Definition of a Channel of Distribution
A channel of distribution can be defined as the collection of organizational units, institutions, or agencies within or external to the manufacturer, which perform the functions that support product marketing. The marketing functions are pervasive: they include buying, selling, transporting, storing, grading, financing, bearing market risk, and providing marketing information. Any organizational unit, institution, or agency that performs one or more of the marketing functions is a member of a channel of distribution.
The structure of a distribution channel is determined by the marketing functions that specific organizations perform. Some channel members perform single functions-carriers transport products, and public warehousers store them. Others, such as third party logistics providers and wholesalers, perform multiple functions. Channel structure affects (1) control over the performance of functions, (2) the speed of delivery and communication, and (3) the cost of operations.
While a direct manufacturer-to-user channel usually gives management greater control over the performance of marketing functions, distribution costs normally are higher, making it necessary for the firm to have substantial sales volume or market concentration. With indirect channels, the external institutions or agencies (e.g. carriers, warehousers, wholesalers, retailers) assume much of the cost burden and risk, so the manufacturer receives less revenue per unit.
Most distribution channels are loosely structured networks of vertically aligned firms. The specific structure depends to a large extent on the nature of the product and the firm's target market. There is no "best" channel structure, for all firms producing similar products. Management must determine channel structure within the framework of the firm's corporate and marketing objectives, its operating philosophy, its strengths and weaknesses, and its infrastructure of manufacturing facilities and warehouses. If the firm has targeted multiple market segments, management may have to develop multiple channels to service these markets efficiently.