To solve these problems, a handful of forward-looking companies are experimenting with their distribution channels to make them more flexible and responsive. Although the scope of the experiments and the specifics vary widely, each embraces a concept we call adaptive channels. The managers whose innovations have given rise to this concept view their distribution channels as webs of capabilities embedded in an extended enterprise. They have realized that by sharing their resources and capabilities in novel ways and new situations, they can take advantage of profit-making opportunities that they could not exploit alone.
To act on this realization, these managers first identify infrequent yet critical customer requirements that they cannot fulfill routinely on their own. Then they make progressive, cooperative arrangements with other channel members for the assistance that will enable them to meet those requirements.
The nature of such assistance, the procedures for providing it, and the appropriate remuneration are all defined in advance. Business dynamics and emerging technologies make this new approach to distribution both essential and feasible. Tough competition is forcing managers to scrutinize every aspect of their operation. Increasingly, they are recognizing that distribution channels represent an untapped opportunity for major cost savings and productivity improvements.
The prevalence of strategic alliances and partnerships has made managers more willing to explore new ways of working together for mutual gain. And recent developments in shared information systems and integrated logistics systems including the emergence of highly competent suppliers such as Federal Express make such cooperative efforts more feasible. Finally, in many markets, global competitors are providing the impetus for innovation.
Excluded from established channels, these newcomers have no choice but to experiment with unconventional distribution arrangements.
The potential benefits of these new arrangements come from the opportunity to leverage resources and share capabilities within the channel.
They can also heighten customer satisfaction by augmenting their own capabilities with those of more proficient partners. To learn more about innovative distribution practices, we conducted an extensive research study in and We started by identifying progressive manufacturers and distributors through discussions with colleagues, with managers from a variety of industries—including information technology and integrated logistics—and with the executive presidents of two distributor trade associations.
Then we conducted a series of individual field interviews in the United States and Europe with 62 managers from 27 U. In the first, the distribution channel is designed to ensure that the members are routinely able to cope with unexpected or unusual demands for products and services.
In the third, the objective is to improve the quality of service throughout the distribution channel by substituting the superior capabilities of one member for the inferior capabilities of another.
Every distribution channel occasionally faces unexpected or unusual demands. Information systems professionals at a large investment bank call their software supplier for emergency problem-solving assistance and get a busy signal. Traditional distribution channels try to meet those challenges by forcing the manufacturer and its distributors to stock excess inventory or hire surplus personnel.
Recognizing the costliness of this approach, innovative managers are experimenting with various kinds of auxiliary support systems. Such systems allow a manufacturer and its distributors to respond to extraordinary situations by sharing inventories and support services in return for prespecified remuneration. Volvo GM sells commercial trucks and repair parts in the United States through a channel that includes regional warehouses and commercial truck dealers.
Through careful market research, they learned why that was the case. Customers use replacement parts in two quite different situations: scheduled maintenance and emergency roadside repairs. In the second, the system was extremely ineffective because the demand for emergency repairs simply could not be predicted. No matter how much inventory the company put into the channel, it seemed that almost every time a truck broke down, the critical parts were in the wrong place and not readily accessible.
Little wonder that when owners learned how long they would have to wait to get their trucks moving again, they located competing dealers that had substitute parts and could make the repairs. Once Volvo GM understood the problem, it could address it. Working with FedEx Logistics Services, the company set up a warehouse in Memphis, Tennessee, that would stock the full line of truck parts.
Now when a dealer needs parts for an emergency repair, the manager calls a toll-free number and the parts are shipped out by FedEx, often on an afternoon flight so they arrive that same night. Managers report that they have been overwhelmed with compliments from both dealers and customers.
Another way to ensure that distributors can routinely satisfy unexpected demands is to have channel members share the burden of maintaining safety stocks and making emergency deliveries.
Historically, it has hampered the ability of distributors to provide responsive service. To overcome the problem, Okuma created its own auxiliary support system. Okuma requires each of its 46 distributors in North and South America to carry a minimal number of machine tools and selected repair parts in its inventory. The company tries to ensure that nearly all Okuma machine tools and parts are in stock at all times, either in its warehouse in Charlotte, North Carolina, or somewhere in the distribution channel.
