Distribution Channel Essay Example

these topics exists, report metrics are not always comparable. Terms may be defined differently.

Some private sources include: •comScore Networks •Forrester Research •Jupiter Research •PhoCusWright •SITA Airline IT Trends Survey comScore, Inc. - a Global Internet Information Provider omScore maintains massive proprietary databases that provide a continuous, real-time measurement of the myriad ways in which the Internet is used and the wide variety of activities that are occurring online. Mission-critical information relating to both offline and online activities is collected through comScore's innovative use of the Internet as a timely and powerful data collection medium. comScore's products and services are utilized by many of the world's leading corporations to better understand, leverage and profit from the rapidly evolving worldwide Web. istribution - channel strategy The following table describes the factors that influence the choice of distribution channel by a business: InfluenceComments Market factorsAn important market factor is "buyer behaviour"; how do buyer's want to purchase the product? Do they prefer to buy from retailers, locally, via mail order or perhaps over the Internet? Another important factor is buyer needs for product information, installation and servicing. Which channels are best served to provide the customer with the information they need before buying?Does the product need specific technical assistance either to install or service a product? Intermediaries are often best placed to provide servicing rather than the original producer - for example in the case of motor cars.

The willingness of channel intermediaries to market product is also a factor. Retailers in particular invest heavily in properties, shop fitting etc. They may decide not to support a particular product if it requires too much investment (e. g.

training, display equipment, warehousing).

Another important factor is intermediary cost.Intermediaries typically charge a"mark-up" or "commission" for participating in the channel. This might be deemed unacceptably high for the ultimate producer business. Producer factorsA key question is whether the producer have the resources to perform the functions of the channel? For example a producer may not have the resources to recruit, train and equip a sales team. If so, the only option may be to use agents and/or other distributors. Producers may also feel that they do not possess the customer-based skills to distribute their products.

Many channel intermediaries focus heavily on the customer interface as a way of creating competitive advantage and cementing the relationship with their supplying producers. Another factor is the extent to which producers want to maintain control over how, to whom and at what price a product is sold. If a manufacturer sells via a retailer, they effective lose control over the final consumer price, since the retailer sets the price and any relevant discounts or promotional offers. Similarly, there is no guarantee for a producer that their product/(s) are actually been stocked by the retailer.Direct distribution gives a producer much more control over these issues.

Product factorsLarge complex products are often supplied direct to customers (e. g. complex medical equipment sold to hospitals). By contrast perishable products (such as frozen food, meat, bread) require relatively short distribution channels - ideally suited to using intermediaries such as retailers. Distribution Intensity There are three broad options - intensive, selective and exclusive distribution: Intensive distribution aims to provide saturation coverage of the market by using all available outlets.For many products, total sales are directly

linked to the number of outlets used (e.

g. cigarettes, beer). Intensive distribution is usually required where customers have a range of acceptable brands to chose from. In other words, if one brand is not available, a customer will simply choose another.

Selective distribution involves a producer using a limited number of outlets in a geographical area to sell products. An advantage of this approach is that the producer can choose the most appropriate or best-performing outlets and focus effort (e. g. training) on them.Selective distribution works best when consumers are prepared to "shop around" - in other words - they have a preference for a particular brand or price and will search out the outlets that supply.

Exclusive distribution is an extreme form of selective distribution in which only one wholesaler, retailer or distributor is used in a specific geographical area. How do you sell to your end-users? Do you use a direct sales team? Resellers? A catalog or website? Distribution channels are the pathways that companies use to sell their products to end-users.B2B companies can sell through a single channel or through multiple channels that may include oDirect/sales team: One or more sales teams that you employ directly. You may use multiple teams that specialize in different products or customer segments.

oDirect/internet: Selling through your own e-commerce website. oDirect/catalog: Selling through your own catalog. oWholesaler/distributor: A company that buys products in bulk from many manufacturers and then re-sells smaller volumes to resellers or retailers. Value-added reseller (VAR): A VAR works with end-users to provide custom solutions that may include multiple products and services from different manufacturers.

