What do you mean by ‘channels of distribution’? What functions do they play in the distribution of goods and services? Explain.

Channels of distribution refer to the individuals, institutions, agents who facilitate the process of distribution. As the potential consumers of a product are spread over a larger geographical area, it becomes difficult for the producers or the manufacturers to directly contact the customers for the sale of their products. Here, channels of distribution play an important role. They facilitate the transfer of goods from the place of production to the place where they are consumed. For example, for a manufacturer of sugar in Punjab, it would be difficult to contact the customers in other parts of the country. To ease the process, it would sell its product to whole sellers who in turn would sell it to the retailers. The retailers then finally sell the product to the customers. In addition, channels of distribution also reduce the efforts of the consumers by offering various goods and services at a convenient single location. For example, at a retail store a customer can get a wide variety of goods.

Thus, channels of distribution refer to the set of individuals, agents and institution that facilitate the exchange or transfer of goods and services from the producer to the consumer.

The following are the functions of channels of distribution.

(a) Arrangement: An intermediary receives the supply of goods from various sources. However, the goods received differ in terms of size, quality and features. The intermediary arranges or sorts these goods into homogeneous groups based on their characteristics.

(b) Collection: A middle man accumulates and maintains large stock of the goods so as to ensure a continuous and smooth flow of supply.

(c) Allocation and Packing: A middle man breaks the whole lot of goods into small, marketable units. It repacks the goods into convenient packets.

(d) Building Variety: An intermediary acquires various goods from different sources and assembles them at a single place. Thus, it maintains a variety of goods. For example, a grocer maintains a wide variety of products for sale.

(e) Promotion of Product: They assist in the promotion activities undertaken by the manufacturers. For example, the manufacturers use advertising for the promotion of their product. The intermediaries can aid this process by putting banners and displays.

(f) Mediation: On one hand, the middle men interact with the producers and on the other hand, with the customers. Thus, they form a link between the producers and the customers. They negotiate on matters related to price, quality, etc. and work towards satisfying the needs of both the parties.

(g) Bearing Risk: Intermediaries acquire goods from the producers and keep them in their possession till the final sale. In the process they bear the risk of fluctuations in demand, price, spoilage, etc. For example, suppose a retailer acquires large quantities of sugar. However, after a period of time, the price of sugar rises which reduces its demand. Thereby, the retailer may lose out as the stock remains unsold.

People, institutions, merchants, and functionaries, who take part in the distribution of goods and services are called ‘Channels of Distribution’. Channels of distribution are set of firms and individuals that take title or assist in transferring title; to particular goods or services as it moves from the producers to the consumers.

Channels of distribution smoothen the flow of goods by creating possession, place and time utilities. They facilitate movement of goods by overcoming various barriers.

The important function performed by middlemen is the following.

1. Sorting: Middlemen procure supplies of goods from a variety of sources, which is often not of the same quality, nature, and size. These goods are sorted into homogeneous groups on the basis of the size or quality. 

2. Accumulation: This function involves the accumulation of goods into larger homogeneous stock, which helps in maintaining a continuous flow of supply. 

3. Allocation: Allocation involves breaking homogeneous stock into smaller, marketable lots to sell them to different types of buyers.

4. Assorting: Middlemen build assortment of products for resale. There is usually a difference between the product lines made by manufacturers and the assortment or combinations desired by the users. Middlemen produce variety of goods from different sources and deliver them in combinations as desired by the customers.

5. Product Promotion: Middlemen also participate in some sales promotion activities, such as demonstration, special display, contests etc., to increase the sales of products.

6. Negotiation: Channels operate with manufacturers on the one hand and customer on the other. They negotiate the price, quality, guarantee and other related matters with customers, so that transfer of ownership is properly effected.

7. Risk-taking: In the process of distribution of goods, the merchant middlemen take title of the goods and thereby assume risks on account of price and demand fluctuations, spoilage, destruction etc.