Most producers use middlemen to bring their products to market. They try to forge a distribution channel. A distribution channel is the set of firms and individuals that take title, or assist in transferring title, to a good or service as it moves from the producer to the consumer or industrial user.
Why Are Middlemen Used?
Why do producers give some of the selling job to middlemen? This means giving up some control over how and to whom products are sold. The use of middlemen largely boils down to their greater efficiency in making goods available to target markets. Through their contacts, experience, specialization, and scales of operation, middlemen usually offer a firm more than it can achieve on its own.
Figure 1 shows one way that using middlemen can provide economies. Part A shows three producers each using direct marketing to reach three customers. This system requires nine different contacts. Part B shows the three producers working through one distributor, who contacts the three customers. This system requires only six contacts. In this way, middlemen reduce the amount of work that must be done by both producers and consumers.
From the economic system's point of view, the role of middlemen is to transform the assortment of products made by producers into the assortments wanted by consumers. Producers make narrow assortments of products in large quantities. But consumers want broad assortments of products in small quantities. In the distribution channels, middlemen buy the large quantities of many producers and break them down into the smaller quantities and broader assortments wanted by consumers. Thus, middlemen play an important role in matching supply and demand.
The first five functions help to complete transactions; the last three help fulfill the completed transactions.
The question is not whether these functions need to be performed--they must be--but rather who is to perform them. All the functions have three things in common--they use up scarce resources, they can often be performed better through specialization, and they can be shifted among channel members.
To the extent that the manufacturer performs them, its costs go up and its prices have to be higher. At the same time, when some functions are shifted to middlemen, the producer's costs and prices are lower, but the middlemen must add a charge to cover their work. In dividing up the work of the channel, the various functions should be assigned to the channel members who can perform them most efficiently and effectively to provide satisfactory assortments of goods to target consumers.
Number of Channel Levels
Distribution channels can be described by the number of channel levels. Each layer of middlemen that performs some work in bringing the product and its ownership closer to the final buyer is a channel level. Because the producer and the final consumer both perform some work, they are part of every channel. We will use the number of intermediary levels to indicate the length of a channel. Figure 2 shows several consumer distribution channels of different lengths.
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