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Category: Business and Industry

Date Submitted: 11/22/2012 04:34 PM

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If selling from the manufacturer to the consumer were always the most efficient way, there would be no need for channels of distribution. Intermediaries, however, provide several benefits to both manufacturers and consumers: improved efficiency, a better assortment of products, routinization of transactions, and easier searching for goods as well as customers.

The improved efficiency that results from adding intermediaries in the channels of distribution can easily be grasped with the help of a few examples. In the first example there are 5 manufacturers and 20 retailers. If each manufacturer sells directly to each retailer, there are 100 contact linesne line from each manufacturer to each retailer. The complexity of this distribution arrangement can be reduced by adding wholesalers as intermediaries between manufacturers and retailers. If a single wholesaler serves as the intermediary, the number of contacts is reduced from 100 to 25 contact lines between the manufacturers and the wholesaler, and 20 contact lines between the wholesaler and the retailers. Reducing the number of necessary contacts brings more efficiency into the distribution system by eliminating duplicate efforts in ordering, processing, shipping, etc.

In terms of efficiency there is an effect of diminishing returns as more intermediaries are added to the channels of distribution. If, in the example above, there were 3 wholesalers instead of only 1, the number of essential contacts increases to 75: 15 contacts between 5 manufacturers and three wholesalers, plus 60 contacts between 3 wholesalers and 20 retailers. Of course this example assumes that each retailer would order from each wholesaler and that each manufacturer would supply each wholesaler. In fact geographic and other constraints might eliminate some lines of contact, making the channels of distribution more efficient.

Intermediaries provide a second benefit by bridging the...