Chapter Seven

Distribution Strategies in International Context

7.1. Concept of Distribution Channel
 The set of people and firms involved in the transfer of products form
producers to consumers or business users.
 Includes both the producer, the final customer and any middlemen such
as retailers and wholesalers.
 Intermediaries do not take title to the products and are not actively
involved in purchase or sales activities are not distribution channels:
banks, insurance companies, storage firms, and transportation
companies.
Middleman
 A business firm that renders services related directly to the sale/or
purchase of a product as it flows form producer to consumer.
 Manage the flows of goods onto their shelves and from their shelves to
customers' homes, stores, or other places of business.
 Owns the product at some point or actively aids in the transfer of
ownership.
 Takes physical possession of the product.
 Classified on the bases of whether or not they take title to the product
being distributed.
i. Merchant middlemen
represents the manufacturers product.
own the merchandise, take possession or not.
Take title to the products help to market.
has no power to contract on behalf of the manufacture.
They are wholesalers and retailers.
ii. Agent middlemen
represents the manufacturer.
take possession of the goods or not.
Never own/take title of the products, but arrange the transfer of
title.
bind the manufacturer in authorized matters to contracts made on
the manufacturer's behalf.
They are real estate brokers, manufacturer's agents, distributors and
travel agents.
6.2. Types of Intermediaries
1. Indirect selling
Manufacturers distribute products through sales intermediaries or
middlemen.
The middlemen act as the manufacturers external export organization,
and responsible for moving the product overseas.
Manufacturer has been relieved of any immediate marketing cost.
 Consists of producer, final customer and at least one level of middlemen.
According to the principal whom agents represent:
a. Buyers representor
purchasing (buying) agents/offices
country controlled buying agents
b. Manufacturers interest representor
export brokers manufacturers export agents
 sales representatives export management companies
cooperative exports trading Company
export distributor export drop shipper
resident buyers export merchant
2. Direct Selling
Employed when a manufacturer develops an overseas channel.
Manufacturer deal directly with foreign party without intermediary.
The manufacturer must set up overseas channel to take care of the business
activities between the countries.
Manufacturers are responsible for shipping the product to foreign market.
Consisting only producer and final customer no middlemen.
Includes:
a. Foreign distributor: a foreign firm having exclusive rights to carry out
distribution for a manufacturer in a specific area of foreign country.
b. Foreign retailer: consumer and industrial product.
c. State-control trading company: a complete monopoly in the buying
and selling of goods.
d. End users: consumers want to buy products from companies with out
intermediaries.
7.3. Channel Decision
1. Channel Length
The number of times a product changes hands among intermediaries
before it reaches the final consumer.
The channel is considered long when a manufacturer is required to move
its product through several middlemen.
2. Channel Width
The number of middlemen at a particular point or step in the distribution
channel.
The function of the number of wholesalers and the retailers.
As more intermediaries or more types are used at a certain point in the
channel, the channel becomes wider and more intensive.
3. Dual distribution channel
used different brands for different kinds of consumers. For example: use long
and direct channel simultaneously.
Factors should be taken into account while using dual channel:
a) legal regulation
b) product image and characteristics
c) intermediary’s loyalty and conflict,
d) local customs
e) Power and Coercion
f) Control
7.4. Physical Distribution/Logistics
 All activities concerned with moving the right amount of the right
products to the right place at the right time.
 The actual physical flow of products.
 Too necessary and costly activity.
 They are packing, warehousing, materials handling, inventory control,
order processing, storage, transportation and so on.
Includes:
i. The flow of raw materials form sources of supply to production line.
ii. The movement of finished goods from the end of production line to
final users' locations.
Its opportunities:
a) Improve customer service
b) Reduce distribution costs
c) Create time and place utilities
d) Stabilize prices
7.4.1. Parts of physical distribution
Each elements of distribution system should be interconnected each other.
a) inventory location and warehousing: the name of the game in physical
distribution.
b) materials handling: select proper equipment to physically handle products.
c) inventory control: maintain control over size and composition of inventories.
d) order processing: procedures for receiving, handling, and filling orders
e) Transportation: major function of the physical distribution system: shipping
products to customers.
7.4.2. Modes of Distribution
Based on the following criteria's’, there are three modes of transportation:
1) market location
2) speed
3) cost
Criteria Essential mode of transport
Market location Water & Air To move goods between continents.
Speed Air urgent or quickly completed perishable
products.
Cost Land bear the responsibility for any damage to
goods while in their possession.