oConsultant: A consultant develops relationships with companies

and provides either specific or very broad services; they may recommend a manufacturer’s product or simply purchase it to deliver a solution for the customer. oDealer: A company or person who buys inventory from either a manufacturer or distributor, then re-sells to an end-user. oRetail: Retailers sell directly to end-users via a physical store, website or catalog. Sales agent/manufacturer’s rep: You can outsource your sales function to a company that sells different manufacturers’ products to a group of similar customers in a specific territory. Distribution is one of the classic “4 Ps” of marketing (product, promotion, price, placement a.

k. a. distribution). It’s a key element in your entire marketing strategy -- it helps you expand your reach and grow revenue. Here are three distribution examples: DIRECT TO END USERSSELL THROUGH A DEALER NETWORKSELL THROUGH A VAR (VALUE-ADDED RESELLER) You have a sales team that sells directly to Fortune 100 companies.You have a second product line for small businesses.

Instead of using your sales team, you sell this line directly to end-users through your website and marketing campaigns. You have two markets and two distribution channels. You sell a product through a geographical network of dealers who sell to end-users in their areas. The dealers may service the product as well.

Your dealers are essentially your customers, and you have a strong program to train and support them with marketing campaigns and materials. You sell a product to a company who bundles it with services or other products and re-sells it.That company is called a Value Added Reseller (VAR) because it adds value to your product. A VAR may work with an end-user to determine

the right products and configurations, then implement a system that includes your product. To create a good distribution program, focus on the needs of your end-users.

oIf they need personalized service, you can utilize a local dealer network or reseller program to provide that service. oIf your users prefer to buy online, you can create an e-commerce website and fulfillment system and sell direct; you can also sell to another online retailer or a distributor to offer your product on their own sites. You can build your own specialized sales team to prospect and close deals directly with customers. Wholesalers, resellers, retailers, consultants and agents already have resources and relationships to quickly bring your product to market. If you sell through these groups instead of (or in addition to) selling direct, treat the entire channel as a group of customers – and they are, since they’re buying your product and re-selling it. Understand their needs and deliver strong marketing programs; you’ll maximize everyone’s revenue in the process.

Best CaseNeutral CaseWorst CaseYou’ve used one or more distribution channels to grow your revenue and market share more quickly than you would have otherwise. Your end-users get the information and service they need before and after the sale. If you reach your end-user through wholesalers, VARs or other channel partners, you’ve created many successful marketing programs to drive revenue through your channel and you’re committed to their success. You’re using one or more distribution channels with average success. You may not have as many channel partners as you’d like, but your current system is working moderately well.You devote resources to the program, but you wonder whether you’d be

better off building an alternative distribution method -- one that could help you grow more aggressively than you are now.

You probably aren’t hitting your revenue goals because your distribution strategy is in trouble. With your current system, you may not be effectively reaching your end-users; your prospects probably aren’t getting the information and service they need to buy your product. Your current system may also be difficult to manage. For example, channel members may not sell at your suggested price; they don’t ollow up on leads you deliver; they don’t service the product very well and you’re taking calls from angry customers. Key concepts & steps Before you begin You can evaluate a new distribution channel or improve your channel marketing / management at any time.

It’s especially important to think about distribution when you’re going after a new customer segment, releasing a new product, or looking for ways to aggressively grow your business. Evaluate how your end-users need to buy Your distribution strategy should deliver the information and service your prospects need.For each customer segment, consider oHow and where they prefer to buy oWhether they need personalized education and training oWhether they need additional products or services to be used alongside yours oWhether your product needs to be customized or installed oWhether your product needs to be serviced Match end-user needs to a distribution strategy oIf your end-users need a great deal of information and service, your company can deliver it directly through a sales force. You can also build a channel of qualified resellers, consultants or resellers. The size of the market and your price will probably dictate which scenario is best.

If the buying process is fairly straightforward, you can sell direct via a website/catalog or perhaps through a wholesale/retail structure.

