The Advantages of Distribution Channel for Your Business

A product’s journey from the manufacturer to the customer has gone through many processes. Manufacturers oftentimes do not sell their products directly to consumers. They use a distribution channel in the process.

A distribution channel is a system chosen by companies to distribute products or services to their consumers. The company’s operations always engage with the usage of distribution lines, particularly in distributing manufactured items to avoid expiration in a warehouse management system. 

Key Takeaways Distribution channels are vital systems chosen by companies to deliver products or services to consumers. These channels involve various intermediaries, ensuring products reach end consumers in optimal condition. Distribution channels serve several functions beyond product delivery, including information gathering, negotiation, promotion, ordering, payment processing, and finance management. These functions facilitate efficient and effective distribution operations. Distribution channels involve multiple stages, starting from the manufacturer, distributor, sub-distributor, wholesaler, retailer, and finally reaching the consumer. Each stage plays a crucial role in ensuring the smooth flow of goods from production to consumption. Market demand, product characteristics, company capabilities, and intermediary selection are key factors that influence distribution channel decisions. Understanding these factors helps companies design effective distribution strategies. Choosing the right distribution channel is essential for companies to effectively reach their target markets and ensure the smooth flow of goods from production to consumption. Leveraging tools like Inventory Management Software from HashMicro can further streamline inventory management processes and enhance distribution channel performance. Click Here to Get the Free Demo!

Distribution Channel Meaning

A distribution channel is a series of distributions or shipments of goods to several parties or places. Accordingly, the intermediaries in this line depend on each other. The manufacturer determines the medium of the distribution process to its consumers.

The medium, for instance, can be distributors, agents, wholesalers, and so on. Maintaining the distribution process from the producer to the consumer is crucial. This process is essential to ensure the products’ condition until they finally reach the end consumer.

Distribution Channel Function

The primary function of a distribution system is to distribute goods and services to consumers. Furthermore, Simon Hudson stated other distribution functions that are in line with the primary role, namely: 

1. Information 

Distribution channels allow companies to collect important information about consumers and competitors. Therefore, this information will help the company to plan its business in the future. 

2. Negotiation 

The process to reach an agreement between the company and the buyer will occur when distributing the product. The company and the buyer often need to agree on the price and requirements in product movement. The agreement then allows the transfer of title to the goods to the buyer.

3. Promotion 

The distribution allows companies to convey product value through persuasive communication to consumers. As a result, people will be more familiar with the company’s products. After understanding more about a product, the possibility of people buying the product will increase. 

4. Ordering

The distribution channel, in this case, acts as an intermediary for the process of ordering goods, starting from the bottom track and continuing to rise at the top level to reach the producer—for example, a distributor who orders goods from a company. 

5. Payment

The payment process for every transaction occurs from consumers to producers according to the agreement of both parties. Generally, manufacturers accept bill payments through banks. 

6. Finance

The function of finance is to utilize funds for various costs used in the distribution process. Companies will have difficulty calculating expenses manually. A manual calculation will be confusing because it concerns various aspects and parties. The company can automate its operational systems to avoid confusion with ERP Finance Software.

Related article: The Ultimate Guide to Warehousing: Warehouse & Inventory Management

Distribution Channel Stages

The distribution of goods does not only involve one but several parties. Therefore, a distribution channel needs to go through several stages in its implementation. These stages include the following: 

1. Manufacturer 

A producer is an owner who wants to sell their product to a distributor. Therefore they are responsible for ensuring the availability of products. Moreover, manufacturers must ensure that the distribution of goods is carried out optimally. They also have to make agreements with distributors so that product delivery can run smoothly.  

2. Distributor 

Distributors are usually involved in a direct transaction with the manufacturer. They will then resell the product to wholesalers and retailers. Distributors generally purchase products from various manufacturers to resell them at a lower price. 

3. Sub-distributor

The next stage is the sub-distributor. Sub-distributors act as product buyers from the main distributor. Furthermore, the leading distributor has determined the expenditure and distribution point of the product. With that being said, the sub-distributor acts more as the product’s successor from the hands of the main distributor. 

4. Wholesaler

Wholesalers are entrepreneurs who buy large quantities from distributors to resell them. They can sell products to several merchants, varying from wholesalers to retailers.

5. Retailer

Retailers are constantly engaged with end-level consumers in particular. Retail traders sell their products directly to consumers, who will not resell the product. Generally, retailers even inform consumers not to resell the products. 

6. Consumer

Consumers are final-level buyers of the product. This party usually uses goods and services to meet their needs. Each consumer’s personal needs and goals are certainly different from one another.

Defining Factor of Distribution Channel

The distribution activities certainly can not be done without consideration. This channel has several determining factors, namely:

1. Market

Determination of market demand helps determine the target market in the distribution of products. This factor is critical so that the goods can reach the right target. 

2. Determination of goods

Companies as sellers must consider the quality of goods, such as the weight of an item. Of course, companies will consider a strategy to manage high shipping costs for heavy goods in the distribution process. 

3. Determination of the company

As a provider of goods or products, a company will influence various decisions. The company must have the ability to buy, distribute, and supervise goods. Supervision by the company is vital so that the goods will arrive safely into the hands of consumers.

4. Determining the intermediary 

The company has the authority to determine the intermediary. As a result, this authority means the company is obliged to provide services in purchasing goods by consumers.

Types of Distribution Channel

The distribution channel is not an absolute thing. There is not only one type of method of distributing goods or services. In practice, the company applies various kinds of product distribution when carrying out its business activities. WallStreetMojo stated that a product movement can be direct or indirect.  

1. Producer-to-consumer direct distribution channel

The direct distribution channel is a short and straightforward path without intermediaries, namely producers who directly sell goods to consumers. For example, ice cream, newspapers, and other sellers. This type of seller on this channel sells its products directly to end-level consumers. 

2. Producer to retailer to consumer distribution channel

In contrast to the direct distribution channel, producers make large sales to retailers. Retailers then transact directly with consumers. Examples are vermicelli and meat that sell their products to meatball sellers. The meatball merchants will then sell their products to consumers. 

3. Producer to wholesaler to retailer to consumer distribution channel 

The difference between this distribution channel and the previous one is that manufacturers only sell products to wholesalers. Wholesalers will engage in transactions with multiple retailers. The retailers then act as the last chain of a product before it reaches the consumer. Simple examples of this type are rice and drinking water. 

Related article: What is Distribution? Definition, Types, Stages, and Examples

Conclusion

After understanding the meaning, function, stages, determinants, and types of distribution channels, we hope that you, as a businessman, will be helped in choosing the right distribution path.

Distribution channels are essential for companies in carrying out product buying and selling activities because they have distributed goods so that consumers can purchase them more easily. Therefore, companies need to consider various factors carefully for the company’s progress in the long term.

Calculating the company’s costs in the entire distribution process and constantly checking inventory to monitor sales and purchases are essential for business. Companies need to do good financial and inventory management to ensure distribution channels run smoothly.

Hence, HashMicro provides a solution for your company to simplify the inventory management process using Inventory Management Software. This software has various excellent features that will help you run your business. Contact our customer service for a free demo.