approach would generally fall
somewhere between the other two.
Cooperative Arrangements—between the manufacturer and channel members at
the wholesale and retail levels have traditionally been used as the most common means of
motivating channel members in conventional, loosely aligned channels. The types of
cooperative arrangements or deals are quite diverse and are limited only by the creativity
of the manufacturer.
Partnerships and Strategic Alliances—stress a continuing and mutually
supportive relationship between the manufacturer and its channel members in an effort to
provide a more highly motivated team, network, or alliance of channel members in an
effort to provide a more highly motivated team, network, or alliance of channel partners.
The traditional “us-against-them” mentality is replaced with a new, cooperative
perception of “us” in an effective channel partnership or strategic alliance.
Distribution Programming—is the most comprehensive approach for achieving a
highly motivated channel team. Distribution programming goes well beyond the typical
partnership or strategic alliance because it deals with virtually all aspects of the channel
relationship. McCammon, who pioneered the concept of distribution programming,
defines it as: A comprehensive set of policies for the promotion of a product through
the channel.
The essence of this approach is the development of a planned, professionally managed
channel. The program is developed as a joint effort between the manufacturer and the
channel members to incorporate the needs of both. If done well, the program should
offer all channel members the advantages of a vertically integrated channel while at the
same time allowing them to maintain their status as independent business firms.
8.3 Providing Leadership through the Effective Use of Power
Even if the channel manager has developed an excellent system for learning about
channel members' needs and problems, and no matter what approach is used to support
them, control must still be exercised through effective leadership on a continuing basis to
attain a well-motivated team of channel members.
Seldom is it possible for the channel manager to achieve total control, no matter how
much power underlies his or her leadership attempts. This state would exist only if the
channel manager were able to predict all events related to the channel with perfect
accuracy, and achieve the desired outcomes at all times. For the most part, this is a
theoretical state not achievable in the reality of an inter-organizational system such as the
marketing channel.

Little explained succinctly the problems of achieving very high levels of control and
leadership in this inter-organizational setting:
Because firms are loosely arranged, the advantages of central direction
are in large measure missing. The absence of single ownership, or close
contractual agreements, means that the benefits of a formal power
(superior, subordinate) base are not realized. The reward and penalty
system is not as precise and is less easily affected. Similarly, overall
planning for the entire system is uncoordinated and the perspective
necessary to maximize total system effort is diffused. Less recognition of
common goals by various member firms in the channel, as compared to a
formally structured organization, is also probable.
As Little points out, the inter-organizational setting of the marketing channel creates a set
of conditions that makes strong leadership more difficult to achieve. This is particularly
the case in channels that have evolved as a group of loosely aligned firms. But even in
channels that have been designed to foster a higher degree of control, such as those based
on contractual commitments or distribution programming, the special circumstances
attendant to inter-organizational systems discussed by Little do not completely disappear.
Thus, even though the basis for control through strong leadership is significantly greater
in formally structured or contractual channels, such as in franchised channels, it does not
often equal the level achieved in an intra-organizational setting. This is not meant to
suggest that the channel manager cannot hope to exercise a high level of leadership in an
effort to motivate independent channel members. Rather, it is simply pointing out that, in
attempting to do so, the channel manager will face a more difficult set of problems.

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CHAPTER I

LOGISTICS AND CHANNEL MANAGEMENT

Marketing Distribution and Logistics Management 1

Marketing Distribution and Logistics Management 2

Marketing Distribution and Logistics Management 3

Transportation—is the most fundamental and obviously necessary component of any

Marketing Distribution and Logistics Management 4

Marketing Distribution and Logistics Management 5

Marketing Distribution and Logistics Management 6

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Marketing Distribution and Logistics Management 8

Marketing Distribution and Logistics Management 9

Generalized relationship between distance and transportation

Generalized relationship between weigh and transportation cost/pound.

Price per pound

Marketing Distribution and Logistics Management 10

Marketing Distribution and Logistics Management 11

Marketing Distribution and Logistics Management 12

Marketing Distribution and Logistics Management 13

Marketing Distribution and Logistics Management 14

Marketing Distribution and Logistics Management 15

Marketing Distribution and Logistics Management 16

Marketing Distribution and Logistics Management 17

Marketing Distribution and Logistics Management 18

Marketing Distribution and Logistics Management 19

Marketing Distribution and Logistics Management 20

4.1 Marketing Channel Concepts

Functions in Marketing Channels

Marketing Distribution and Logistics Management 21

Flows in Marketing Channels

Negotiations are prevalent throughout the channel. Manufacturers, wholesalers, and

CHANNEL INSTITUTIONS PARTICULAR TO SELECTED

Marketing Distribution and Logistics Management 22

b. Analyzing Marketing Channel Structures

Marketing Distribution and Logistics Management 23

ii. Service Outputs as Determinants of Channel Structure

Marketing Distribution and Logistics Management 24

Spatial Convenience—provided by market decentralization of wholesale and/or retail

Marketing Distribution and Logistics Management 25

The Determination of Channel Structure

Thus, when construction machinery manufacturers purchase brake parts in carload

Marketing Distribution and Logistics Management 26

4.4 Channel Management, Channel Relationships, and Competitive

Marketing Distribution and Logistics Management 27

TYPOLOGY OF RELATIONSHIP MARKETING

Strategic Alliance Partnering

Channel partnership is an in-depth collaboration between suppliers and their

Marketing Distribution and Logistics Management 28

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 Producers and manufacturers,

Marketing Distribution and Logistics Management 30

Merchant Agents, brokers, Manufacturers’

Merchant Wholesaler—are firms engaged primarily in buying, taking title to,

Marketing Distribution and Logistics Management 31

Marketing Distribution and Logistics Management 32

Marketing Distribution and Logistics Management 33

Distribution tasks performed Distribution task performed

Marketing Distribution and Logistics Management 34