You may also use an inbound telemarketing group or a field sales team. oIf you need complete control over your product’s delivery and service, adding a channel probably isn’t right for you. Identify natural partners If you want to grow beyond the direct model, look for companies that have relationships with your end-users. If consultants, wholesalers or retailers already reach your customer base, they’re natural partners. Build your channelIf you’re setting up a distribution channel with one or more partners, treat it as a sales process: oApproach the potential channel partner and “sell” the value of the partnership oEstablish goals, service requirements and reporting requirements oDeliver inventory (if necessary) and sales/support materials oTrain the partner oRun promotions and programs to support the partner and help them increase sales Minimize pricing conflicts If you use multiple channels, carefully map out the price for each step in your channel and include a fair profit for each type of partner.Then compare the price that the end-user will pay; if a customer can buy from one channel at a lower price than another, your partners will rightfully have concerns.

Pricing conflict is common but it can jeopardize your entire strategy, so do your best to map out the price at each step and develop the best solution possible. Drive revenue through the channel Service your channel partners as you’d service your best customers and work with them to drive revenue. For example, provide them with marketing funds or materials to promote your products; run campaigns to generate leads and

forward them to your partners.What’s next? As you’re creating a new channel you’ll need a pricing strategyand sales process. When your channel is up and running, you can start launching marketing campaigns to channel partners and end-users.

55 How to design a good distribution system? A manufacturing company manufactures products. It then needs to deliver the manufactured products to the consumers. Many times, the place of manufacturing and the place where the consumers require the products is very far away form each other. For example: Tata Motors has a "Indicar" manufacturing plant in Pune but it's customers are all over India.So, Tata Motors needs to set up a efficient distribution system so that the products reach its consumers.

In case of some products like perishable food products etc. physical distribution is a very important part of the whole business. The transportation of "Amul Butter" to the stores that sell "Amul Butter" is a big challenge. While transportation, the butter has to be stored properly so that it does not get contaminated.

To completely understand and appreciate physical distribution, consider the case of "Amul Butter". Amul is made in "Kaira District" somewhere in Gujrat if I am not mistaken.From there it is distributed all over India and it is available at the local store near you. The destitution guys have to make sure that, every little "banya shop" on every little street of our extremely large country gets Amul Butter. To add to this enormous challenge, Amul butter is a perishable milk based product. It has to be stored and transported properly so that it does not get spoilt on the way.

And while the distribution

guys do all this, they have to make sure they keep the costs under control. The above example makes one think that the distribution guys do a whole lot of work.However, in practice what they do is, set up distribution channels. What are distribution channels? Distribution channels are all the sub-marketers or intermediate marketers of the company.

For example: selling agents, wholesalers, retailers, authorized representatives, showrooms etc. are basically distribution channels. The distribution channel for a particular product may be: Manufacturer - Wholesaler - Retailer - User Manufacturer - Distributor - Wholesaler - Retailer -User All of these members of the distribution channels also want to sell the products that they hold so they too try to market the products in their own small way.For example: the showrooms might try to promote their showroom in the local papers and sell more of the products they hold etc. OR An insurance selling agent may try to use word of mouth marketing to sell more insurance policies. OR The local "banya shop" will keep his shop stocked with the Amul butter packets so that he does not loose business from customer who asks for Amul butter.

Using these distribution channels the company can sub-market it's product at various localized levels. Using these distribution channels, the company can market it's self in all the local neighborhoods and streets of the country.The company has to give some commission to the people along the distribution channel. It also gives incentives to them if they sell more products. This way, the distribution and marketing of the product takes care of itself to some extent. In some cases having distribution channels may

prove to be costly as the price of the product rises at every level.

So, a company may choose to by-pass all distribution channels and directly market the product and deliver it to the consumer itself. However, whatever the method of distribution used, the products still have to reach the distribution channels or the consumer from the point of production.So we come back to the original topic of physical distribution. The two most important factors when considering physical distribution are: 1. The time taken for the product to reach the consumer. 2.

The cost of delivering the product to the consumer. Firstly, we do not want the consumer to wait for too much time when he is waiting for the products to reach him. So we want to use the fastest product delivery system we can. But, the problem with doing this is that the faster we try to make the product delivery, the more the cost of product delivery will increase.So, what needs to be done is to choose the "minimum service level" What is minimum service level? As we saw above, we cannot just reduce the time taken to delver the product and make the delivery as fast as possible. This would mean a very fast but also very costly distribution system.

