Procurement- Lecture 4 Channels of distribution

1. Procurement- Lecture 4Channels of distribution ABDIKARIM MOHAIDIN AHMED muhudiin@gmail.com

2. INTRODUCTION • This chapter looks at the alternative ways in which products can reach their market. • Physical distribution channel is the term used to describe the method and means by which a product or a group of products are physically transferred, or distributed, from their point of production to the point at which they are made available to the final customer. Concepts of Logistics and Distribution

3. INTRODUCTION Cont… • trading or transaction channel is also concerned with the product, and with the fact that it is being transferred from the point of production to the point of consumption. • The trading channel, however, is concerned with the non-physical aspects of this transfer. Concepts of Logistics and Distribution

4. INTRODUCTION Cont… • These aspects concern the sequence of negotiation, the buying and selling of the product, and the ownership of the goods as they are transferred through the various distribution systems. • The question that arises, for both physical and trading channels, is whether the producer should transfer the product directly to the consumer, or whether intermediaries should be used. Concepts of Logistics and Distribution

5. PHYSICAL DISTRIBUTION CHANNEL TYPES AND STRUCTURES • There are several alternative physical channels of distribution that can be used. • Figure 4.1 illustrates the main alternative channels for a single consumer product being transferred from a manufacturer's production point to a retail store or shop. • The circles in the figure indicate when products are physically transferred from one channel member to another. Concepts of Logistics and Distribution

6. The alternative channels Figure 4.1 Alternative distribution channels for consumer products to retail outlets Concepts of Logistics and Distribution

7. The alternative channels Cont… • Manufacturer direct to retail store. The manufacturer or supplier delivers direct from the production point to the retail store. As a general rule, this channel is only used when full vehicle loads are being delivered. • Manufacturer via manufacturer's distribution operation to retail store. Here, the manufacturer or supplier holds its products in a finished goods warehouse, a central distribution centre (CDC) or a series of regional distribution centers (RDCs). Concepts of Logistics and Distribution

8. The alternative channels Cont… The products are trunked (line-hauled) in large vehicles to the sites, where they are stored and then broken down into individual orders that are delivered to retail stores on the supplier's retail delivery vehicles. 3. Manufacturer via retailer distribution centre to retail store. This channel consists of manufacturers supplying their products to national distribution centers (NDCs) or RDCs, which are sites run by the retail organizations. Concepts of Logistics and Distribution

9. The alternative channels Cont… • These centres act as consolidation points, as goods from the various manufacturers and suppliers are consolidated at the site. • The retailers then use their own delivery vehicles to deliver full vehicle loads of all the different manufacturers’ products to their own stores. 4. Manufacturer to wholesaler to retail shop. Wholesalers have acted as the intermediaries in distribution chains for many years, providing the link between the manufacturer and the small retailers' shops. Concepts of Logistics and Distribution

10. The alternative channels Cont… 5. Manufacturer to cash-and-carry wholesaler to retail shop. These are usually built around a wholesale organization and consist of small independent shops collecting their orders from regional wholesalers, rather than having them delivered. • The increase in cash-and-carry facilities has arisen as many suppliers will not deliver direct to small shops because the order quantities are very small. Concepts of Logistics and Distribution

11. The alternative channels Cont… 6. Manufacturer via third-party distribution service to retail shop. A number of companies have developed a particular expertise in warehousing and distribution. 7. Manufacturer via broker to retail shop. broker is similar to a wholesaler in that it acts as intermediary between manufacturer and retailer. Its role is different, however, because it is often more concerned with the marketing of a series of products, and not really with their physical distribution. Concepts of Logistics and Distribution

12. The alternative channels Cont… • The main alternative physical distribution channels previously described refer to those consumer products where the movement is from the manufacturer to the retail store. • There are additional channels for industrial products and for the delivery of some consumer products that do not fit within the structure of Figure 4.1 because they bypass the retail store. These include: Concepts of Logistics and Distribution

13. The alternative channels Cont… • Mail order. The use of mail order or catalogue shopping has become very popular. Goods are ordered by catalogue, and delivered to the home by post or parcels carrier. • Factory direct to home. The direct factory-to-home channel is a relatively rare alternative. It can occur by direct selling methods. Concepts of Logistics and Distribution

14. The alternative channels Cont… • Internet and shopping from home. There is now an important development in shopping from home via the internet. • Initial physical distribution channels were similar to those used by mail order operations by post and parcels carrier. Concepts of Logistics and Distribution

15. The alternative channels Cont… • Factory to factory/business to business. The factory-to-factory or business to business channel is an extremely important one, as it includes all of the movement of industrial products, of which there are very many. • This may cover raw materials, components, part-assembled products, etc. Concepts of Logistics and Distribution

16. Concepts of Logistics and Distribution

17. CHANNEL SELECTION • Channel objectives will necessarily differ from one company to another, but it is possible to define a number of general points that are likely to be relevant. • The main points that need to be addressed are as follows: Concepts of Logistics and Distribution

18. CHANNEL SELECTION Cont… • order sizes • unit load types • product handling characteristics, • materials handling • aids, delivery access (eg vehicle size) • delivery time constraints • Company resources Concepts of Logistics and Distribution

19. CHANNEL SELECTION Cont… • Channel characteristics • does the channel being considered serve or supply the customer in the way required? • how efficient is the channel being considered? • Competitive characteristics Concepts of Logistics and Distribution

20. Designing a channel structure Figure 4.4 Designing a channel structure - a formalized approach Concepts of Logistics and Distribution

21. Designing a channel structure Cont… Figure 4.4 Designing a channel structure - a formalized approach Concepts of Logistics and Distribution

