Channel System and Channel Structure

Channel System

Goods are produced to use/ consume. Goods should be distributed from production place to sale center. Right channel is needed to carry goods to right place at right time. The way used to distribute goods/ products is called channel. All the elements present in this channel are called channel system. Intermediaries, industrial buyers, ultimate consumers and channel member manage conflicts and play important roles. This type of channel system does production, whole selling and retailing functions. This channel system is categorized in different classes as follows:

1. Vertical channel system

Vertical channel system integrates different types of intermediaries. This type of channel system performs producing wholesale and retailing functions. Such channel system can be classified as follows:
  1. Corporate system: Company’s own excessive channel works in corporate vertical system. It does all the works from production of goods or services to selling to final consumers. All the channels involved in distribution are integrated under single/sole ownership. The business firms which want to keep control over distribution channels use this system.
  2. Administered system: In this system, one company controls channel co-ordination activities. So, the company does not have formal organizational structure. In other word, this system is conducted under the leadership of any one channel member.
  3. Contract system: Members of vertical channel are independently involved in this system on contract. The members involved in this system conduct programs of distribution channels. The works of channel members are formally divided which are also controlled through co-ordination.

2. Horizontal channel system

In this system, different channels jointly and mutually integrate the available man power and programs. In this way, if different organizations and intermediaries work together, this is called horizontal channel system. Among the members of such system, some may produce goods and others may distribute. This type of mutual work may be practiced at production level. This system can also be used at the wholesaler and retailer level.

3. Multi channel system

A company may use several channels to provide goods or service to the customers. In this way, if many channels are involved in distribution, it is called multi channel system. Producers may directly supply their products to final consumers. They can also sell their products through wholesalers and also through retailers. In this way, the producers may use multi channel to distribute their products according to suitability.

Meaning of Channel Structure

In simple meaning, the way to supply products from production place to consumers is called distribution channel. Structure of distribution channel may be different according to the nature of product and environmental elements. Whatever may be the channel structure, it works as a good bridge between producers and consumers. This type of distribution channel may be direct or indirect. In direct channel, the producers supply their products to the consumers by themselves. In indirect channel, the products are supplied to the consumers through intermediaries or distributors. Such indirect channel can be classified into three types as follows:

Single level channel: In this channel one retailer works.

Two level channel: In this channel two intermediaries, the wholesaler and retailer, work.

Three level channel: In this channel three intermediaries work. They are wholesalers, jobber and retailer.
Levels of Distribution Channel

Channel Structure for Consumer Goods

Personal or daily uses product is called consumer goods. According to product nature, size and price, the firm can be used as direct or indirect channel. In indirect channel, the products are supplied to the consumers through agents, wholesalers and retailers. Producer, agents, wholesalers and retailers directly participate in the channel structure for consumer goods. The following four levels are involved in the channel structure of consumer goods.
Channel Structure for Consumer Goods

1. Producer → Consumer channel

The channel in which no any intermediaries are involved between producer and consumer is called producer – consumers channel. As no any intermediary is needed between the two sides, it is called zero level channel. In this type of distribution channel, the producers themselves supply goods to the consumers. In other word, producer does all the works to distribute produced goods directly to the customers. In such channel, it is necessary to have direct contact and talks between producer and customers. This channel is very cost effective/economical. But the producer should be physically, financially and intellectually able to distribute produced goods.

Technological goods such as television, deck, computer, automobile, machines and machinery goods are distributed through direct channel. Similarly, this channel is used to distribute perishable goods, such as milk, fruits, fish and meat, etc. Door to door service facilities such as mail, order, TV selling, exhibition arcade, telemarketing etc. are forms of direct distribution channels.

Wants and interests of consumers can be easily identified through such direct channel. To perform this task, no any added or extra expense is needed. But, as management for all the tasks should be looked after by producers themselves, it needs capital. Besides, it becomes very difficult for the producers to have direct contact with all the customers.

2. Producer → Retailer → Consumer

In this channel, one intermediary business holder is involved. This is the shortest indirect channel for consumer goods. This is also called single/one level channel. In this channel, retailers remain in between producers and consumers. Consumer goods reach retailer from producers and consumers from retailers. There may be a large number of retailers. Perishable goods such as fruits, vegetables, eggs, milk etc. are distributed through this channel. In this channel, the producers do not need to keep direct personal contact with consumers. Goods are sold out in high quantity with low distribution cost. Channel store, departmental store, super market, discount houses, big mail order houses and cooperative organizations are involved in the single/ one level channel.

3. Manufacturer → Wholesaler → Retailer → Consumer channel

Two intermediaries, wholesaler and retailer work in this channel. So, this channel is also called two – level – channel. This distribution channel becomes longer than one/single level channel. In practice, most of goods reach market through this channel. Goods can easily reach even any market segment where there are many wholesalers and innumerable retailers. The producer/manufacturer does not have direct contact with retailers and consumers but only with wholesalers. As distribution function widens very much through this channel, there remains possibility of large amount sale. But it takes more distribution cost. This channel is used to distribute groceries, medicines, food stuff, hardware, goods, etc.

4. Producer → Agent → Wholesaler → Retailer → Consumer channel

The longest channel to distribute goods to the final consumers is this three – level channel. In this channel, there are three intermediaries such as agents, wholesalers and retailers between producer/manufacturer and consumers. The goods reach the hands of consumers through agents, wholesalers and retailers respectively. Mostly the international and global companies use this channel. Such companies produce goods in huge quantity. Sale quantity of goods increases through three – level channel. But it takes high sales cost.

Different experts and scholars of marketing have prepared different types of structures of distribution channels. Marketing scholar William J. Stanton has suggested that five/fifth type distribution channel also can be used. This structure is as follows:
Channel Structure of Final Consumer Goods

Channel Structure for Industrial Goods

The goods used in order to produce any new goods are called industrial goods. Direct or indirect distribution channel can be used according to the nature, size, design, price etc. If it is to use indirect distribution channel, goods reach the users through agents and industrial distributors. Producers, agents, industrial distributors and industrial users are directly involved in the channel structure of industrial goods. Specially, there are three levels in channel structure of industrial goods. It is presented in the figure as follows:
Channel Structure of Industrial Goods

1. Producer → Industrial user channel


This channel is also called direct channel or 0 level channel. In this channel no intermediaries are found between producer and industrial user. This channel has become very popular for industrial goods. Heavy machines and raw materials are distributed through this channel. In this channel the producers themselves identify industrial users, sign contract and supply goods. As this is also direct channel used for industrial goods, its distribution cost becomes cheap, but skilled seller is needed as he/she has also to play intermediary’s role. The seller should be experienced, efficient and have technical knowledge.

2. Producer → Distributor → Industrial user channel

As only one intermediary works in this channel, it is called one/single level channel. In this channel, industrial goods come to distributors from producers and reach the industrial users. This channel is very popular and is suitable for the goods such as photocopy machine, auxiliary equipment, operation supply, air conditioner, computer etc. This distribution channel becomes more expensive then direct channel. The distributors of industrial goods acquire specialization in dealing industrial goods. Otherwise, dealing in industrial goods becomes impossible.

3. Producer → Agent → Distributor → Industrial user channel

This is the longest and popular channel. In this channel, agents and distributors work between producers and industrial users. So, this level is also called two level channel. Here agents mean representatives of producer. Agents take the responsibilities to supply goods to distributors. This channel is used for cheap industrial goods for mass distribution. As the way of distribution is long, distribution cost also gets high in proportion. The producer distributing industrial goods can select other distribution channels. The alternative channel is represented as follows:
Alternative Channel for Industrial Goods

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