BUAD 307





Intermediaries: Value added, functions, and types

PowerPoint Narration

Distribution (also known as the place variable in the marketing mix, or the 4 Ps) involves getting the product from the manufacturer to the ultimate consumer. Distribution is often a much underestimated factor in marketing. Many marketers fall for the trap that if you make a better product, consumers will buy it. The problem is that retailers may not be willing to devote shelf-space to new products.

Retailers would often rather use that shelf-space for existing products have that proven records of selling. Although many firms advertise that they save the consumer money by selling direct and “eliminating the middleman,” this is a dubious claim. The truth is that intermediaries, such as retailers and wholesalers, tend to add efficiency because they can do specialized tasks better than the consumer or the manufacturer.

 Because wholesalers and retailers exist, the consumer can buy one pen at a time in a store located conveniently rather than having to order it from a distant factory. Thus, distributors add efficiency by:

  • Breaking bulk—the consumer can buy small quantities at a time. Small and modest scale retailers (e.g., the USC bookstore) can buy modest quantities. This service reduces quantity discrepancy in the supply-demand relationship between manufacturers and end customers.
  • Consolidation and Distribution. It would be highly inconvenient for customers to have to buy each product at a different store. Most American consumers today also have limited patience with specialty stores in most categories. Rather than having to go to one store to buy produce, one store to buy meat, and other stores for other household products, there is considerable value in having everything available in a supermarket. The consumers can buy at a neighborhood store, which in turn can buy from a regional warehouse. It would also be very inconvenient for supermarkets and most other retailers to have to receive deliveries individually from each manufacturer. Wholesalers consolidate products from different manufacturers so that a large number of different products can be received in one shipment. This reduces costs by increasing the efficiency with which products can be (1) delivered and (2) received. Consolidation and distribution services offered by wholesalers reduce the assortment discrepancy between manufacturers on the one hand and local retailers and consumers on the other. NOTE: Some very large retail chains such as Wal-Mart may be able to handle distribution more effectively than outside wholesalers. Wal-Mart often insists on sales directly to the chain from the manufacturer rather than sales through wholesalers. This is the exception to the rule since Wal-Mart is large enough to be able to handle distribution itself rather than going through retailers. It should be noted that Wal-Mart has made very large investments to make this possible, and these capabilities have taken a long time to develop. Wal-Mart had a very difficult time breaking into the grocery business—especially for perishable items—and took several years to perfect this capability.
  • Carrying inventory. This service reduces the temporal discrepancy between
    • manufacturers who may need to schedule production at relatively constant levels and consumers who need certain products only at certain times (e.g., turkeys needed mostly at Thanksgiving and Christmas)
  • Financing. Certain small manufacturers may have difficulty waiting for payment until goods are sold to the end-customer. Wholesalers and retailers may negotiate lower prices from the manufacturer in return for quick payment.

Many of the cost savings associated with having an efficient system of intermediaries result from specialization. Manufacturers specialize in what they do well—manufacturing products—while others specialize in handling various phases of the distribution path. Some specialize in retailing—usually selling a large assortment of goods in small quantities to a large number of end customers. Wholesalers, in turn, specialize in moving and goods from numerous manufacturers to a large number of retailers.