Levels of distribution channels, the contribution of intermediaries, and the functions of a wholesaler

Levels of distribution channels

A distribution channel is the route by which goods pass from the producer to the final buyer, together with the middlemen who handle them on the way; choosing it is one of the two main decisions in physical distribution. Every middleman who stands between producer and buyer adds one level, so counting the middlemen gives the length of the channel.

1. Zero-level channel (direct marketing). Manufacturer → consumer. No intermediary. Examples: door-to-door selling, a company's own website or app, factory outlets, mail orders, a farmer selling at a farm gate.
2. One-level channel. Manufacturer → retailer → consumer. Used for durable goods and by large retailers who buy directly from manufacturers. Examples: cars sold through dealers; products supplied directly to supermarket chains or online marketplaces.
3. Two-level channel. Manufacturer → wholesaler → retailer → consumer. The most common channel for consumer goods such as groceries, medicines and stationery sold through small shops.
4. Three-level channel. Manufacturer → agent or distributor → wholesaler → retailer → consumer. Used where markets are vast and scattered, as for FMCG reaching small towns and villages through carrying-and-forwarding agents, distributors and sub-wholesalers.

Industrial products use shorter channels: the manufacturer sells directly to industrial users, or through industrial distributors or agents. Longer channels give wider coverage; shorter channels give more control and quicker feedback. Many firms now use multichannel distribution, combining several levels at once, for instance, selling through dealers, through large online marketplaces and directly through their own app, to reach different segments.

The choice of channel level depends on the nature of the product (perishable, bulky or technical products need short channels), the market (many scattered buyers need long channels), the company's resources and desire for control, and the availability and cost of suitable intermediaries.

Contribution of intermediaries to distribution

Intermediaries such as wholesalers and retailers make distribution more efficient because they specialise in it and operate at scale.

1. Fewer transactions. One intermediary serves many manufacturers and many buyers, greatly reducing the number of contacts and the total cost of distribution.
2. Matching supply and demand (sorting). They collect products from many sources, grade them, break bulk into smaller lots and assemble assortments that consumers want.
3. Creating utilities. They create place utility (goods at convenient locations), time utility (when needed) and possession utility (through credit and easy purchase).
4. Storage and transport. They hold stocks and move goods along the channel.
5. Financing. Wholesalers pay manufacturers and extend credit to retailers; retailers give credit or instalment facilities to consumers.
6. Risk bearing. They bear risks of damage, theft, price fall and unsold stock while they own the goods.
7. Promotion and selling. Retailers display, demonstrate and recommend products; wholesalers pass on trade schemes and push new products into shops.
8. Information. They gather information about consumers, competitors and demand and pass it back to manufacturers.
9. After-sales service. Retailers and dealers install, repair and handle complaints and returns.

Wholesalers contribute mainly between the manufacturer and the retailer; retailers contribute at the final point of contact with consumers: they keep goods regularly available close to where people live, sell in the small quantities a household can buy, and offer a choice of brands, personal service and credit.

Functions performed by the wholesaler

A wholesaler buys in large quantities from manufacturers and sells in smaller quantities to retailers and institutional buyers, not to final consumers. NCERT sets out the services wholesalers render to manufacturers and to retailers; arranged as functions:

1. Assembling (buying). The wholesaler buys goods from many manufacturers and brings them together in one place. By pooling many retailers' small orders into large ones and taking big lots, it lets manufacturers produce on a large scale.
2. Breaking bulk. It buys in large lots and sells in smaller quantities suited to retailers.
3. Warehousing. It stores goods until retailers need them, ensuring regular supply and absorbing seasonal fluctuations.
4. Transportation and delivery. It moves goods from manufacturers to its godown and delivers them to retailers.
5. Financing. It often pays manufacturers in advance or on delivery and sells to retailers on credit, financing both.
6. Risk bearing. It bears the risks of price changes, spoilage, theft, obsolescence and bad debts.
7. Grading and packing. It sorts goods by quality and size and repacks them in convenient lots.
8. Pricing. It helps set prices in the market by assessing demand and supply.
9. Market information. It informs manufacturers about demand, retailers' needs and competition, and informs retailers about new products and prices.
10. Selling and promotion support. Its salesmen visit retailers regularly, take orders and pass on manufacturers' schemes and display material.
11. Management advice. It advises small retailers on stocking, display and sales.

Example: a district distributor of a biscuit company receives truckloads from the company's depot, stores them in its godown, delivers weekly to hundreds of kirana shops on credit, collects orders and payments, and reports which products are moving.

Conclusion

Channel levels vary from direct selling to long, multi-level channels. Intermediaries, especially wholesalers and retailers, make distribution economical and wide by performing essential functions, and the wholesaler in particular serves as the vital link between mass production and scattered retail demand.