Direct versus Indirect Distribution

Channel Management
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Aniket Deolikar
Consultant, India

Direct versus Indirect Distribution

🔥NEW A Distribution channel is a chain of processes that involves the physical movement of the goods from the manufacturer to the end consumers. Companies usually have the following goals in mind in terms of distribution:
  • QUALITY OF PRODUCTS: Companies must ensure that the product provided to the consumers is the best in terms of packaging, quality and freshness.
  • SMOOTH MOVEMENT OF GOODS: Channels serve to ensure a proper flow of goods. Without channels, the products of the manufacturer would probably not reach the end consumer. So one of the goals of distribution channels is to bring the goods from the place of production to the place of consumption.
  • INVENTORY CLOSER TO THE CONSUMER: Distribution channels typically include warehousing of the goods. From those warehouses, the goods are transported further. Warehouses are made at such a location from where the transport of goods is convenient and quick.
  • AVAILABILITY: Companies should ensure that if a consumer is looking for certain products, their brand/product is available to them. It means their products should be there at the right place at the right time. This also helps in estimating the demand of a particular area.
Direct Distribution versus Indirect Distribution:
  1. Direct Distribution
    Direct distribution channels are organized and managed by the manufacturer itself. This way of distribution allows consumers to buy directly from the manufacturer. Here the manufacturing company requires its own logistics teams, warehouses transport facilities, etc. This type of channel is organized and managed by the manufacturer itself. Direct distribution can be done by opening retail shops, through traveling salesmen, through mail order business, through online selling of products on their own websites, etc. Certain goods like B2B products like industrial machinery are often directly sold to consumers. But also more costly goods like perhaps luxury automobiles are being sold directly to consumers. Sometimes companies open their own retail shops in many localities. For example Bata shoe company shops.

    Advantages of Direct Distribution:
    • Full control over the process: As manufacturer owns the whole distribution channel has 100% control and ownership and makes changes whenever needed.
    • High profit margins as no intermediaries are being used.
    • The initial cost may be high. Setting up warehouses, logistics is costly initially but eventually direct distribution channels are shorter and may be less costly than Indirect channels
    • Better connection with the customer base. Faster and easier demand forecasting.
    Disadvantages of Direct Distribution:
    • Can be difficult to manage at large scales.
    • Initial setup costs are high.
    • Growing in many geographical areas (countries, regions) at the same time can be too costly.

  2. Indirect Distribution
    This type of distribution involves one or more third parties (intermediaries) that help deliver the goods to the consumers. Such third-parties normally include exporters, importers, wholesalers, and retailers. The retailers obviously sell the products of the manufacturer, however they may also sell the competitors' products. So as a manufacturer you have little or no control over what other products will be sold in the shops. The third parties store the goods, display it, and employ their salesforce to sell it. In return, the manufacturers have to share some of its profit with the intermediaries. Retailers sell directly to the consumers while wholesalers sell through retailers.

    Advantages of Indirect Distribution:
    • Distribution agents have specialized knowledge and experience in getting the products to as any markets as possible.
    • A large geographical area can be targeted at once since initial costs are relatively low.
    • Initial setup cost is lower.
    • Retailers know their local markets and how to best sell your products there.
    Disadvantages of Indirect Distribution:
    • Less control at the manufacturer over the products being sold.
    • May increase the total cost to consumer.
    • Amount of time for the product to reach customers can be longer as intermediaries are involved. On the other hand, by having more inventory closer to the customer the opposite can also be true.
    • Harder to establish brand loyalty as retailers will also be selling competitor brands.
    • problems with trust: Third parties have to be entrusted with the manufacturer's products.

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