The purpose of a distribution channel is to make the right quantities of the right product/service available at the right place, at the right time. What has made distribution strategy unique relative to the other marketing mix decisions is that it has been almost entirely dependent on physical location. The old saying among retailers is that the three keys to success are the 3 Ls--Location, Location, Location!
Intermediaries provide economies of distribution by increasing the efficiency of the process. They do this by creating time, place, and possession utility, or what we have referred to simply as right product, right place, right time. Intermediaries in the distribution channel fulfill three basic functions.
26. Intermediaries support economies of scope by adjusting the discrepancy of assortments . Producers supply large quantities of a relatively small assortment of products or services, while customers require relatively small quantities of a large assortment of products and services. By performing the functions of sorting and assorting, intermediaries create possession utility through the process of exchange and also create time and place utilities. We refer to these activities as reassortment/sorting, which comprise:
- Sorting which consists of arranging products or services according to class, kind, or size.
- Sorting out which would refine sorting by, for example, grading products or output.
- Accumulation which involves the aggregation of stocks from different suppliers, such as all (or the major) producers of household equipment or book publishers.
- Allocation which is really distribution according to a plan--who will get what the producer(s) produced. This might typically involve an activity such as breaking bulk .
- Assorting which has to do with putting an appropriate package together. Thus, a men's outfitter might provide an assortment of suitable clothing: shirts, ties, trousers, socks, shoes, and underclothes.
27. Intermediaries routinize transactions so that the cost of distribution can be minimized. Because of this routinization, transactions do not need to be bargained on an individual basis, which would tend to be inefficient in most markets. Routinization facilitates exchange by leading to standardization and automation. Standardization of products and services enables comparison and assessment, which in turn abets the production of the most highly valued items. By the standardization of issues, such as lot size, delivery frequency, payment, and communication, a routine is created to make the exchange relationship between buyers and sellers both effective and efficient. In channels where it has been possible to automate activities, the costs of activities such as reordering can be minimized--for example, the automatic placing of an order when inventories reach a certain minimum level. In essence, automation involves machines or systems performing tasks previously performed by humans--thereby eliminating errors and reducing labor costs.
28. Intermediaries facilitate the searching processes of both producers and customers by structuring the information essential to both parties. Sellers are searching for buyers and buyers are searching for sellers, and at the simplest level, intermediaries provide a place for these parties to find each other. Searching occurs because of uncertainty. Producers are not positive about customers' needs and customers cannot be sure that they will be able to satisfy their consumption needs. Intermediaries reduce this uncertainty for both parties.
We will use these functions of reassortment/sorting, routinization, and searching in our construction of a technology-distribution function grid, or what we call the Internet Distribution Matrix.
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