Industrial Distribution Channel

When a company or a manufacturer produces goods or services, it has the  immediate responsibility to distribute and sell them to the industrial and  institutional customers. The industrial customers generally constitute of  wholesalers, retailers, manufacturers, educational institutions, governments,  hospitals, public utilities, and other formal organizations. There are various  intermediaries who are involved in a distribution and selling process helping the  manufacturers to make their goods reach the end users. Thus, a network or  channel that helps to flow the goods from the producer to the consumer through  a set of interdependent organizations (intermediaries) is called distribution  channel or trade channel or marketing channel. Channels are the tools used by  management to move the goods from the place of production to the place of  consumption. In the progression, the title of goods gets transferred from sellers  to buyers.

Industrial distribution is unique as there are several different methods of  channeling the products and services to industrial consumers. The type of  product, the selling price of the product and technical knowledge required to sell  the product all play a considerable role in selecting the proper sales or  distribution channel. Unlike consumer organizations, the decisions taken by the  industrial organizations on distribution channels is of great significance as the  decisions involved are of long-term nature that cannot be changed frequently.  The industrial organizations carry on certain important functions till the products  reach the consumers — like utilizing the services of transportation companies for  distribution, the services of warehouses for safe storage of goods, inventory  control, order processing and selection of marketing channels. This necessitate  taking important decisions like devising effective communication tools,  planning promotional activities, managing finances etc that help in serving the  consumers better.

Industrial Distribution Channel

The Nature of  Industrial Distribution Channel

The nature of industrial distribution channel is quite different from the consumer  goods distribution channel. The intermediaries stock the products they are  distributing thereby assuming part of the burden of marketing the product and  maintaining close contact with customers. There are various factors that affect  the distribution of industrial goods.

  1. Geographical Distribution: The industrial distributors are concentrated highly in  the industrial markets they serve and certain other places that have large number  of industries like large towns and cities.
  2. Size: Unlike consumer markets, the industrial markets tend to have fewer  channels of distribution. Even the industrial channel is shorter in size as  organizational buyers expect immediate product availability, technical expertise  and prompt after-sales service. This indirectly demands investment in training  and physical facilities for the industrial organizations.
  3. Intermediary characters: The intermediaries involved in industrial marketing are  technically qualified who maintain very close relationship with industrial  organizations. Industrial manufacturers tend to depend more heavily on each  member of the channel and may do more to support that channel member.  Industrial distributors, brokers and agents are some types of intermediaries used  by industrial marketers to reach customers.
  4. Mixed channels: A combination of direct and indirect channels is used by some  industrial marketers to cater to different market segments or when they have  some resource constraints. To cater to large-volume customers, industrial firms  generally use their own sales force, and to cover small scale organizations, they use independent distributors. In case of large geographical territories, due to  resource constraints they use their agents called as ‘manufacturers  representatives’.

The Structure of  Industrial Distribution Channel

There are different ways in which an industrial distribution channel can be structured. Some  of the industrial distribution channel structures are direct while some are indirect.

Direct Channel Structures

In direct channel structures, the entire task necessary to create sales and to  deliver the products to industrial customers is performed by the manufacturers  themselves. The various tasks involved in this process are contacting the  potential customers, communicating and negotiating with them,  financing and  selling, storing the products, transportation and providing related services. This  approach is viable to the company only if:

  • The buying process is lengthy,
  • The selling includes extensive technical and commercial negotiations at  various levels, including top management,
  • The industrial buyer insists on buying directly from the manufacturer, and
  • The value of each transaction is large.

Some of the examples of direct channel are direct sales (through the company  sales force) and direct marketing (through direct mail, telemarketing, Internet  marketing)

Indirect Channel Structures

In indirect channel structures, the various tasks discussed above is shared both  by the manufacturer and the intermediaries. An indirect distribution approach is  appropriate when:

  • The industrial buyers are widely dispersed,
  • The value of transaction or sales are low,
  • The industrial buyers purchase many product items in one transaction, and
  • The manufacturer has limited resources.

Some of the examples of indirect channel are manufacturer’s representatives (or  agents), brokers, commission merchants, commission merchants, industrial  dealers or distributors, value-added resellers, jobbers, drop shippers. Indirect  distribution is used in industrial chemicals, construction materials, electrical  wiring materials and supplies, general industrial machinery, iron and steel  products, etc..

Types of Industrial Middlemen

The industrial middlemen are the intermediaries used by the manufacturers to  deliver their products to the end users. They are categorized based on the  number and the extent to which they specialize in the performance of certain  functions. Different types of industrial middlemen are manufacturers  representatives (also called agents), brokers, commission merchants, industrial  dealers or distributors, value-added resellers (VARs), jobbers and drop shippers.

