Distribution problem and marketing *

Field of distribution

Market distribution involves all those business activities which are necessary to move goods from the producer to the consumer and to make them available in the amounts and of the kind desired. These activities are many and complex. They intertwine or interweave with all other types of business operations. They concern every individual business enterprise, large or small.

In many instances the huge corporations of the present day provide for the performance of the entire range of distributive activities. They conduct market researches, make market forecasts, institute sales promotion studies, develop channels of distribution, direct and execute advertising and field salesmanship, pack and ship products, and in some cases, even operate transportation units.

The small business enterprise especially if it is a retail establishment, may appear to be concerned with only a few of the many distributive activities. Actually, however, the small concern must recognize and deal with all or most of the distributive activities if it wishes to be successful. Of course, it is hardly necessary for the small concern to establish the elaborate departments or to develop the intricate organization which may be essential to the profitable operation of the large company.

But the large corporations of to-day have grown from the small business enterprises of yesterday largely because they have studied the problem of market distribution in its whole extent. As a result, they have been able to coordinate their distributive activities with those of production, accounting, and finance.

Objective of business

Commodities and services are produced for sale in a market. This is true of minerals dug out of the ground, of crops grown in it, of articles manufactured upon it, and of the varied services conceived and performed by men. To bring raw materials from the four corners of the earth and to manufacture consumers' goods is only part of the business job. The finished products must eventually reach the consumer or the factories will be obliged to shut down.

Goods are produced or manufactured to be consumed. Potatoes are grown to be cooked and eaten, hats are made to be worn, and musical instruments are made to be played. The final or ultimate purpose of all industry and business is consumption. People must buy what industry and business produce or anticipated profits will not be realized. And without the driving urge or motive force of anticipated profits from sales in a market, there will be no extensive nor intensive organization of men, materials, and machines into those relationships which are necessary to perform the productive work of the world.

The beginning of markets

In the simplest economic stage of human existence there is, of course, scarcely any exchange of goods. Markets do not exist. The individual or the family produces directly everything that is consumed. Since goods are made for personal use and not for sale in a market, there is no problem of market distribution. A peep at the trading of our primitive ancestors shows us that the market was originally a luxury.

Marketing begins with the exchange of superfluous goods. An individual or a family with an extra tomahawk hunts up an individual or family with a bundle of hair-cord to spare and attempts to barter. The practice of the Australian black-fellows of the present day is typical of primitive marketing. Two parties or groups approach an appointed spot, the men in front armed to the teeth and the women behind carrying the goods. The chiefs go out ahead of their respective groups, and assure each other that they come in peace and not for war. After other formalities the marketing begins.

Goods are exchanged for goods. A barter economy prevails instead of a money economy. For example, a boomerang is exchanged for a glittering trinket. When one group's supply does not exactly meet the other group's demand there is first an argument, and then a regular combat. And yet the characteristics of a market are present. This primitive negotiation takes place at a definite spot where at an appointed time an exchange of goods occurs.

The establishment of regular markets

Later, as life becomes more settled, the separation of employments and the specialization of work begins. The individual or the family ceases to produce everything it needs or wants and begins to produce according to its opportunity and aptitude. It becomes evident, for example, that a man who is a shoemaker six days a week succeeds in turning out a better pair of boots than the farmer who turns cobbler but one day a month.

As industry grows more productive, markets become more necessary, and are fixed for known spots and certain dates. In many instances, these markets are distinguished by market "crosses," still standing in the old European towns. Money appears and is used in effecting exchanges. It overthrows the barter balance, for it is suspended purchasing power. It hangs over the market "to be used, nobody knows when, or where, or for what." And yet, for years the markets remain local in the main. Most exchanges are made directly between the producer and the consumer, although as time goes on, many men break away from cultivation and fabrication to become exclusively handlers of goods, buying from all and selling to all.

The effect of specialization and large-scale production

Then the possibilities of large-scale manufacture present themselves. Commercial needs and economic conditions favourable for experimentation call forth inventive genius. New machines and new sources of power develop productive capacities with amazing rapidity.

The specialization of labour continues, but there is even more specialization by machines. Territorial specialization also proceeds at an astounding rate. When communities specialize and make the products for which they are best fitted, either through their natural endowment or through the development of special services and facilities, productivity rapidly increases. Moreover, the people of all localities and communities become interdependent and cooperative, like workers in a single plant. The Massachusetts shoemaker, the British miner, the Ohio machinist, the Southern cotton-grower, and the Minnesota wheat farmer are all dependent one upon the other. Markets, once merely local institutions, become nation-wide and world-wide.

