The distribution channel consists of many parties each seeking to meet their own business objectives. Clearly for the channel to work well, relationships between channel members must be strong. For product distribution to flow smoothly, each member must understand and trust others on whom they depend. For instance, a small sporting goods retailer trusts a wholesaler to deliver required items on time in order to meet customer demand, while the wholesaler counts on the retailer to place regular orders and to make prompt payments.
Relationships in a channel are in large part a function of the arrangement that occurs between the members. These arrangements can be divided in two main categories:
Independent Channel Arrangement
Under this arrangement, a channel member negotiates deals with others that do not result in binding relationships. In other words, a channel member is free to make whatever arrangements they feel is in their best interest. This so-called conventional distribution arrangement often leads to significant conflict as individual members decide what is best for them and not necessarily for the entire channel (see Channel Conflict). On the other hand, an independent channel arrangement is less restrictive than dependent arrangements and makes it easier for a channel members to move away from relationships they feel are not working to their benefit.
Dependent Channel Arrangement
With a dependent channel arrangement, a channel member feels tied to one or more members of the distribution channel. Sometimes referred to as vertical marketing systems, this approach makes it more difficult for an individual member to make changes to how products are distributed. However, the dependent approach provides much more stability and consistency since members are united in their goals. The dependent channel arrangement can be further broken down into three types:
Under this arrangement, a supplier operates its own distribution system in a manor that produces an integrated channel. This occurs most frequently in the retail industry where a supplier operates a chain of retail stores. Starbucks is a company that does this. They import and process coffee and then sell it under their own brand name in thousands of their own stores. It should be mentioned that Starbucks also distributes their products in other ways, such as through grocery stores and online sales. As we will see in more detail later, Starbucks is using a multichannel structure to market their products (see Multichannel or Hybrid System).
Under this arrangement, a legal document obligates members to agree on how a product is distributed. Often times, the agreement specifically spells out which activities each member is permitted to perform or not perform. This type of arrangement can occur in several formats including:
- Wholesaler-sponsored – where a wholesaler brings together and manages many independent retailers including having the retailers use the same name
- Retailer-sponsored – this format also brings together retailers but the retailers are responsible for managing the relationship
- Franchised – where a central organization controls nearly all activities of its members
- Licensing Agreement – where a central organization controls some activities of its channel members, but it does not control all activities of the members
In certain channel arrangements, a single member may dominate the decisions that occur within the channel. These situations occur when one channel member has achieved a significant power position (see Channel Power). This most likely occurs if a manufacturer has significant power due to brands in strong demand by target markets (e.g., Apple) or if a retailer has significant power due to size and market coverage (e.g., Walmart). In most cases, the arrangement is understood to occur and is not bound by legal or financial arrangements.