Each channel has different requirements and costs associated with it.
For most businesses, they will deal exclusively with only one channel.
Many times it is not the business itself that dictates what channel will
be used, but rather the volume and size of that business as well as the
channels available. Not all four channels are available for all
products, and in some cases there may only be one channel available no
matter what volume your business requires.
The first channel is the manufacturer who actually makes the product.
Smaller companies often sell directly to other businesses because they
are new to the market, or do not have business capital required to work
through other channels. In situations such as this, you will deal with
internal sales staff at the manufacturer who will handle all aspects of
purchase, delivery logistics and billing.
A wholesaler usually works with the manufacturer to provide quantities
of goods to other retail outlets or businesses. Often, they may also be
the distributor of the product as well. A wholesaler is usually only
interested in volume sales and does not sell single or low-quantity lots
of the products. In situations such as this the manufacturer sells only
to its wholesalers, who in turn sell to businesses or distributors. The
manufacturer may be the wholesaler in some cases. They usually handle
all logistics involved in getting the merchandise to your location, as
well as billing for the products and delivery.
Distributors often sell in lower quantity lots and purchase the goods
from a wholesaler. In some cases, the distributor is also the
wholesaler. Often distributors may be regional in scope. A distributor
may also act as a customer relationship manager between the manufacturer
and the business purchasing the goods. They will often come to the
business to suggest ways of improving sales, layout of the display and
answer any questions or concerns that business has about the product.
Suppliers may sell to small businesses with low volume or to individuals
directly. In some situations you may have to go to their showroom or
warehouse to pick up the goods yourself. Suppliers are often used when
distributors and/or wholesalers do not deal in small enough quantities
for a business. They can also be used when there is no distribution
method available to move goods easily through a fragmented retail
environment with fluctuating sales and purchase patterns. Furthermore,
some suppliers may act as a drop-shipper on your behalf warehousing the
goods and shipping directly to your customers.
It is important to realize that with each layer in the distribution
channel the cost of the goods increase. This is why large retail firms,
such as Kroger, can purchase a can of tuna at a much lower price than a
small, independent grocer can. Kroger is purchasing directly from the
wholesaler, whereas the independent grocer is purchasing from a regional
supplier or distributor who has purchased from the wholesaler.
Let’s examine two scenarios to explain which method may work best for
your business. We’ll assume that all four channels are available to us.
Scenario #1: Large or Growing Business with Significant Up-Front Capital
The larger the volume you can purchase, the lower the price will be for
each individual unit. This is why Kmart, Wal-Mart and Kroger can offer
lower prices as compared to independent retailers. Doing so requires a
significant capital investment as well as the ability to warehouse and
move a large quantity of merchandise through your business.
In this scenario, you would deal directly with a wholesaler who would
handle the logistics for delivery of the merchandise to your location.
Often this be through their dedicated truck fleet, or through your own
fleet who will pick up the merchandise directly from the wholesaler.
The key here is the ability to move those goods through your business or
retail channel quickly. The longer an item sits on a shelf or in a
warehouse, the less profit is made. Even if you purchase at a lower
price by buying a larger quantity, if an item has to be warehoused for
long periods of time then the cost of storing that item quickly erodes
the price break obtained for that product.
Scenario #2: Small Business Wishing to Maintain a Low Overhead or Buy in
Small Quantities
In this situation you have limited capital to invest in goods and do not
have the resources available to purchase, store or move large quantities
of goods. Here you would benefit more by dealing directly with the
distributor or a regional supplier depending on your ability to
turn-over the merchandise.
Though your cost per unit will be higher, you will have less overhead
expenses (such as storage). However, caution must still be used
especially when there are other businesses in your area that carry
similar products. If they can significantly undercut your price because
of the quantity they purchase, you have to rethink if it benefits you to
carry that particular item.
This method also benefits businesses that are just getting started. As
your volume grows, you will be able to purchase in larger quantities and
can negotiate lower prices or move to a different distribution channel.
It is important to research and evaluate all the channels available to
you when deciding to purchase merchandise for your business. Market
factors, competition and availability will all play a factor in deciding
what products to carry and how to obtain them.
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