Efficiency refers to the optimal use of resources to ensure the best possible results. So if all processes are properly optimized, companies can reach their maximum efficiency and, therefore, improve their bottom line. But doing this isn't easy—it means analyzing each and every step in the process and recognizing deficiencies. These shortcomings can then be adjusted and realigned to make them more efficient and cost-effective. This article focuses on making an important part of any business more efficient—the distribution channel.
- A distribution channel is the means through which a company gets its products to consumers.
- Channels can be direct or indirect—the latter being more costly because it involves more intermediaries.
- While managing distribution channels can be challenging, making them more efficient can lead to a boost in profits and a drop in costs.
- Companies can make their distribution channels more efficient by making careful choices about their channels, focusing on supply chain management, and consolidating channels.
What Is a Distribution Channel?
A distribution channel is the means through which a company gets its products to consumers. The term is also used to describe how consumers pay the vendor for their goods and services. A distribution channel is made up of a set of independent organizations that work to make a product or service available for sale and use. Some of these channels may be short. Others may be longer and often require intermediaries to make sure product delivery goes through.
There are two categories of channels—direct and indirect. Manufacturers and consumers are connected through direct channels. Direct-to-consumer sales such as direct mail and internet sales are examples of direct distribution channels. Indirect channels, on the other hand, require the use of an intermediary. Intermediaries are any additional companies that take a manufacturer's product and sell it to a company, such as a distributor or a retailer. These channels are typical for goods sold in traditional brick-and-mortar stores.
Costs vary between each channel. Because the manufacturer is also the entity selling the good or service, prices tend to be lower in a direct distribution channel. Indirect channels, on the other hand, generally see higher prices because of the number of intermediaries involved. The more there are, the higher the price.
Indirect distribution channels tend to be more costly because of the number of intermediaries involved.
Increasing Distribution Channel Efficiency
Managing distribution channels can be challenging even for the most successful companies. That's because there are so many variables to think about—especially in this period of social media and technology. Failing to put in a good strategy to manage these channels can lead to a poor business model and even higher costs.
Many companies increase the number of distribution channels they have to boost their profits. Why? Having more channels means getting more of your products and services to consumers which translates to more money. This can be tricky—adding more layers to the business means the need for more oversight. But a company will need to spend more time and money investing in this kind of strategy. Companies can earn more revenue and profit by increasing the efficiency of an already established distribution channel.
There are three high-level ways to increase channel efficiency:
- Increasing or carefully picking the channel intermediaries
- Increasing the focus on supply chain management
- Consolidating all channels into a single, strong channel
Choosing Channel Intermediaries
A company can increase the efficiency of a distribution channel by maximizing the benefit of channel intermediaries or increasing the number of intermediaries they have. As noted above, intermediaries are additional companies that take a manufacturer's product and sell it on the open market, such as a distributor or a retailer. It's important for companies to choose intermediaries that fall in line with their business models and goals. Since these companies are experts at what they do, intermediaries can increase sales volumes and decrease costs.
Supply Chain Management
Supply chain management represents the processes of taking raw materials and transforming them into finished products and managing the flow of these goods and services from the manufacturer to the consumer.
Increasing the focus supply chain management also increases distribution channel efficiency. Implementing strategies like training programs and project plans, introducing automation, and increasing supply chain visibility are a few options. Doing so can reduce costs related to inventory, improve delivery, and enhance product availability through dedicated supply chain managers.
Another way to increase efficiency is to consolidate distribution channels into a strong one. For example, a manufacturer can acquire a distributor and a retailer, putting two distribution channels under a single umbrella.
This not only cuts down on the cost of managing the channel, but it also leads to less oversight. With a fewer number of channels in the distribution chain, companies can reduce the amount of time they need to manage their channels and focus on other key components of their business.