Chapter seven
Distribution
strategy international context
Accessing foreign market of
distribution
Meaning of channel
distribution
A channel of distribution refers to the individuals
and organizations involved in the transfer of a product from the producer to
the final consumer or business user.
ü It
includes the producer, middlemen (such as wholesalers and retailers), and the
end customer.
ü The
distribution channel extends only to the last person or organization that
purchases the product without making significant changes to its form.
ü If
the product undergoes a transformation and a new product emerges, a new
distribution channel is established.
ü In
addition to producers, middlemen, and final customers, other institutions such
as banks, insurance companies, storage firms, and transportation companies may
also play a role in the distribution process.
ü However,
because they do not take ownership of the products and are not actively
involved in purchase or sales activities, they are not typically considered
part of the formal distribution channel.
Types of intermediaries
1. Indirect Selling: Also
known as the local or domestic channel, indirect selling occurs when a
manufacturer markets its product through sales intermediaries or middlemen.
ü These
intermediaries, acting as the manufacturer's external export organization, take
responsibility for moving the product overseas.
ü Indirect
selling can involve domestic agents (who do not take ownership of the goods) or
domestic merchants (who do take ownership of the goods).
ü While
indirect selling relieves the manufacturer of immediate marketing costs, it
also means giving up control over the marketing of the product to another firm.
2. Direct Selling: occurs
when a manufacturer establishes its own overseas channel and deals directly
with a foreign party without intermediaries in the home country.
ü The
manufacturer sets up its own internal export department or organization to
handle the business activities between countries and is responsible for
shipping the product to the foreign market.
Direct Channel
Intermediaries:
1. Foreign Distributor: A
foreign distributor is a foreign firm that has exclusive rights to distribute a
manufacturer's products in a foreign country or specific area.
ü They
buy and maintain merchandise in their own name, simplifying credit and payment
activities for the manufacturer.
2. Foreign Retailer: Foreign
retailers are used for consumer products. Manufacturers may contact foreign
retailers through personal visits, mailings of catalogs, brochures, and other
literature to interest them in carrying their products.
3. State-Control Trading Company: Some
countries have state-controlled trading companies that have a complete monopoly
in buying and selling goods, particularly utility and telecommunication
equipment.
4. End Users: In
some cases, manufacturers can sell directly to foreign end users without
intermediaries involved. This direct channel is suitable for costly industrial
products but may have challenges with duty and clearance problems for consumer
products.
Indirect Channel
Intermediaries:
1. Export Broker: An
export broker brings buyers and sellers together for a fee, negotiating the
best terms for the manufacturer or seller but requiring the principal's
approval to conclude the transaction.
2. Manufacturer's Export Agent or Sales Representatives: These are independent business people who
represent the manufacturer but retain their own identity and do not use the
manufacturer's name.
3. Purchasing/Buying Agent: A
purchasing/buying agent represents the foreign buyer and seeks the best
possible price on the buyer's behalf.
4. Country-Controlled Buying Agent: This agent performs the same function as a
purchasing/buying agent but is empowered to locate and purchase goods for its
country.
5. Export Management Company (EMC): An EMC manages the entire export program
of a manufacturer and may function as an export department for multiple
manufacturers.
6. Cooperative Exporter: A
cooperative exporter is a manufacturer with its own export organization that is
retained by other manufacturers to sell in foreign markets.
7. A resident buyer is
an independent agent retained by a principal and located near centralized
production industries. They continuously search for new products suitable for
the principal and provide valuable services.
8. Export Merchant: An
export merchant is an independent business that takes title to the goods and
aims to make a profit by selling them.
9. Export Drop Shipper: An
export drop shipper requests a manufacturer to directly ship the product to the
overseas customer without physically handling or possessing it.
10. Export Distributor: An
export distributor is authorized to represent the manufacturer and sell its
products in one or more foreign markets. It pays for goods and handles
financial risks in the foreign sale.
11. Trading Company: Trading
companies are large intermediaries that perform various functions, including
buying and selling goods, handling consignments, acting as commission houses,
and engaging directly in production, distribution, financing, and resource
development.
