I. Executive Summary.
Channels of distribution are critical to the success of a manufacturer. A well designed channel creates time, place and ownership utility for the consumer and can augment the manufacturer’s product. Distribution channels may move product directly from the manufacturer to the consumer, or make use of intermediaries between the manufacturer and the consumer.
This report consists of two parts: Part 1 explains some of the major concepts relating to distribution channels, and Part 2 relates the findings of a case study of the computer industry. The first section of the case study explores Dell’s use of direct channels and Compaq’s use of indirect channels in Canada. We will see how Dell uses the direct model to easily allow the customization of computers for consumers, and how the direct model allows Dell to operate with very little inventory through the use of a just-in-time inventory system. Compaq uses indirect channels to utilize the ability of its wholesalers to efficiently move its computers from its manufacturing plant to retailers where customers expect to be able to shop for computers.
The second section of the case study focuses on how emerging economies differ in terms of direct and indirect distribution channels with respect to Canada. In terms of extending its products to emerging economies, Dell believes that its direct model is adequate to work in any country. However, some cultural issues need to be assessed prior to implementing its channel model. In terms of indirect distributors, the Indian personal computer (PC) market has revamped its channel relationships to focus on national and regional wholesalers and reducing its use of local wholesalers.
The Indian PC wholesalers erred in assuming that distribution to rural parts of the country would succeed. They did not consider the other parts of the marketing mix in their distribution strategy; for example, having a product available in a market will only translate to sales if the customer knows it is there. Lastly, the case study analyzes the differences in PC prices across countries and explains the variances in these prices.
Channels of distribution represent the “place” component of the marketing mix. Place is a critical element because it is the ultimate goal of a business transaction, the consumer receives the product and the manufacturer receives revenue. This report focuses on how the manufacturer delivers its product to the consumer.
Part one of the report will give an explanation of the major concepts related to distribution channels. For the second part of the report we will conduct a case study which relates the concepts learned in the first part of the report to the computer industry. The computer industry case study will look at indirect and direct distribution channels in Canada using Compaq and Dell Computers. Secondly, the distribution channels for computers in emerging economies such as China and India will be examined to give the reader insight as to how foreign distribution channels differ from those used in Canada.
III. Limitations and Methodology.
As with most secondary research we had difficulty finding the specifics regarding what we were looking for. In our opinion, the best way to do a study like this would be to conduct primary research. However, without faculty clearance, research funding, and with a time constraint, conducting primary research was not an option. Although many websites did offer to sell us information regarding distribution channels we simply could not afford to purchase their offerings.
We concluded that the lack of distribution information was due to organizations protecting their distributional competitive advantage. Finding general information regarding distribution channels for specific organizations was readily accessible but the specifics were hard to locate. Another reason for the lack of distribution information was due to the dynamic nature of distribution channels. They are continuously changing due to organizational cost reduction practices, evolving computer technology and the dynamics of the general business environment.
IV. Part 1: Distribution Channel Concepts
Distribution is one of the elements of the marketing mix. The purpose of a distribution system is to create place utility for customers, which is the value of having the product where the customer wants it to be. While many manufacturers choose to sell their products directly to end-users, a direct channel, most choose to use channel intermediaries. Intermediaries are firms or individuals such as wholesalers, agents, brokers, or retailers that help move the product from the manufacturer to the consumer and also add value to the product. Manufacturers use intermediaries to help distribute their goods for three reasons: contractual efficiency, specialization and division of labor, and economies of scale.
Functions performed by intermediaries include bulk breaking, creating assortments and facilitating functions. Bulk breaking refers to dividing larger quantities of goods into smaller lots to meet the needs of consumers. Manufacturers typically ship full truckloads or shipping containers of their product to wholesalers who unpack and sell the product by the pallet or case to regional wholesalers or to retailers. Creating assortments refers to providing a variety of products in one location to meet the needs of buyers. For example; someone building a house would prefer one-stop shopping to save time.
See Appendix A for an illustration of the dramatic difference an intermediary makes in saving a customer time. Facilitating functions refers to the functions of channel intermediaries that make the purchase process easier for customers and manufacturers. For customers these functions include technical advice on selection, having customer service available, and been offering credit. For manufacturers, wholesalers make it possible to bundle third party product with the manufacturer’s product, to customize packaging, and provide product monitoring throughout the channel.
After a manufacturer has decided on a channel of distribution the focus shifts to logistics. Logistics refers to the physical activities involved in moving products from the manufacturing plant to the location where the consumer takes possession of them. The activities used to move finished goods include order processing, warehousing, materials handling, transportation, and inventory control. Materials handling involves the moving of products into, within, and out of warehouses. Warehousing refers to storing goods in anticipation of sale or transfer to another member of the channel of distribution. It is important to have an efficient logistics system in place to improve inventory control and to ensure that goods are always available to meet customers’ demands.