So, what need to be done is to decide what minimum level of service will the customers be satisfied by. In case of a car, for example, we may say that the minimum level of service is set to one day. This means that, the car has to be delivered within one day to the consumer.So, the distribution system/distribution channels of

the company should be designed in such a way that the car can reach the consumer within one day flat.

One day is the minimum level of service desired. If a company keeps the minimum level of service too high, it risks loosing customers. In today’s competitive environment, if a car manufacturer delivers a car in one week and it's competitors deliver the car in one day; the care manufacturer will loose business to the competitors. Today people will not wait a week if they can get something in a day. The minimum level of service should be at least at par with your competitors.

If it is not, you better be selling some spectacular product or you are soon going to be out of business. On reading the above paragraphs, one may tend to think that the physical distribution system is only related to transportation of goods from the company to the consumer. However, physical distribution is a whole lot more. Some of the major aspects of physical distribution are: •Transportation •Warehousing •Inventory Management •The problem with Inventory and Warehousing Transporting a car from the car manufacturer to the customer every time an individual order is placed would be very costly.Not only would this be costly, but also it would take too much time and the time of delivery would exceed the desired minimum level of service. For example: if a car manufacturer is situated in Pune and an order for the car is placed in Delhi, it would take 3 days for the car to be delivered to Delhi.

Also since only one car is being delivered at a time, the cost of delivery

would be very high. Because of this the concept of warehouses and inventory is introduced. The car manufacturer has a warehouse in Delhi or around Delhi. The warehouse is stocked with cars.

Whenever an order is placed in the Delhi showroom for the car, the car comes from the warehouse instead of the company. This is obviously much more faster. However, there are some problems with this system. If the warehouses and the number of cars in the warehouses (inventory) is not managed by the company properly, it could prove to be very costly for the company.

For example: If the warehouse is not stocked properly, then a situation may arise where a customer is waiting for the delivery of a car but there is no car available for delivery.He may have to wait for the car to come in from the company. This will take a lot of time. The customer will cancel his order and book a car somewhere else. In the case of buying cars this is less likely to happen.

However, in the case of a small product, if the distribution system is not good, the products will not be available in the local stores and if this happens the consumer will buy something else and that will be the end of that consumers loyalty. So, in conclusion, the warehouse/stores/retail outlets must never be under stocked. However, even if they are over stocked there will be a problem.If a car manufacturer keeps his warehouse overstocked and full of inventory, he has lot of money tied up in the cars that are waiting to be sold in the warehouse. Because of this he

has less money to run his business and make the next batch of cars.

Also, since he has so many cars in the warehouse there are threats like, the warehouse catching fire and this cars being destroyed etc. For this he may choose to insure all the cars in his warehouse but that too will add to the costs of overstocking the inventory or overstocking the warehouse.So warehouses cannot be overstocked either. In conclusion, warehousing and the amount of inventory in the warehouses is a tricky subject. It must be managed effectively or it will prove to be costly for the marketer. Please Note: The above text only covers a basic idea of what is involved in designing a distribution system.

There are books and books written on this subject. Most of our readers are people starting or running small business. This marketing subject is less important to them as compared to other subjects so we have not given it too much stress.However, there are many good books available on this subject.

1-1 Major Channels of Product Distribution In China's distribution sector, the coverage of its vertical wholesaling system is extensive with wholesalers reaching out to a large number of widely dispersed rural markets at county level and below where the distribution system is undeveloped, meeting the enormous consumption needs of markets at the lower end. On the other hand, the coverage of China's horizontal retailing system is relatively narrow and retailers tend to concentrate in markets at different levels.The major types of distribution channels in the mainland are: 1. Manufacturer > wholesaler > retailer > consumer. This is the traditional channel. 2.

Manufacturer >

trade fair or exhibition > commercial enterprise (wholesale or retail) > consumer. 3. Manufacturer > commercial enterprise (wholesale or retail) > consumer. This type of distribution channel is known as direct purchase, i. e. a commercial enterprise purchases the goods directly from a manufacturer.