1. Air: appropriate for shipment between countries which are not joined
boundaries.
2. Water (Ocean and inland): more suitable for inland and domestic
transportation.
3. Land(rail and truck): When countries are connected by land, use rail and
truck to move merchandise from locations.
Marine cargo insurance
An insurance covers loss or damage at sea.
Avoid disputes with overseas buyers, exporters.
Arranged by either a buyer or seller, depending on the term of sale.
Having two policies:
a. Special Policy
A one time policy insures a single specific shipment.
Expensive because the risk cannot be spread over a number of shipments.
Practical insurance solution if a seller’s export business is infrequent.
B. Open policy
Issued cover all its shipments as described in the policy within named
geographic regions.
Continuous by automatically providing coverage on all cargo moving at
the seller’s risk.
No reports of individual shipments cannot be known in advance.
No reports of individual shipments are required, although the insured
must declare all shipments to the underwriter
In providing coverage, the policy distinguishes between particular average
and general average.
a. General Average
sacrifice made intentionally for goods to diminish an impeding peril.
Any loss in a sea shared by all parties (all cargo owners and carriers).
contribution by all parties to cover a loss sustained by one of the parties
through a voluntary sacrifice made to save the ship and liens of those on
board for the general benefit of all parties.
To have a general average, the following considerations must exist:
a) peril threatens the whole adventure.
b) Sacrifice of physical or unusual expense incurred.
c) measure of success: if nothing is saved there is nothing to contribute.
b. Particular average
partial loss of an accidental resulting from a peril.
the loss is only experienced by the particular insured that is affected.
only shipper’s insurer is liable, subject to the terms and conditions of the
policy.
For example: If the specified condition is free of particular average, a partial
loss is not covered, unless the loss is caused by the stranding, sinking,
burning and collision of the ship.
In the case of with average, a shipment is protected from partial damage
as long as the damage exceeds 3% (or some specified percentage) of the
total cargo value.
c. Free of damage insurance
very limited coverage.
Only covers total not partial loss of goods (Actual or absolute total loss).
d. Fire and sea perils
When the insured has fire and sea perils coverage, claims are paid only
when the vessel is stranded sink, burned or in collision, and only if the
damage is caused by fire or sea perils.
e. Fire and sea perils with damage: similar to fire and sea perils, but not
necessary show the vessel has been standard, sink burned and in collision.
f. All risk insurance
the most complete type of coverage but applies only to physical loss of
cargo or damage from an external cause suffered in transit.
excludes war, strikes, riots, costs of delay, and loss due to the inherent
nature of goods.
7.5. Shipping Documents
1. Commercial Invoice
To collect payment there are two kinds of invoices:
a. Pro-forma invoice
an invoice provided by a supplier prior to the shipment of merchandise.
Used to inform the buyer of the kinds and quantities of goods to be sent
their value and important specification (weight, size and so on).
Help buyers to apply for an import license and/or a letter of credit.
b. Commercial invoice
provides an itemized list of goods shipped and other charges.
provides a complete description of merchandise quantity, price and
shipping and payment terms.
2. Certificate of origin
a document prepared by the exporter to identify or declare the merchandise
originated in a certain country.
assures the buyer or importer of the country of manufacture.
necessary for tariff and control purposes.
prevents the inadvertent important of goods from prohibited or
unfriendly countries.
3. Packing list
a document that lists the type and number of pieces, contents, weights,
and measurement of each and the marks and numbers.
Used to facilitate customs clearance, keep track of inventory of goods,
and assists in tracing lost goods.
useful in estimating shipping costs prior to export.
4. Airway bill / Bill of lading
a bill of lading issued by air carriers for air shipments.
not a negotiable document.
a carrier will release goods to a designated consignee without the waybill.
a document issued to record shipment transportation.
 prepared by a shipper on the shippers’ carrier's forms.
serves three useful functions:
1) As a document of title: a certificate of ownership that allows a holder or
consignee to claim the merchandise described.
2) As a receipt of goods: the carrier issues it to the shipper for goods
entrusted to the carrier's possession of the freight.
3) As a contract of carriage: the contract terms between the shipper and his
carrier.
5. Insurance certificate
a negotiable document issued to provide coverage for a specific shipment.
briefly describes the transaction and its coverage.
6. Special purpose documents
importer request for inspections such as a certificate of
weight/measurements and certificate of analysis in order to protect the
importer's interest.
Other documents may include - inspection report, warranty, bank
permit, etc.