A company's distribution strategy is largely defined by decisions on the number and type of customer interfaces.
Once the retail distribution strategy is set, the management focus shifts to distribution logistics (i.e. moving goods from the manufacturer, through any intermediaries, to the customer).
To achieve its strategic distribution objectives, a company may choose to use few layers of intermediaries (called short distribution channels), or relatively many layers (long distribution channels).
Dell sells directly to customers.
Frito Lay distributes directly to retail stores.
Home Depot stores receive most shipments directly from manufacturers.
Cotter- TrueValue (a hardware cooperative) receives shipments from many manufacturers and redistributes to independent hardware retailers
At one extreme, the shortest of channels is direct distribution, i.e. a customer places an order directly with the company, and the company ships the goods directly to customers.
In the 'old days', direct distribution was largely restricted to higher priced products (like industrial equipment) or to companies with relatively broad lines of high volume products that could be aggregated to provide the necessary operating efficiencies of scale or scope (e.g. catalog companies like Lands End).
In the digital era, an increasing number of companies are willing and able to distribute to customers directly.
From a logistical perspective, the web provides a cheap, effective way to process customer orders, and efficient package delivery networks (UPS, FedEx) provide a relatively cost-effective way to transport small quantity orders directly to customers. Further, since finished goods inventory can be centralized, service levels can be maintained at high levels with relatively low stocks (largely because of lower required safety stocks).
At the other logistical extreme are long, highly intermediated distribution channels. For example a company may sell to a specialized distributor who sells to a wholesaler who sells to a retailer who sells to a final customer. click to view : Rationale for Intermediation
Most typically, the length of distribution channels falls somewhere on the continuum between direct and heavily intermediated. From a conceptual perspective, the decision as to where on the continuum a company should operate depends on two key factors:
(1) Scope and nature of the value added services required to take a product from the manufacturer to customers
(2) Relative effectiveness (cost and service quality) of alternative providers of the services
More specifically, certain value-added logistics tasks must be performed to distribute a product.
In the simplest cases, a customer order must be processed (received, validated, credit checked, matched to inventory, scheduled for shipment) and the product shipped to the customer, either from the end of the production line (make to order) or out of some company's inventory (make to stock).
In more typically complex cases, products may need to be bundled with other products (e.g. to compile a usable system, or to accrue quantity discounts for transportation economies), slightly modified to meet customer specifications (e.g. small features added or deleted, bulk quantities may be packaged into smaller units), installed and fine-tuned at the customer site, and serviced after it is put in use.
Once the necessary value-added activities are identified, the pivotal question is: who can most effectively perform the activities from both cost and quality perspectives - the company or third party intermediaries.
If a company operates under the direct model, it must perform all of the value added activities. By doing so, the company is able to retain all of the system profits (the difference between total accumulated costs and the price customers pay for the product).
If a company has an infrastructure in place (facilities, people, systems) and has adequate relevant scale (i.e. enough volume to make operations economical), then direct distribution may be a viable alternative.
Recent trends have included the polar extremes of channel disintermediation during the eCommerce frenzy, and subsequent reintermediation and outsourcing.