22. THIRD PARTY OR OWN ACCOUNT? • The most common channel decision for those operating in physical distribution is whether to use a third-party distribution or logistics service, or whether to run an own-account (in-house) distribution operation. • The own-account/third-party decision is rarely a straightforward one, especially as there are a number of different types of third-party distribution operation available. Concepts of Logistics and Distribution

23. THIRD PARTY OR OWN ACCOUNT? Cont…. • The main ones include the following: • Dedicated (or exclusive) distribution operation. This is where a complete distribution operation is provided by a third-party company. • The third party undertakes to provide the customer with all its distribution requirements, exclusively, on a national or regional basis. • The resources used will include warehouses,, distribution centres, transport fleets, managers, etc Concepts of Logistics and Distribution

24. THIRD PARTY OR OWN ACCOUNT? Cont…. 2.Multi-user (or shared-user) distribution operation. Multi-user distribution operations are similar to dedicated operations, the principal difference being that a small group of client companies is catered for, rather than just a single client. • The advantage of this approach is that expensive distribution costs are shared between the clients, so all parties enjoy the benefits. Concepts of Logistics and Distribution

25. THIRD PARTY OR OWN ACCOUNT? Cont…. 3. Specialist distribution operation. These distribution operations are used for the storage and movement of products that require special facilities or services. • The distribution operation run by the third-party company is especially tailored to suit these needs. 4. Regional multi-client distribution operation. They are usually provided by a ‘ general' third-party distributor. (a regional operation concentrated in a specific small geographic area) Concepts of Logistics and Distribution

26. THIRD PARTY OR OWN ACCOUNT? Cont…. 5. National multi-client distribution operation. This category is very similar to the previous one. The main difference relates to the size of the operation (nationwide). 6. Satellite or cross-docking operation. These are operations where the operator is not involved in the storage of any products, but is only providing a collect, break-bulk and delivery service. Concepts of Logistics and Distribution

27. THIRD PARTY OR OWN ACCOUNT? Cont…. 7. Joint venture. A limited number of operations have been set up whereby a third-party operator and a client company form a separate distribution company called a joint venture. 6. International distribution operations. These may be dedicated but are most likely to be multi-user, enabling a client to achieve international movements between sites and delivery to final customers over a broad international area. Concepts of Logistics and Distribution

28. THIRD PARTY OR OWN ACCOUNT? Cont…. 8. Occasional use. Many companies use third-party services on an occasional basis or as an aid to support their own-account operations. • There are a number of reasons why a company might do this: to cover seasonal peaks in demand; to cover weekly demand peaks; for non-standard products that don‘t fit easily into their own operation (very small or very large products) etc. Concepts of Logistics and Distribution

29. DIFFERENT SERVICES THAT ARE OFFERED • Breadth of outsourcing (distance from side to side) • Basic services • primary transport (trunking, line-haul); • collection; • break-bulk; • fleet management; • telesales; • management information; • local delivery; • stock-holding warehouse; Concepts of Logistics and Distribution

30. DIFFERENT SERVICES THAT ARE OFFERED Cont… • trans-shipment; • cross-docking; • order picking; • inventory management; • general management; • home delivery; • Reverse logistics; • Packing. • Value added services. Concepts of Logistics and Distribution

31. KEY DRIVERS FOR THIRD-PARTY DISTRIBUTION • There are a large number of advantages and disadvantages claimed for and against both third-party and own-account distribution. • The major drivers for and against the use of a third party can be split into four broad categories covering cost, service, organizational and physical factors. Concepts of Logistics and Distribution

32. KEY DRIVERS FOR THIRD-PARTY DISTRIBUTION Cont… • Cost factors: • There are several cost advantages claimed because of the elimination of asset ownership. • In particular, there are capital cost advantages through using third-party distribution because the client company does not have to invest in facilities and resources (DC, vehicles etc). • Thus, the capital can be invested in more profitable areas of the business, such as new production machinery, retail stores, etc. Concepts of Logistics and Distribution

33. KEY DRIVERS FOR THIRD-PARTY DISTRIBUTION Cont… • Service factors • many third-party distributors make frequent and regular deliveries to their varied delivery points. Indeed, in remote rural areas, the use of a third party can greatly improve service levels. Concepts of Logistics and Distribution

34. KEY DRIVERS FOR THIRD-PARTY DISTRIBUTION Cont… • Organizational factors • One of the prime reasons quoted for the move to the use of a third-party distribution company is the opportunity for users to focus on their core business, be this manufacturing or retail. • There are both organizational and cost benefits to be gained from this. Concepts of Logistics and Distribution

35. KEY DRIVERS FOR THIRD-PARTY DISTRIBUTION Cont… • Physical factors: • Vehicle characteristics (Vehicle size, body quality, equipment etc) • Basic delivery systems • products may be incompatible (If some food products are carried next to a product with a very strong smell then they will easily absorb the smell and be spoiled). Concepts of Logistics and Distribution

36. FOURTH-PARTY LOGISTICS • Fourth-party logistics is where an external organization is able to provide a user with an overall supply-chain-wide solution by incorporating the resources and expertise of any number of third parties to best effect. Concepts of Logistics and Distribution

37. FOURTH-PARTY LOGISTICS • The fourth-party provider will be involved in both the design and the management of a client's logistics system and will act as a coordinator for many different types of service, which may include distribution, information Systems, Financial services, etc. Concepts of Logistics and Distribution

38. SUMMARY • This chapter has been concerned with channel choice and selection. • Channel choice and selection and particularly the increased use and sophistication of third-party distribution services are all very important aspects of modern-day logistics. • This is an exciting area of change within the industry, and there is ample scope and opportunity for growth and development in the future. Concepts of Logistics and Distribution