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Channels of Distribution

relieved of many of the administrative costs associated pharmaceutical distributors continuously break bulk
with routine orders. Not coincidentally, the system makes to satisfy retailers’ lot-size requirements.
it more likely that McKesson will get their business as a
result of the savings. The role intermediaries play in building customer
confidence is their most overlooked function. Several
Routinization refers to the means by which transac-
types of risks are associated with exchanges in channels of
tion processes are standardized to improve the flow of
distribution, including need uncertainty, market uncer-
goods and services through marketing channels. Rou- tainty, and transaction uncertainty. Intermediaries create
tinization has several advantages for all channel partici-
value by reducing these risks.
pants. To begin with, as transaction processes become
routine, the expectations of exchange partners become
Need Uncertainty. The term need uncertainty refers to the
institutionalized. The need to negotiate on a transaction-
doubts that sellers have regarding whether they actually
by-transaction basis disappears. Routinization permits
understand their customers’ needs. Usually neither sellers
channel partners to concentrate more attention on their nor buyers understand exactly what is required to reach
own core businesses. Routinization clearly allows channel optimal levels of productivity. Since intermediaries act like
participants to strengthen their relationships.
bridges linking sellers to buyers, they are much closer to
Organizations strive to ensure that all market offer- both producers and users than producers and users are to
ings they produce are eventually converted into goods and each other. Since they understand buyers’ and sellers’
services consumed by members of their target market. The needs, intermediaries are well positioned to reduce the
process by which this market conversion occurs is called uncertainty of each. They do this by adjusting what is
sorting. In marketing channels, assortment is often available with what is needed.
described as the smoothing function. The smoothing Few organizations within any channel of distribution
function relates to how raw materials are converted to are able to accurately state and rank their needs. Instead,
increasingly more refined forms until the goods are most channel members have needs they perceive only
acceptable for use by final consumers. The next time you dimly, while still other firms and persons have needs of
purchase a soda, consider the role intermediaries played in which they are not yet aware. In channels where there is a
converting the original syrup to a conveniently consumed lot of need uncertainty, intermediaries generally evolve
form. Coca-Cola ships syrup and other materials to bot- into specialists. The number of intermediaries then
tlers throughout the world. Independent bottlers carbon- increases, while the roles they play become more complex
ate and add purified water to the syrup. The product is and focused. The number of intermediaries declines as
then packaged and distributed to retailers, and consumers need uncertainty decreases.
buy it. That is assortment. That is what channels of distri-
bution do. Two principal tasks are associated with the Market Uncertainty. Market uncertainty depends on the
sorting function: number of sources available for a product or service. Mar-
ket uncertainty is difficult to manage because it often
1. Categorizing. At some point in every channel, large
results from uncontrollable environment factors. One
amounts of heterogeneous supplies have to be con-
means by which organizations can reduce their market
verted into smaller homogeneous categories. Return-
uncertainty is by broadening their view of what marketing
ing to pharmaceutical channels, the number of channels can and perhaps should do for them. Channels
drugs available through retail outlets is huge. More must be part of the strategic decision framework.
than 10,000 legal drugs exist. In performing the cat-
egorization task, intermediaries first arrange this vast
Transaction Uncertainty. Transaction uncertainty relates
product portfolio into manageable therapeutic cate-
to imperfect channel flows between buyers and sellers.
gories. The items within these categories are then
When considering product flows, one typically thinks of
categorized further to satisfy the specific needs of the delivery or distribution function. Intermediaries play
individual consumers.
a key role in ensuring that goods flow smoothly through
2. Breaking bulk. Producers want to produce in bulk the channel. The delivery of materials must frequently be
quantities. Thus, it is necessary for intermediaries to timed to coincide precisely with the use of those goods in
break homogeneous lots into smaller units. Over 60 the production processes of other products or services.
percent of the typical retail pharmacy’s capital is tied Problems arising at any point during these channel flows
to the purchase and resale of inventory. The oppor- can lead to higher transaction uncertainty. Such difficul-
tunity to acquire smaller lots means smaller capital ties could arise from legal, cultural, or technological
outflows are necessary at a single time. Consequently, sources. When transaction uncertainty is high, buyers

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