Distribution Channel Structure

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Woman holding a box in a warehouse
Woman holding a box in a warehouse (Image: Jupiterimages/Stockbyte/Getty Images)

A distribution channel is the flow of a product from the original manufacturer through to the end customer. Traditionally, manufacturers produce goods and then sell them to wholesalers, which then sell them to retailers. Retailers hold inventory for consumers. Manufacturers may look for alternatives to the traditional distribution channel to optimize profits.

Sales to Wholesalers

The premise of a distribution channel is that different types of companies specialize in different elements of the process. Manufacturers have expertise in product development and production. Some emphasize high-quality solutions while others focus on mass production at low costs. Manufacturers typically hold finished inventory in storage until sale to a wholesaler. Wholesalers, also known as distributors, hold inventory in warehouses for distribution to retailers or consumers.

Distributor's Role

The expertise involved in wholesaling is acquiring finished goods at reasonable rates and getting them to market. Top wholesalers identify quality or value-oriented products they expect customers to place high demand on. After establishing agreements with retailers, wholesalers often pull and ship products to replenish orders at stores. In some cases, wholesalers ship goods directly to consumers.

Retail to Customer

The expertise of retailers includes holding inventory on hand, breaking down bulk items and providing customer service. Retailers identify the needs and preferences of particular target markets and offer goods and services to match. Traditional brick-and-mortar retailers acquire goods from wholesalers and submit renewal orders for replenishment. Some retailers connect with distributors through electronic data integration and engage in a more efficient system known as vendor managed inventory. Online retailers may hold goods in their own distribution centers or rely on distributors for online order fulfillment.

Alternate Manufacturer Strategies

Product manufacturers aren't restricted to the traditional path. Some companies find more profitable ways to distribute finished goods. With Internet capabilities, manufacturers can sell online and ship completed goods directly from their own distribution centers. This strategy is known as forward vertical integration. Eliminating traditional distribution steps also reduces add-on costs. The major challenge is that manufacturers have to develop marketing, transportation and logistics, and consumer service abilities that aren't core strengths for them. Manufacturers also may develop exclusive agreements with wholesalers or retailers, allowing them sole rights to market the goods to consumers. This strategy is effective when a high-volume or well-branded retailer can generate more revenue with exclusive rights than multiple resellers could generate with open access.

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