As this channel involves fewer intermediaries and thus saves costs, it has developed rapidly. . Manufacturer > wholesale mart > commercial enterprise (wholesale or retail) > consumer. Goods such as clothing, footwear and small home electrical appliances are primarily channelled through wholesale marts. 5. Manufacturer > agent > retailer > consumer.

This flexible channel is also growing very fast. 6. Manufacturer > distribution centre > retailer > consumer. This channel is particularly well suited to the development needs of commercial chain operations, convenience stores and supermarkets. 7. Manufacturer > consumer.

Also known as direct sales, this channel does not involve any intermediaries. The manufacturer sells its products to end consumers directly or through intermediaries such as mail order and TV shopping. In the latter case, certain fees are added to the ex-factory price. 8. Electronic commerce. E-commerce takes the form of B2B, B2C or C2C.

Among these, B2B (business-to-business) online wholesale is posting the largest transaction volume. E-commerce is a growing trend for the distribution of key commodities in China promising excellent development prospects.Many mainland manufacturers take a multi-channel approach in distributing their products. On the one hand, they adopt the systems of agents and distributors, franchised chain stores and wholesale marts.

On the other hand, they set up their own offices and sales operations to sell direct to wholesalers. Some of them would also establish direct sales outlets or specialty stores

through own operation or through acquisition of controlling stake in order to assume more control over the end market. 1-2 Wholesale SystemIn China, the traditional form of wholesaling was single-tiered. However, after two decades of reforms and development, a modernised wholesale system featuring three tiers of market has taken shape. These are commodities markets, regional wholesale markets and central wholesale markets (or state-level wholesale markets). Compared to traditional wholesaling, the new wholesale system today has very different characteristics.

•Diversified ownership structure. Nowadays wholesalers can be incorporated as collectively-owned, individually-owned, private, joint-stock, andSino-foreign equity or contractual joint venture. Among these, private wholesale enterprises are growing rapidly. •Diversified players. Three types of enterprises have become key players in the wholesale sector: first, manufacturers which also act as wholesalers; second, former specialised wholesale enterprises which have developed into wholesale agents or wholesale dealers representing brands; and third, large supermarket chains and hypermarket enterprises which are commanding an increasingly larger share of the wholesale market.

•Diversified forms.There are four major forms of wholesaling: first, manufacturers which wholesale through agents or brokers, or directly wholesale to wholesalers and retailers by means of contract; second, wholesale marts which often deal in both wholesale and retail, they are currently a major wholesale channel for a wide variety of goods especially agricultural sideline products and certain daily-use industrial goods; third, trade fairs where wholesale transactions can take place, these fairs -- which can be general, specialised, national or regional in scale -- are becoming an important platform for wholesale transactions; fourth, online wholesale transactions. Nowadays, wholesalers/distributors operate in tiers. For instance, a first-tier wholesaler supplies to a large number of second-tier wholesalers, and

a second-tier wholesaler may deal with many third-tier wholesalers. Alternatively, a sole distributor may work with agents, or a sole agent may be appointed alongside a sole distributor.

Hence, the wholesale chain can be rather long, involving a large number of intermediaries.In terms of operation scale, level of development and efficiency, the mainland wholesale sector remains at an early stage of development. A typical wholesale mart in China is made up of rows of booths, has a relatively small operation scale, and hardly attracts any large-scale wholesaler. As China further liberalises its wholesale sector, the entry of large-scale foreign wholesalers is set to stimulate the development of the wholesale sector. Transforming the small-scale "sales booth" model into large-scale wholesaling is a development direction for the sector. Another growing trend is for general markets to develop along the lines of specialised, brand-driven markets comprised primarily of sole agents and sole distributors of domestic and foreign brands.

-3 Retail System As the Chinese economy continues to surge ahead, the consumption power of the cities is rising steadily and retail is making up an increasingly larger share of the commercial distribution sector. In particular, the rapid expansion of large-scale supermarkets and hypermarkets in recent years underlines the growing importance of the retail sector. China is a vast country with an unbalanced development of regional economy and diverse consumer preferences. Its retail markets in different regions differ significantly from one another. The hierarchy of retailers differs from city to city depending on its level of economic development.