Competition to push back limiting market frontiers grows in intensity as production speeds up. It appears almost as though the looms weave cloth more rapidly than we can wear it out, that the farmers raise crops in greater abundance than we can consume them, and that machines and assembly lines pour goods into the world markets faster than they can be absorbed.

The gap between producer and consumer

Because of the tendency toward large-scale production and geographical specialization a wide gap develops between the producer or manufacturer and the ultimate consumer. In our modern economic life the great bulk of production is for the general market rather than for known individuals.

Producer and consumer do not usually come directly into contact with each other. It is only on very rare occasions that the skilled craftsman or the farmer acts as salesman. Most industrial workers make or help to make goods which others will sell to unknown customers, many of whom may be living on other continents. In the stock of a small retail store there can be found goods from practically every state in the Union and from many foreign lands.

An ultimate consumer in California wears a suit of clothes made in Rochester, New York, out of cloth manufactured in Atlanta, Georgia, from wool imported from South America and coloured with dyes brought from Switzerland. In order that this ultimate consumer may be comfortably and neatly clothed, the manufacturer of this suit has drawn upon the resources of at least three continents. In addition, he and other distributive agencies have performed a whole group of service activities. Certainly the problem of getting goods to the consumer has become highly complicated and demands the services of experts possessing the highest grade of business ability. Market distribution is no longer a butterwoman's job.

Distribution the business problem of the present

An extremely elaborate system has developed for the purpose of bridging the gap between the farm, the mine, and the factory, and the thousands of business organizations and households whose needs and wants these producing agencies must supply.
The function of market distribution has become highly specialized and is now distinctly separated from the function of physical production. Indeed, so much progress has been made in the technique of production and so little has been accomplished in distribution that the principal business problem of the moment is not how to produce, but how to distribute profitably what can be produced.

When oil operators welcome a material drop in oil production, when farmers grow "bumper" crops only to discover that they must market them at a loss, when manufacturers see their distribution costs mount so high that they offset production savings, when wholesalers and retailers find it necessary to buy from "hand to mouth" in order to increase their rate of turnover to "the point which enables them to survive"—it must be evident that we are living in an "Age of Distribution," an age of perplexing problems and challenging costs. Moreover, it is entirely likely that these problems will increase in importance. The more advanced our civilization becomes, the more value the average consumer will be likely to put upon service and time, and the more complicated will be the problem of distribution.

Definition of the term distribution

In order to understand this problem of distribution it is necessary to resolve it into its component parts or elements. However, before we proceed to an analysis of distributive activities we need to be sure of certain of our terms.

The word distribution is used here not in the special and technical sense in which it is applied in pure economic science, the sense of income distribution. Ordinarily, the economist divides his field of study into three parts, production, distribution and consumption. He defines production as the process of creating elementary, form, time and place utilities. Under such a definition, what is called market distribution in this text falls under the head of production.

To the economist, distribution is the process by which the total income of the entire nation is apportioned to labour, capital, land, and management. In this sense, distribution deals with rent, wages, interest, and profit, their nature and their relationship one to another. The business man, however, speaks of production in the sense of the creation of form utilities alone, and of distribution as all the activities of getting goods from those who are primarily responsible for the form of the commodity to those who will ultimately consume the commodity. In this text, distribution will be used in its business meaning rather than in its special economic sense.

The distributive functions

In making a purchase, the consumer must decide upon the type of goods, the particular brand, grade, or unit to be purchased, and the particular vendor to be patronized. In this whole process he is influenced by the extent to which distributors carry out their responsibilities. These responsibilities or activities are called the distributive functions. They include standardization, storing, transporting, risk-bearing, financing, assembling or purchasing, and demand-creating or selling. Two of these activities, risk-bearing and financing, underlie all business activity, and therefore, they are not exclusively the problems of distribution.

Standardization (grading and sorting) , storing and transporting are physical matters, in the main, and are sometimes set apart from the more purely marketing functions of purchasing and selling. In fact, a definite distinction is sometimes made between the terms "distribution" and "marketing." The former is often said to be an all-inclusive term which involves all the functions listed above, while the latter is often rather specially restricted to the activities of purchasing and selling.

Standardization

The function of standardization involves the adoption of definite rules for classifying commodities into uniform groups. These standards or rules may be based upon a variety of factors such as size, shape, strength, chemical content, flavour, moisture, method of packing, etc. The actual dividing or sorting in accordance with these standards or rules is grading. The standards or rules which are used in grading may be fixed by public authority or by private initiative.

Common or public standards are usually established and promulgated by the state or federal governments. They tend to do away with distinctiveness as regards the output of any one producer because they frequently result in the mixing of goods of similar types and grades so that the identity of individual lots is lost. They make it possible to sell goods by description (grade) rather than by sample or inspection.