A shared information-technology system called Okumalink keeps distributors informed about the location and availability of machine tools and parts in Okuma warehouses in Charlotte and Japan. When a customer orders a machine tool or a part that a distributor does not have, the distributor checks Okumalink to determine if the item is in stock. If it is available, the distributor can order it electronically. Okuma further supports the availability of repair parts with a hour shipment guarantee on all parts manufactured in Charlotte: If the parts are not shipped within 24 hours of receipt of the order, the customer gets them for free.
Okumalink will be upgraded to allow channel members to connect with one another directly. All the distributors will post their inventories on Okumalink and be able to scan those of their channel partners. Equally important, they will be able to arrange intrachannel exchanges of machine tools and parts electronically. Investments and costs associated with stocking and handling inventory have been reduced for all the members of the distribution network.
Okuma now has 48 potential pathways—its 46 distributors and its two warehouses—for its products and services to reach each customer. The likelihood that a distributor will lose a sale because an item is out of stock has plummeted. Customer satisfaction has increased because Okuma is consistently delivering the superior service it promises. Microsoft delivers most of its technical problem-solving assistance to customers by telephone.
To handle the overload during peak periods, Microsoft relies on a carefully selected network of authorized support centers and Microsoft service providers. Microsoft programs its telephone switching system with call arrival forecasts, goals for minimum waiting time, and estimates of support staff availability—its own and that of its partners.
Microsoft compensates the service providers on a per-call basis with a guaranteed number of calls per day. Fees paid to service providers reflect their investments in facilities, equipment, direct phone lines, and hiring and training of support engineers.
Microsoft managers report that the system helped them handle technical service calls smoothly following the introduction of Windows 95 last year. By using our website, you agree to our privacy policy and our cookie policy. Business encyclopedia. Learn everything there is to know about running a business. Distribution channel refers to the network used to get a product from the manufacturer or creator to the end user. Intermediaries between the manufacturer and the consumer in an indirect distribution channel might include:.
A company that sells directly to consumers through direct mail, a catalog of its own products, or its own ecommerce site represents a business that uses a direct distribution channel.
For example, entrepreneurs who create and sell digital products that include workbooks, audio training, and online courses from their own websites are using a direct distribution channel. The digital products go directly from the creator to the customer. On a larger scale, the beverage alcohol industry uses a multi-tier, indirect distribution channel. Distillers and wineries sell to distributors, who sell to retailers, who sell to consumers.
But while wineries must use indirect distribution channels to get their wines into retail outlets where consumers can buy them, many also sell directly to consumers onsite at wineries. Using both approaches lets wineries reach a mass market through an indirect distribution channel and a smaller market through direct distribution via on-site retail operations that they own.
Businesses with products should ask a number of questions before determining a distribution program. Those questions include:. The distribution channel will have an impact on pricing.
With indirect distribution, a product that goes from the manufacturer to a distributor before it goes to a retail outlet needs to be priced at wholesale so that both the distributor and retailer can mark up the price. A CRM system could be the answer.
Partner relations can be managed in the same way as customer relationships and a CRM provides the technology to support this.
Learning Centre. Watch demo. Contact Us. Start learning. What is a Distribution Channel? How do you manage distribution channels? Considered CRM? What we will cover:. Types of Distribution Channels Explained. Channels of distribution can be sorted into two main categories: direct and indirect. A direct channel of distribution.
Is one where a company sells directly to the end consumer. For instance, an athletic apparel company who manufactures sports shoes and sells them through an e-commerce website or at their own retail store is employing a direct channel of distribution. Products go directly to the buyer with no intermediaries or intervening partners between them. Benefits of this approach. More profit goes directly to the company from the consumer. The drawbacks. Companies using direct channels of distribution must heavily invest in sales teams and consumer marketing infrastructure, rather than relying on partners.
An indirect channel of distribution. There are numerous types of intermediaries:. Value-added retailers VARs. Add features to a product to improve it and then sell the new product directly to retail customers. May not directly profit from the sale of products or services, but they can be powerful intermediaries all the same, influencing clients to buy. System Integrators SIs. Help unite different components of a product or system together, making sure they are functioning together properly before passing them to the customer.
Allow businesses to outsource their technology management by delivering IT and e-management services across a network to multiple enterprises.
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