In economically more developed cities that command greater reach, the retail market can be divided into four tiers: •National commercial districts -- featuring

large department stores, supermarkets and specialised stores; •Regional commercial districts -- mostly located near residential areas featuring large general merchandise stores; •Community commercial districts -- featuring super- markets offering primarily food products and daily necessities; •Residential districts -- featuring convenience stores and small retail outlets. In second-tier cities with a relatively high level of consumption and economic development, the retail market can be divided into three tiers: •Central commercial districts -- housing large department stores, different types of specialised stores and boutiques; •Regional commercial districts; Community commercial districts. In medium-sized cities, the retail market is mainly made up of small- and medium-sized commercial outlets in addition to several large-scale commercial facilities. In small towns and county-level townships, the retail market has only one tier comprising primarily of small commercial outlets such as supermarkets and convenience stores. Today, state-owned, private and foreign-invested operations are the three dominant players in the retail sector.

Prior to its accession to the WTO, China began to open up its retail sector to foreign investment. Nearly 70% of the world's top 50 retailers have now established sizeable networks in China.In fact, retail giants such as Wal-Mart of the US, Carrefour and Auchan of France, and Makro of Germany have already started to expand into second-tier small- and medium-sized cities. Meanwhile, large-scale indigenous retail enterprises have actively pursued merger and acquisition in a bid to expand their operation scale.

The central government is also giving support to 20 large retail enterprises, helping them transform into China's flagship retailers. It can be expected that world-class retail enterprises, state-level retail enterprises and regional retail enterprises will dominate the mainland retail scene in future. In

the past, China's retail sector was dominated by a single store format -- the department store.Nowadays, a wide variety of stores have gradually come into play, including large shopping malls, supermarkets, chain stores, specialised stores, convenience stores, discount stores, hypermarkets, auction houses, online shops, mail order houses, TV shopping channels, and distribution centres. As the Chinese economy continues to develop, the diversification trend of retailers is set to continue over the long term. Supermarkets will become more and more consolidated, structured and modernised and will move towards the directions of chain operation, specialisation, differentiation and personalisation.

Hit by the challenges brought about by the rapid growth of new retail channels, traditional department stores went downhill for some time. But now, some have undergone transformation and re-emerged as modernised department stores moving from general merchandise stores to theme stores.They have also experimented with the format of specialised chain store operation dealing primarily in stylish, up-market goods. Larger operation scale, organisational restructuring, and diversification into new retail formats are the development trends of department stores. In recent years, with the rapid development of computer network technology and growing popularity of business and home computers, the retail system in China is switching to network operations in growing numbers.

The internal systems of retail enterprises and B2B horizontal linkages are adopting the Intranet-based chain operation model, whereas B2C interactions are becoming Internet-based, vertical business operations. Direct selling is another retail format that should be noted.Since the 1990s, as a new form of retailing, direct selling has undergone various development stages in China: from the introduction of pyramid sales, banning of pyramid sales, to the transformation of direct selling enterprises

and the promulgation of a dedicated legislation. In August 2005, the draft Regulations on the Administration of Direct Selling was passed. The new rule stipulates that direct selling enterprises must establish provincial-level branch operations before applying for permission to launch direct sales in that province. Upon approval by the state, direct selling shops may open in the province concerned.