  1. Manufacturers Representatives: The manufacturers representatives (sales  agents or manufacturers agents) are very commonly seen middlemen who  secure orders from existing and potential customers. They provide relevant  information on market conditions to the manufacturers as well as customers.  They are paid a certain amount of pre-specified commission on sales and other  tasks performed to make the sales. Generally small and medium-sized industrial  firms use the services of agents in territories with low market potential. Agents  are cost-effective for them because commission is paid as per the orders  generated. The agents particularly have good knowledge about the product, their  target market apart from excellent contacts with the buyers.
  2. Brokers: Brokers are the middlemen who represent either the buyer or the  seller. They help the manufacturer to find potential buyers and vice versa and  take the commission when sales process is complete.
  3. Commission Merchants: They deal with large quantities of items like raw  materials. They are paid commission by the manufacturers when they perform  certain functions. Their general functions include getting the raw materials  inspected, negotiating during sales and finally close the sales. They receive the  commission based on the net sales value as is compensated to agents and  brokers.
  4. Industrial Distributors: Industrial distributors are the important and most  preferred middlemen that are typically small and independent serving narrow  geographic markets. They perform functions like buying, transportation and  warehousing, promotion and selling, and offering credit. Because of such varied  functions, they are sometimes referred to as full function intermediaries. They  are offered trade discounts on the price list of the products as their  compensation.  Industrial distributors are categorized as  general line distributors or mill supplies houses that stock wide variety of  products and sell to a diversified group of customers. They are referred to as the  supermarkets of industry. The products stocked by them include maintenance  repair and operating (MRO) supplies, original equipment manufacturer (OEM)  supplies, and equipment used in the operation of a business, such as hand tools,  power tools and conveyors etc. The second type of distributors known as  specialized distributors specializes in products they handle or customers they  serve. Because of increase in specialized markets, their numbers are increasing.  Specialized distributors limit their inventories to specific product range like  bearings, office equipment and supplies, electrical equipment and supplies, or  abrasives etc. The third category called the combination house sell directly to  industrial customers as well as some other retailers or dealers.
  5. Value-added Resellers (VARs): They add some value or feature to an  existing product and sell to end-users as a new package. This is found  often in the computer industry, where a company purchases computer  components and builds a fully operational personal computer. By doing  this, the company has added value above the cost of the individual  computer components. Customers would purchase a computer from the  reseller to either save time or if they do not have the skills to build a unit  themselves.
  6. Jobbers: They get orders from the customers and pass them to the  manufacturers. Though they do not handle the goods physically in any form,  they take the title to the products they sell. Jobbers specialize in marketing bulky  products like coal, iron ore etc, that are transported in huge quantities and do not  require assorting or grouping of products.
  7. Drop Shippers: When an online marketer has certain concerns like  where to get the goods from, where to store them until they are sold, and  what amount to charge for shipping the goods to the customers, then  drop shippers come to the rescue of such marketers who work with  merchants to move the products. Drop Shipping is generally used by  web site owners, shop owners and mail order firms  who do not stock inventory of the products sold for future delivery  through mail order, catalog and internet advertising. Middlemen send  single unit orders for products to manufacturers, or major stocking  distributors, who in turn drop ship the merchandise direct to the  customers of the middlemen. Manufacturers providing drop shipping  services can gain additional sales, shift advertising costs to middlemen,  offer advertising material and reduce inventory requirements. Middlemen  who initiate drop ship orders shift the risks of stocking inventory to the  supply source, including storage, insurance, overhead, and personnel by  spending nothing on inventory.

The Functions and Responsibilities of Distributors

Nothing prevents a producer from meeting his customers directly and effecting  sales. If he does not use this privilege, he has to borrow the services of different  middlemen who act as a vital link in the distribution network to pass on the  production to the actual users. A full function intermediary or the distributor  performs all or most of the distribution functions like:

  • Purchasing products from the producer to resell back to the industrial buyers
  • Promoting the product through ads, negotiating by offering discounts and  securing orders from customers
  • Extending credit to customers while reselling the products
  • Storing the products safely at warehouses and ensuring its availability to the  customers
  • Inspecting and testing the product, and assigning distinct quality grades.  (Various grades of products are sold to different end users at different prices)
  • Transporting the product from warehouses to customers place
  • Providing information on product features, price etc., to the customers and  competition, market demand etc., to the manufacturers.
  • Providing pre-sales and after-sales services to the customers through their  technical service personnel.

As the intermediaries perform all or most of the above functions, the industrial  marketers find it more suitable to use their services rather than doing all the  things by themselves. But, they should analyze certain functions that are very  important for them but cannot be performed effectively due to reasons like cost  effectiveness or service inefficiency. Such tasks should be outsourced to those  intermediaries who have the expertise to perform them effectively and  efficiently.

Reasons Industrial Customers prefer Distributors

There are many reasons why industrial customers buy from distributors. Some  of the common reasons include:

  1. Delivery: Industrial customers particularly the small scale manufacturers find  the distributors to be more reliable who delivers them goods in less time and at a  lesser price. This helps them reduce their inventory level as well as the inventory  carrying cost.
  2. Information: Distributors provide relevant information on various products like  technical information, price, availability, quality that helps the customer select  and buy the best.
  3. Variety: The distributor stocks variety of products at one place that caters to all  the requirements of the industrial buyers.
  4. Credit:  The distributor offers credit facility to his reputed and credible buyers  whenever they purchase from him.

Besides above, it is the relationship and best customer service that matters the  most to the customers to prefers a particular distributor.

Manufacturer and Distributor – Partners in progress

Though there would be lot of conflicts and disputes existing between the  manufacturer and the distributor, both need to maintain good relationship that  help them to be partners in progress. The manufacturer should provide the  distributor with all the assistance that is economically feasible to enhance the  distributor’s performance. The assistance from the manufacturer could be in the  form of:

  1. Providing increased margins or financial help that stimulates the distributor  to increase inventory levels
  2. Improving distributor’s performance through deploying its sales force where  supplemental technical support can be provided or joint sales calls can be  done
  3. Imparting technical and general training to the distributor personnel to  improve their effectiveness and strengthen the bond.

Simultaneously, the distributors should also execute all their basic functions and  meet their responsibilities (that have been discussed earlier) in a systematic way  that would help the manufacturer perform better. In addition, they should  recognize the significant trends unfolding in the industry by understanding the  market dynamics and forecasting its future directions. Eventually, the efforts of  both the ‘partners in progress’ should be to grow together that can happen only  through mutual coordination and understanding each other in a better way.

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