How to design a good distribution system?

A manufacturing company manufactures products. It then needs to deliver the manufactured products to the consumers. Many times, the place of manufacturing and the place where the consumers require the products is very far away form each other.

For example: Tata Motors has a "Indicar" manufacturing plant in Pune but it's customers are all over India. So, Tata Motors needs to set up a efficient distribution system so that the products reach its consumers.

In case of some products like perishable food products etc. physical distribution is a very important part of the whole business. The transportation of "Amul Butter" to the stores that sell "Amul Butter" is a big challenge. While transportation, the butter has to be stored properly so that it does not get contaminated.

To completely understand and appreciate physical distribution, consider the case of "Amul Butter". Amul is made in "Kaira District" somewhere in Gujrat if I am not mistaken. From there it is distributed all over India and it is available at the local store near you. The destitution guys have to make sure that, every little "banya shop" on every little street of our extremely large country gets Amul Butter. To add to this enormous challenge, Amul butter is a perishable milk based product. It has to be stored and transported properly so that it does not get spoilt on the way. And while the distribution guys do all this, they have to make sure they keep the costs under control.

The above example makes one think that the distribution guys do a whole lot of work. However, in practice what they do is, set up distribution channels.

What are distribution channels?

Distribution channels are all the sub-marketers or intermediate marketers of the company. For example: selling agents, wholesalers, retailers, authorized representatives, showrooms etc. are basically distribution channels.

The distribution channel for a particular product may be:

Manufacturer - Wholesaler - Retailer - User
Manufacturer - Distributor - Wholesaler - Retailer -User

All of these members of the distribution channels also want to sell the products that they hold so they too try to market the products in their own small way.

For example: the showrooms might try to promote their showroom in the local papers and sell more of the products they hold etc.


An insurance selling agent may try to use word of mouth marketing to sell more insurance policies.


The local "banya shop" will keep his shop stocked with the Amul butter packets so that he does not loose business from customer who asks for Amul butter.

Using these distribution channels the company can sub-market it's product at various localized levels. Using these distribution channels, the company can market it's self in all the local neighborhoods and streets of the country.

The company has to give some commission to the people along the distribution channel. It also gives incentives to them if they sell more products. This way, the distribution and marketing of the product takes care of itself to some extent.

In some cases having distribution channels may prove to be costly as the price of the product rises at every level. So, a company may choose to by-pass all distribution channels and directly market the product and deliver it to the consumer itself.

However, whatever the method of distribution used, the products still have to reach the distribution channels or the consumer from the point of production. So we come back to the original topic of physical distribution.

The two most important factors when considering physical distribution are:

1. The time taken for the product to reach the consumer.

2. The cost of delivering the product to the consumer.

Firstly, we do not want the consumer to wait for too much time when he is waiting for the products to reach him. So we want to use the fastest product delivery system we can. But, the problem with doing this is that the faster we try to make the product delivery, the more the cost of product delivery will increase.

So, what needs to be done is to choose the "minimum service level"

What is minimum service level?

As we saw above, we cannot just reduce the time taken to delver the product and make the delivery as fast as possible. This would mean a very fast but also very costly distribution system. So, what need to be done is to decide what minimum level of service will the customers be satisfied by.

In case of a car, for example, we may say that the minimum level of service is set to one day. This means that, the car has to be delivered within one day to the consumer. So, the distribution system/distribution channels of the company should be designed in such a way that the car can reach the consumer within one day flat. One day is the minimum level of service desired.

If a company keeps the minimum level of service too high, it risks loosing customers. In today’s competitive environment, if a car manufacturer delivers a car in one week and it's competitors deliver the car in one day; the care manufacturer will loose business to the competitors. Today people will not wait a week if they can get something in a day.

The minimum level of service should be at least at par with your competitors. If it is not, you better be selling some spectacular product or you are soon going to be out of business.

On reading the above paragraphs, one may tend to think that the physical distribution system is only related to transportation of goods from the company to the consumer. However, physical distribution is a whole lot more.

Some of the major aspects of physical distribution are:

  • Transportation
  • Warehousing
  • Inventory Management
  • The problem with Inventory and Warehousing

Transporting a car from the car manufacturer to the customer every time an individual order is placed would be very costly. Not only would this be costly, but also it would take too much time and the time of delivery would exceed the desired minimum level of service.

For example: if a car manufacturer is situated in Pune and an order for the car is placed in Delhi, it would take 3 days for the car to be delivered to Delhi. Also since only one car is being delivered at a time, the cost of delivery would be very high.

Because of this the concept of warehouses and inventory is introduced. The car manufacturer has a warehouse in Delhi or around Delhi. The warehouse is stocked with cars. Whenever an order is placed in the Delhi showroom for the car, the car comes from the warehouse instead of the company. This is obviously much more faster.

However, there are some problems with this system. If the warehouses and the number of cars in the warehouses (inventory) is not managed by the company properly, it could prove to be very costly for the company.

For example: If the warehouse is not stocked properly, then a situation may arise where a customer is waiting for the delivery of a car but there is no car available for delivery. He may have to wait for the car to come in from the company. This will take a lot of time. The customer will cancel his order and book a car somewhere else.

In the case of buying cars this is less likely to happen. However, in the case of a small product, if the distribution system is not good, the products will not be available in the local stores and if this happens the consumer will buy something else and that will be the end of that consumers loyalty.

So, in conclusion, the warehouse/stores/retail outlets must never be under stocked.

However, even if they are over stocked there will be a problem. If a car manufacturer keeps his warehouse overstocked and full of inventory, he has lot of money tied up in the cars that are waiting to be sold in the warehouse. Because of this he has less money to run his business and make the next batch of cars.

Also, since he has so many cars in the warehouse there are threats like, the warehouse catching fire and this cars being destroyed etc. For this he may choose to insure all the cars in his warehouse but that too will add to the costs of overstocking the inventory or overstocking the warehouse.

So warehouses cannot be overstocked either. In conclusion, warehousing and the amount of inventory in the warehouses is a tricky subject. It must be managed effectively or it will prove to be costly for the marketer.

Please Note: The above text only covers a basic idea of what is involved in designing a distribution system. There are books and books written on this subject.

Most of our readers are people starting or running small business. This marketing subject is less important to them as compared to other subjects so we have not given it too much stress. However, there are many good books available on this subject.

Next - How to promote and advertise? >>

<< Previous - Some more pricing strategies!

Other articles YOU may like...
How to market your business?
How to start a company?
How to manage your money?
How to manage time?
How to make money in the stock market?

Table Of Contents

  1. How to market? – Introduction
  2. What is marketing?
  3. Understanding the Indian consumer
  4.     - Literacy scenario of India
  5.     - Urban and rural life of India
  6.     - Indian consumers are buying more than ever before
  7.     - Understanding India’s economical classes
  8.     - Understanding the Indian middle class “male”
  9.     - Understanding the Indian middle class “house wife”
  10.     - Understanding the Indian middle class “urban teenager”
  11. How to make a “complete” marketing plan or strategy?
  12. How to identify your target market? & Why?
  13. How to design the “best” marketing mix for your business?
  14. How to design and manage your product?
  15.      - How to position your product in the consumers mind?
  16.      - Positioning & Product Management
  17. How to choose the right price for your product or service?
  18.      - Some more pricing strategies!
  19. How to design a good distribution system?
  20. How to promote and advertise your product or your business?