However, such approval is not valid in other provinces. Cross-province operations without the required approvals are prohibited.While the new rule has lifted the restriction on the number of stores, direct selling enterprises must still operate under the "shop + sales personnel" mode. Performance of Larger Retail Chains in 2004 (By Store Type) IndicatorTotal No. of StoresBusiness Floor Area (sqm)No.

of EmployeesSales Revenue (Rmb 10,000)Directly Operated StoresFranchised Stores Total54,89135,170,6431,055,97855,806,95834,59020,301 Department Store2,6376,110,570139,0487,447,3159971,640 Supermarket14,07315,943,112510,82724,099,4019,1074,966 Specialised Store25,86711,874,235317,15622,066,94216,6079,260 Specialty Store4,493393,42232,588796,6611,7972,696 Convenience Store7,755832,72555,4411,382,6326,0271,728 Others6616,57991814,0075511 Source: National Bureau of Statistics 1-4 Distribution of Imported GoodsPrior to China's accession to the WTO, the government had maintained tight control over import-export trade. Foreign companies generally were not permitted to import goods for sale in the mainland. In 2003, with the merger of the State Economic and Trade Commission and the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) into the Ministry of Commerce (MOFCOM), domestic and foreign trade began to come under unified management. In 2004, China fully liberalised foreign trade. At the end of 2004, foreign commercial enterprises were allowed to be established, making it possible for foreign companies to import goods for sale in China. 5-1 Categories of Distributors/AgentsDistributors generally fall into four categories: Category One Distributors This category of distributors abide by agreements; possess high credibility, strong marketing capability, extensive sales network

and good capital flow; have the same business philosophy as the enterprises they serve; and have long-term development plans and strategies.

With such strengths, they are high quality partners and can be nurtured to become long-term distributors for enterprises. As a gesture of support to these distributors, enterprises can grant them a credit limit in payment for goods, allowing part of the payment to be settled in cash and providing credit for the remainder.Category Two Distributors The sales capability of these distributors is relatively weak, yet they have good credibility. Support from manufacturers is often required. In dealing with this category of distributors, manufacturers have to provide support and guidance such as sending sales representatives to assist them in developing the market, boosting their sales capability and confidence.

Preferential treatment such as extending their credit period or lowering their minimum order requirement may also be considered. Category Three Distributors These distributors possess good sales capability, yet their credibility is low. Hence, there are risks in dealing with them.They must be closely supervised under a set of stringent distribution policies. In the manufacturer's initial stage of building sales channels, these distributors are of great value to the manufacturer in capturing market share with their strong sales capability. Yet, since the risks of working with them are high, they should be restricted to play a limited role and not to be relied upon too much in the distribution process.

In settling payment with these distributors, cash transaction should be used as far as possible. Yet, backed by their strong operation capacity, these distributors are in a good position to bargain with manufacturers for more favourable payment terms.If

they really have problems with cash payment, manufacturers can consider allowing them to pay the bulk amount in cash yet requiring them to settle the balance before the next batch of goods is delivered. The amount of outstanding payment allowed should also be capped. If payment is overdue for two consecutive months without good reasons given and warnings have been issued two months before, manufacturers should cease supplying goods in the third month. Other methods should also be used to recover the overdue amounts.

Category Four Distributors These distributors have poor sales capability and low credibility. It is best to avoid working with them or else manufacturers may find themselves bogged down in piles of bad debts. Worse still, some distributors may maliciously run away with the merchandise, causing great losses to the manufacturers.An advisable strategy to deal with these distributors is to insist on payment on delivery and payment by cash.

5-2 Operation Models of Distributors/Agents There are mainly three distribution models based on the distributor's coverage. 1. Multi-Layer Regional Agent Under this model, the market is divided into several major regions, with a sole agent established in each region. The agents can be divided into several classes, and the regional sole agent may develop its secondary agents or distributors.

The biggest advantage of this traditional distribution model is that a sizeable sales network can be formed in a short time with relatively low costs.The sales network can also be expanded quickly building up the product brand. Structure of the Multi-Layer Regional Agent Model 2. Regional Sole Distributor Every region (usually a province) covered by an enterprise's sales office is divided into sub-regions. Except

for major retailers in the first-tier market which source directly from the regional sales office, all small retailers in the region source their goods from the first-tier wholesaler, which is the sole distributor set up in that region. The first-tier wholesaler will appoint a second-tier wholesaler in each second-tier city to act as sole agent from which all the retailers in the second-tier city will make their purchases.