IV. Part 2: Case Study
A. Tracing Distribution Channels in Canada
i: Direct Distribution.
This section will examine direct and indirect distribution channels in Canada. We shall begin the analysis by turning to Dell’s direct distribution channel. Dell’s operating practices focus strictly on direct distributions; meaning, they have close relationships with its customers and suppliers; thus, there is no interaction with intermediaries along Dell’s distribution channel. “No unnecessary costs: This is an all-but-sacred mandate of the famous ‘Dell direct’ business model. No inventory, no middlemen to eat into profits, no agenda other than giving the customer what he or she wants. “
Dell believes it can best understand the needs of consumers and thus provide the most effective and efficient computing solutions for its customers through this model. Dell also utilizes its practices of mass customization and direct distribution channeling to enjoy a competitive advantage over its competitors while providing the best in customer service. To place an order with Dell a customer can simply order through telephone or use the internet to meet his/her needs. Ordering a PC through Dell is simple but in order to maintain an edge on the competition, Dell sets up kiosks across the country to keep people informed and to allow them to try out the latest Dell products.
Dell uses a just-in-time inventory system, where a large inventory is not necessary; instead, it produces computers only after orders have been received. “The supplier hub feeds components directly into the assemble-to-order manufacturing operations, allowing Dell to hold almost no inventory which provides it with the benefits of a negative cash-to-cash cycle. ” This is referred to as a “pull’ approach to production, where a customer’s order triggers a reaction that can be traced back to the supplier of the component parts.
As PC components enter the factory, workers scan the bar codes of the major components. This makes it easier to track each part of a PC as it is being built. “The unique bar code links each PC to a detailed list that is used to confirm the PC system using instructions for configuration, software loads, and testing to be done on the system. ” All the parts in a PC are traceable to the specific invoice and manufacturing process, so Dell will be able to track each part in a finished system, especially for finding linkages in defective products.
Dell turns over its inventory more than once a week, thereby allowing the company to escape from holding excess inventory of short-lived electronic components. “This way inventory costs are kept to a minimum; therefore, brand new computer parts can be delivered to customers within a week, and obsolete and dated stock holdings are minimized. ” This reduction in inventory is achieved by requiring suppliers to hold batch inventory in their manufacturing plants, which are closely located to Dell’s production plant. This way inventory costs are kept to a minimum; therefore, brand new computer parts can be delivered to customers within a week, and obsolete and dated stock holdings are minimized. Moreover, while Dell does some of the work, a significant amount of the manufacturing process is tied to third-party suppliers.
The responsibility of shipping is placed on external courier companies. “Shipping is contracted out to several courier companies, with multiple shippers delivering the finished systems to locations in North and South America. ” These contracted companies manage the delivery of product throughout the Americas. Moreover, it takes an average of three working days to receive an order and complete the production. Once the finished systems leave the factory, it can take 7-10 days to ship the product to urban customers; whereas, it can take 8-11 working days to ship to rural customers; and it may take 9-14 working days to deliver products to customers in more remote areas.
ii: Indirect Distribution.
This section will examine indirect distribution channels in Canada. We shall begin the analysis by focusing on Compaq’s indirect distribution channel.
Compaq makes extensive use of intermediaries to take advantage of their channel partners’ core competencies, especially in servicing the home and small business markets. Wholesalers are experts at the logistics of moving products from point A to B as cost effectively as possible. Compaq uses the largest information technology distributors in the world; Tech Data, Ingram Micro, and Synnex. These companies are able to efficiently move computers from Compaq’s manufacturing plant to their own regional distribution centres through the use of rail and highway systems.
Once at their distribution centres the wholesalers are able to fill the order of smaller independent retailers by shipping directly to their retail locations by truck. The wholesalers transport container size shipments to the regional distribution centres of national resellers, such as Future Shop and Office Depot. Once at the national retailer’s distribution centre, the containers are broken down and stored to later fill orders for an individual store. Refer to Appendix B for a model of the channels of distribution that Compaq computers take from Compaq’s manufacturing plant to the PC purchaser.
Compaq has frequently altered its channels of distribution in order to remain as competitive as possible. In 1999 Compaq made its boldest move in reorganizing its channels of distribution. It started an integrated distribution system, which meant it cut the number of wholesalers it dealt with from 39 to 4, and had the remaining wholesalers co-locate facilities to Compaq’s manufacturing headquarters in Houston, Texas. This allowed Compaq to improve communication between channel members and to significantly reduce inventory levels. They were able to bring their inventory turnover down to 30 days from 100 days. This reduction occurred because Compaq was not relying as much on intermediary forecasters dictating shipping times, but rather on now being able to quickly transfer product to their wholesalers to speed up movement threw its channels of distribution.
