Direct or indirect distribution channel: overview
A distribution channel is a chain of businesses or intermediaries through which a good or service passes until it reaches the final consumer. Channels are divided into direct and indirect ways.
Distribution channels can include the manufacturer, warehouses, shipping centers, retailers, and even the Internet. Direct channels allow the customer to buy goods directly from the manufacturer, while an indirect channel moves the product through other distribution channels to reach the consumer.
Companies that use direct distribution require their own logistics teams and transport vehicles. Those with indirect distribution channels must establish relationships with third-party sales systems.
The goods and services produced must find a way to reach consumers. The role of the distribution channel is to transfer goods and services efficiently. They can be shipped to a retail store or directly to the customer’s residence.
There are advantages and disadvantages to direct distribution channels. The same goes for indirect channels. It is the task of managers and others involved in corporate governance to find the most effective means based on the specific needs of the company.
What is the difference between a direct and indirect distribution channel?
A direct distribution channel is organized and managed by the manufacturer itself. Direct channels tend to be more expensive to set up up front and can sometimes require significant capital investment. It will be necessary to install warehouses, logistics systems, trucks and delivery personnel. However, once established, the direct channel is likely to be shorter and less expensive than an indirect channel.
Direct selling can be difficult to manage on a large scale, but it often allows the manufacturer to have a better connection with its consumer base.
By controlling all aspects of the distribution channel, a manufacturer has more control over how goods are delivered. They have more control over eliminating inefficiencies, adding new services, and setting prices.
An indirect distribution channel relies on intermediaries to perform most or all distribution functions, also known as wholesale distribution. The most challenging part of indirect distribution channels is that the manufacturer’s products and customer interaction must be entrusted elsewhere. However, the most successful logistics companies are adept at delivering accounts receivable in a way that most manufacturers cannot.
Indirect channels also relieve the manufacturer of any initial costs. With the right relationship, they are much simpler to manage than direct distribution channels. Indirect distribution channels add levels of costs, suppliers, and bureaucracy. This can increase the cost to the consumer, slow delivery, and take control of the manufacturer. On the other hand, indirect distribution could bring new levels of expertise. A manufacturing company is not a transportation company. While a company may be adept at making a certain good, shipping it efficiently is a different area of expertise. The company may choose to focus on its core competition while distributing its shipping service to a company that focuses exclusively on that.
- Direct distribution is a direct-to-consumer approach, where the manufacturer controls all aspects of the distribution.
- Indirect distribution involves third parties, such as warehouses, wholesalers, and retailers.
- Direct distribution gives companies more control over the entire process.
- Indirect distribution can allow companies to focus on their core business while outsourcing distribution to an expert.