Distribution Channels (1)

What is a “distribution channel”?

A basic definition of “distribution channel”: the intermediary that links participants in the supply chain, through which products and services are marketed and distributed (Lee and Carter, 2004). In the sense of pure physical supply however, “distribution channel” can refer to the sequence of stages and connections through which products reach customers. The following six forms of distribution channel describe variant designs of physical distribution channels, so do not include marketing stages.

1. Drop shipping/direct shipping from manufacturer
   In this design, supply comes directly from the manufacturer to the customer. For the retailer, this design is especially advantageous, as there is no need for the retailer to store inventory or to coordinate collections, deliveries, and returns. The retailer (online or bricks and mortar) simply offers the product, takes payment, and acts as the point of contact linking customer and product. The order is received and dispatched at the manufacturer’s facility. For this process to work however an efficient order processing system was required. Retailers need to know what levels of inventory are available at the manufacturer. From the customer’s perspective, this design can be problematic: in the event of delivery failure, the customer may discover that communicating directly with the manufacturer is difficult, and the retailer may not be equipped to handle customer queries concerning order delivery.
2. In-transit merging with drop shipping/direct shipping from manufacturer
   This design necessitates a consolidation point, i.e. a hub facility where orders called from different companies can be consolidated into single orders for dispatch to the customer. Coordination complexity is high with this model, and increases as the number of manufacturers providing products to customers increases. The complexity of customer orders determines the degree of coordination challenge. If a customer’s order includes items from several manufacturers, each manufacturer’s item must be received and processed for the order to be completed.
3. Package carrier delivery from distributor storage
   In this design, the distributor holds stock on behalf of the manufacturer and third party carries collect and deliver when customer orders come in. An advantage of this design is the distributor’s freedom to request bids for the logistics contract, which should result in a competitive rate. The cost of owning and maintaining a vehicle fleet is also avoided. A disadvantage for the distributor is the obligation to carry stock, which can be costly in terms of processing and storing. Reverse logistics may also be unduly challenging with relatively little profit to be extracted. The distributor may require large premises and full-time handling staff. For the end customer, the system is highly efficient, as most package carriers provide efficient deliveries with high levels of customer visibility.