There are no wholesalers in third-tier markets, and the retailers in these markets will buy from the second-tier wholesaler in second-tier cities. Structure of the Regional Sole Distributor Model 3. Direct Sale by Manufacturers Manufacturers establish their own branch offices in first-tier markets to deal directly with retailers. In second-tier markets, distribution arms may be established or sales representatives may be sent there to deal directly with retailers in second- and third-tier markets as well as specialty stores in third-tier markets. Distributors may also be appointed, but only as a supplement where the sales capability of the manufacturer is inadequate.

Structure of the Direct Sale by Manufacturers Model 5-3 Criteria for Selecting DistributorsThe criteria for selecting distributors include mainly the distributor's operation scale, financial position, reputation, sales volume and growth, warehousing capability, transportation capability and customer mix. In particular, customer mix refers to whether the distributor has an extensive and in-depth customer network comprising a number of second-tier wholesalers and retailers which can cover a regional-level city. The distributor's credit position should be the first and foremost criterion in the selection process. In assessing the distributor's strengths in this aspect, its financial position and in particular its ability in settling payment for goods is of utmost importance.The distributor's

reputation is a good indicator of its reliability and thus another important selection criterion.

The reputation of the distributor can be gauged by means of its company image and customers' feedback. It is also crucial to examine whether the distributor shares the same development goals, industry prospects and market views with the manufacturer. A good assessment method is to observe the distributor's corporate culture and values. The sharing of common goals and values is pertinent to the smooth cooperation and effective integration between the two parties and should be given due consideration before agreeing on a partnership.The management capability of the distributor is a key factor in determining whether it can effectively implement agreed business decisions and plans, which will in turn affect sales performance. The continuity of the management staff is also important.

If management personnel are changed frequently, the cooperation relationship may be disrupted and the business performance may be affected. With regard to the distributor's sales capability and performance, two assessment standards may be used. One is the number of sales personnel employed by the distributor and their calibre, and the other is whether the distributor's market coverage meets the manufacturer's requirements. 5-4 Signing Distribution Agreement with Distributors/AgentsTo enhance distributors' competitiveness and boost sales, distribution agreements may specify distributors' market positioning and business development directions as well as measures to be taken by manufacturers to help distributors in the process. 5-4-1 Positioning and Development of Distributors 1.

Modernised distribution and warehousing centre. Distributors are the primary suppliers of goods and services to retailers and wholesalers. Distributors must have good infrastructural facilities, attractive rewards, standardised operation processes and efficient management so as to

provide customers with new, stable and timely products. By offering value-added goods and services (such as storage and transportation of products and credit), distributors can gain reasonable profits from their customers. 2.

Potential suppliers providing manufacturers with coverage services.Distributors can provide coverage services to manufacturers by recruiting, training and managing the sales teams, and are paid a "coverage service fee" by manufacturers based on their service quality. 3. Potential suppliers providing management services to small and medium-sized customers. Distributors can provide e-commerce management, store promotion, inventory management and sales management services to small- and medium-sized customers and collect a management service fee.

5-4-2 Characteristics of Distributors Size. In the distribution and sales coverage sector, competitiveness in size is obviously important. Efficiency. Efficiency is the key to profit generation. While application of technology and change in business model are the major ways to raise efficiency, lowering costs and enhancing productivity are also crucial.The major goal of the distributors is to satisfy the manufacturers' needs.

Standardisation. Standardisation in business operations forms the basis for distributors' long-term, healthy development. Professional services. Distributors should strive to build a professional image and offer professional services to cater to the needs of the shops.

5-4-3 Ways to Improve the Distribution Network 1. Alignment in strategies is key to the joint development of the manufacturer and distributor. The strategy of the manufacturer should be to build a network of distributors who are strategic partners possessing size, efficiency, professional services and standardisation in addition to strong financing capabilities.These distributors must also assign top priority to the manufacturer's business. 2. To improve the business environment of the distributors and increase the confidence of the

strategic partners, the manufacturer should take action such as granting preferential payment terms or core business development fund to the distributors.

3. The manufacturer can assign distributorship rights through open tender. This can help distributors realize that distributorship is a valuable intangible asset which can only be obtained through competition and bidding. This can also motivate distributors to pay more attention to sharpening their competitive edge and carry out reforms. www.

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