A distribution channel is a chain of businesses or intermediaries through which a good or service passes until it reaches the end consumer. Channels are broken into direct and indirect forms.
A direct distribution channel is organized and managed by the firm itself. An indirect distribution channel relies on intermediaries to perform most or all distribution functions, otherwise known as wholesale distribution. Firms that use direct distribution require their own logistics teams and transport vehicles. Those with indirect distribution channels have to set up relationships with third-party selling systems.
How Distribution Channels Work
Produced goods and services have to find a way to reach consumers. The role of the distribution channel is to transfer goods and services efficiently. They can either be sent to a retail store or directly to a customer’s residence.
There are advantages and disadvantages to direct distribution channels. The same goes for indirect channels. It is the job of the managers and others involved in corporate governance to find the most effective means based on the firm’s specific needs.
Direct channels tend to be more expensive to start running and can sometimes require significant capital investment. Warehouses, logistics systems, trucks and driving staff will need to be set up. However, once those are in place, the direct channel is likely to be shorter and less costly than an indirect channel.
Direct selling can be difficult to manage on a large scale, but it often allows the manufacturer to have a better connection to its consumer base.
The most challenging part of indirect distribution channels is that another party has to be entrusted with the manufacturer’s products and customer interaction. However, the most successful logistics companies are experts at delivering receivables in a way that most manufacturers cannot be.
Indirect channels also free the manufacturer from any startup costs. With the right relationship, they are much simpler to manage than direct distribution channels.