Channel decision
The decision-making process for international channel
decisions involves three key factors:
1. Channel Length: This
refers to the number o of times a product changes hands among intermediaries
involved in the distribution process before the product reaches the final
consumer.
2. Channel Width: Channel
width relates the number of middlemen at a particular point or step in the distribution
channel.
3. Number of Distribution Channels: This decision involves determining the
number of distribution channels to be used.
Several other factors
influence channel decisions, including:
§ Legal
Regulations
§ Product
Image and Characteristics
§ Middlemen's
Loyalty and Conflict
§ Local
Customs
§ Power
and Coercion
§ Control
Physical distribution
Physical distribution, which we use synonymously with
logistics, consists of all the activities concerned with moving the right
amount of the right products to the right place at the right time.
ü The
strategic management of physical distribution can enable a company to
strengthen its competitive position by providing better customer satisfaction
and reducing operating costs.
Here are some opportunities that physical distribution
management can provide:
§ Improve
customer service
§ Reduce distribution costs costs
§ Create
time and place utilities
§ Stabilize
prices
The tasks involved in physical distribution management
include:
§ Inventory
location and warehousing
§ Materials
handling
§ Inventory
control
§ Order
processing
§ Transportation
Modes of distribution
There are three modes of transportation
ü Air: is
preferred when speed is crucial, such as for urgent deliveries or perishable
items that need to reach their destination quickly.
ü Water (Ocean and Inland): is suitable for large
quantities of goods and when the distance between countries is significant and
between continents.
ü
Land (Rail and Truck): more appropriate for domestic
transportation within a country and used to move goods between locations when
countries are connected by land.
Factors Affecting
Transportation Mode Selection:
ü Market
Location
ü Speed:
ü Cost:
Marine Insurance: Marine cargo insurance is an insurance
that covers loss or damage at sea, though in practice it also applies to
shipments by mail, air and ship.
A.
Special Policy: are one-time insurance policies that cover
specific shipments.
ü They
are relatively expensive but can be a practical solution for infrequent
exporters.
B.
Open Policy: are continuous insurance contracts that
cover all shipments as described in the
policy within specified geographic regions.
ü Under
an open policy, individual shipment reports are not required, but all shipments
must be declared to the underwriter.
I.
General average refers to a voluntary sacrifice made for
the common good to mitigate a peril during a sea adventure. The loss is shared
by all parties involved, including cargo owners and carriers.
II.
Particular average refers to a partial loss resulting from an
insured peril. Unlike general average, particular average losses are
experienced only by the affected insured party.
Types of coverage
§ Free
of damage
§ Fire
and see perils
Shipping documents
1. Commercial Invoice: This
document provides an itemized list of goods shipped, including their quantity,
price, and other charges.
ü It
serves as a record of the business transaction between the buyer and seller and
includes shipping and payment terms.
2. Packing List: A
packing list details the type and number of pieces, contents, weights,
measurements, and marks and numbers of the shipment.
ü It
assists in customs clearance, helps track inventory, aids in tracing lost
goods, and can be used for insurance purposes and estimating shipping costs.
3. Certificate of Origin: This
document, prepared by the exporter, certifies the country in which the goods
were manufactured.
ü It
provides assurance to the buyer or importer of the country of origin and may be
required for tariff purposes and to establish eligibility for preferential
import duty rates.
4. An airway bill\Bill of Lading (B/L): An airway bill is basically Bill of lading.
It is a document issued to record shipment transportation. Usually prepared by
a shipper on the shippers’ carrier's forms, this document serves three useful
functions.
5. Insurance Certificate: A
certificate of insurance is issued to provide coverage for a specific shipment.
It briefly describes the transaction and specifies the coverage provided.
6. Special Purpose Documents: Depending
on the specific requirements or nature of the goods, additional documents may
be required or requested.
ü These
can include inspection certificates, certificates of weight/measurements,
certificates of analysis, warranties, inspection reports, bank permits, and
other relevant documents to protect the importer's interests or comply with
regulatory requirements.