Compaq makes limited use of direct channels. These channels are used in some of its dealings with large corporate customers and for sales to government. Compaq has attempted to increase their direct channels for its personal computer sales in response to the phenomenal success of Dell. However, Compaq experienced an extreme amount of channel friction from this decision. Retailers and wholesalers were very upset and subsequently began steering their customers to other brand name manufacturers. In response, Compaq has curtailed its drive to compete with Dell in the direct market, and is instead focused on eliminating costs in the indirect channel and improving the value that indirect channels add to its computers.
B. Tracing Distribution Channels in Emerging Economies
i: Direct Distribution
Dell applies its direct-channel-distribution model to all of its global operations; allowing for some minor adaptation to the local consumer’s needs and demographic behaviors. In China, Dell addresses the fact that most Chinese consumers do not have a credit card; thus, Dell has adapted its payment system by striking deals with customers and their banks to facilitate payments. The reason being, the price of a PC can cost three months wages for an average Chinese worker. So, to buy a PC the customer my have to give Dell some sort of collateral which is facilitated by the customer’s bank.
In terms of selling tactics, Dell realizes it is important to set up an abundant network of kiosks to inform its customers about Dell products. Notably, Chinese consumers prefer seeing the product before they purchases it; not to mention, many Chinese consumers currently do not have access to the internet; therefore, kiosks make it easier for Dell to overcome these obstacles. Furthermore, Dell only implements its direct model based on the readiness of a region or country. If a region or country is ready, then it has the right kind of infrastructure to make Dell’s direct model work effectively.
ii: Indirect Distribution.
We now shift from direct distribution in China to indirect distribution in India. In 2001, the Indian economy entered a major downturn, which had a large impact on the existing channels of distribution in the PC market. The impact was large enough to force a restructuring of channel relationships amongst distributors. Restructuring resulted in the elimination of small wholesalers; leaving only the national and regional wholesalers in the market. The situation was dire enough that some experts predicted that regional wholesalers were also in danger of getting eliminated along with the small wholesalers; leaving only the larger national wholesalers.
Some extreme forecasts predicted that direct distribution would be the only efficient way to do business. These predictions were flawed for several reasons. For one, regional wholesalers have a comprehensive knowledge of local markets; thus, they add value to the chain, making their efforts invaluable. Secondly, direct channels would not work due to poor infrastructure in most parts of the country; this fact is something Dell is fully aware of. Lastly, making dramatic changing due to the natural ups and downs of the business cycle can create hostilities within the supply chain.
During the economic downturn, the PC market in India began to focus on smaller rural locations. Rural markets were focused upon because the larger markets were viewed as being saturated. Again, this strategy was flawed because if people living in metropolitan regions are reducing their expenditure due to economic conditions, it would be safe to assume that rural customers are doing the same thing. Also, the PC market also failed in incorporating its distribution channel with other elements of the marketing mix. For example, PC’s were being shipped to rural regions of the country but people had no idea they were there and in some cases did not know how to use them!
C. Canada and the Emerging Economies: Price, Availability, and Quality Differences
A price comparison between a Dell Inspiron 700m notebook was made between Canada and China. A Dell Inspiron 700m notebook is priced at $1,699 in Canada and is priced at $1,366 in China. The difference of $300 is a result of Dell’s plant location strategy. For example, the hub of Dell’s production system is based in the United States, while the major factories are located in Tennessee, Ireland, Malaysia, China, and Brazil. With no local factory in Canada transportation costs are noticeably higher; meaning, Canadians pay more for the same notebook than their Chinese counterparts.
Also, a comparison of prices between a Dell Inspiron 2200 notebook was made between Canada and India. The notebook cost $899 in Canada but costs more than $1,370 in India. These cost differences are due to the fact that neither country has a Dell production plant but Canada has the advantage of the North American Free Trade Agreement; which reduces the cost of transportation across borders. Moreover, the closest factory is located in China, thus transportation is relatively difficult.
Part one of the report gave a thorough explanation of the concepts related to distribution channels. For the second part of the report we conducted a case study which related the concepts learned in the first part of the report to the computer industry. The computer industry case study looked at indirect and direct distribution channels in Canada using Compaq and Dell. Secondly, the distribution channels for computers in emerging economies such as China and India were examined to give the reader insight as to how foreign distribution channels differ from those used in Canada.
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