What is the Work of the Marketing Channel?

The work of the channel includes the performance of several marketing flows. We use the term flows rather than functions or activities to emphasize that these processes often flow through the channel, being done at different points in time by different channel members. In institutional settings, one often hears of the need to carry inventory; to generate demand through selling activities; to physically distribute product; to engage in after-sales service; and to extend credit to other channel members or to end-users.

Important flow that permeates all the value-added activities of the channel: the flow of information. Information can and does flow between every possible pair of channel members, in both routine and specialized ways. Retailers share information with their manufacturing suppliers about sales trends and patterns through electronic data interchange relationships; when used properly, this information can help better manage the costs of performing many of the classic flows (e.g., by improving sales forecasts, the channel can reduce total costs of physical possession through lower inventory holdings). So important is the information content that logistics managers call this the ability to “transform inventory into information.” Manufacturers share product and salesmanship information with their distributors, independent sales representatives, and retailers, to improve the performance of the promotion flow by these intermediaries. Consumers can give preference information to the channel, improving the channel’s ability to supply valued services. Clearly, producing and managing information well is at the core of developing distribution channel excellence.

In addition, not every channel member need participate in every flow. Indeed, specialization in the performance of channel flows is the hallmark of an efficiently operating channel. For example, a channel in which physical possession of product moves from the manufacturer to wholesalers to retailers and finally to end- users. But an alternate channel might involve not stocking wholesalers, but instead manufacturer’s representatives, who generally do not participate in the physical possession or ownership flows because they do not handle physical product. In such a case, the physical possession flow might be performed by the manufacturer and retailer, but not by other intermediaries, on its way to the final end-user.

Similarly, financing may be spun off to a specialist and not be done by other channel members to any great degree. For example, the mission of Maruti Finance, a wholly owned subsidiary of Maruti Udyog a car maker, is to finance not only ultimate consumers of its automobiles but also the inventories held by dealers. It has worked to cement its key role as financing agent both by introducing innovations such as the 10-minute credit review. As long as Maruti Finance can handle the financing flow at lower cost than other channel members can, others (e.g., dealers) do not need to help consumers finance their automobile purchases.

In general, flows should be shared only among those channel members who can add value or reduce cost by bearing them. However, specialization increases interdependencies in channels, and thus creates the need for close cooperation and coordination in channel operations.

It is also important to note that the performance of certain flows is correlated with that of other flows. For instance, any time inventories are held by one member of the channel system, a financing operation is also underway. Thus, when a wholesaler or retailer takes title and assumes physical possession of a portion of a manufacturer’s out-put, the intermediary is financing the manufacturer. This is consistent with the fact that the largest component of carrying cost is the cost of capital tied up when inventories are held in a dormant state that is, not moving toward final sale. Other carrying costs are obsolescence, depreciation, pilferage, breakage, storage, insurance, and taxes. If that intermediary did not have to tie up its funds in inventory holding costs, it would instead be able to invest in other profitable opportunities. Capital costs are thus the opportunity costs of holding inventory.