Private standards are used to make the units of a product uniform, to provide easy identification, and to indicate distinctiveness when compared with competing products. These standards are represented by brands or trademarks which are made known to the market through advertising and personal salesmanship. Grading may be performed at the point of production, in wholesale markets and in retail markets. Generally speaking, it should be performed as near as possible to the point of production or manufacture.

Storage

There is almost always a "lag" between production and consumption which makes storage highly essential. Goods must be stored until consumers are ready to use them because the consumption of most products is fairly even and continuous while production is often intermittent.

The huge elevators in which grain is held until the millers buy, the large oil tanks, the warehouses in which manufacturers store raw materials and in which they accumulate their finished products, the warehouse in which jobbers and wholesalers keep their complex variety of supplies, the storerooms, shelves, counters and display cases of the retailer—all are parts of the necessary storage system. In general, there is need for three kinds of storage: common, special, and cold.

Common warehouses provide storage for non-perishable products and are built merely to protect them and prevent them from being wasted. Semi-perishable products are stored in special warehouses which may be equipped with air-circulating and temperature-controlling devices. Cold storage warehouses are furnished for perishables like green vegetables, butter, eggs, meats, and so on, and are equipped to provide temperatures at or below freezing.

Transportation or traffic control

Even in the case of the simplest marketing mechanism, the transportation function is involved and must be performed by either the buyer or the seller. Transportation or traffic control includes a variety of sub-functions such as proper packing and loading, the selection of suitable routes, the securing of favourable rates, the effective use of terminal facilities, and the study and control of trucking, draying, or delivery systems.

The cost of transportation is often so high that it limits the geographical bounds within which the product can be marketed. The cost of performing the original haul, carried on largely by wagons and motor trucks, the intermediate haul, accomplished by the railroads and steamships, and the final haul by wagons and trucks, has a very vital effect on the problem of reaching the consumer.

Risk-taking

At all stages of the marketing process there are certain risks which must be assumed by the seller, buyer, middleman, or risk-bearing specialist. In general, these risks are of three types : Definite risks, indefinite risks, and price risks. Definite risks are the risks of physical losses, and consequent money losses, through fire, flood, sprinkler leakage, tornado, hail, theft, etc. Most of these risks can be passed over to the professional risk takers, the insurance companies.

However, the insurance premiums which must be paid add to the cost of doing business and the indemnities paid over by the insurer seldom compensate completely for the losses sustained. Indefinite risks are the risks of losses caused by deterioration, style changes, and the like. These risks must be borne by the owner of the goods and can be minimized only by the exercise of good business judgment in buying and selling.

Price risks are similar. Losses may be sustained because of changes in market prices. These losses must be borne by the owner of the goods. They cannot be passed on to others except through hedging which is possible in organized commodity exchanges where future trading is permitted.

Financing

Financing, too, is an important function which is fundamental to the whole process. Goods are produced or manufactured, stored, and transported on the assumption that they will be purchased and paid for in money. On this assumption credits may be secured during the period of transportation and while the goods are in storage. The task of securing these credits is an important function of the producer, manufacturer, or middleman. Practically every series of ownership transfers necessitates financing, and financing quite naturally increases in importance with the length of time which elapses between production and consumption.

Assembling or purchasing

Three types of purchasing or assembling activities are important. There is first the assembly of like goods for the purpose of obtaining a sufficient quantity of goods under one control for economical operation. This is the type of assembly which interests the car-lot shipper, the local grain elevator owner, the cotton broker, the grain broker, and similar operators. Next there is the assembly which is performed for the immediate purpose of obtaining raw materials, fabricating goods, accessory goods, and installation equipment in the amounts, of the kind, and at the price to make possible economical manufacturing.

This is the type of assembly in which the purchasing agent of the manufacturer is engaged. Finally there is assembly for the purpose of obtaining a variety and quantity of goods sufficient to meet the convenience of buyers and to make economical operation possible. This, in turn, is the province of the purchasing agent for the jobber or wholesaler of consumers' goods, and of the retailer. In all types, the efficient performance of this function depends upon a thorough knowledge of market supply, market demand, market prices, and sources of production, an economical and effective system for filling and following up orders, and a continuous check of stocks on hand.

Demand creating or selling

Selling or demand creating activities in some form are involved in the distribution of every commodity. Sales are made on three bases, by inspection, by sample, and by description. Of the three methods, sales made on the basis of description are the least costly. But not all products lend themselves to sale by description. It may be impossible to sell a carload of potatoes by description or even by sample.

The purchaser may insist upon inspection. On the other hand, it may be perfectly possible to sell a watch by description alone. The two principal sales methods utilized are advertising and personal salesmanship. Either may be used alone, but both are generally employed in some carefully planned combination. The steps involved in demand creating and making a sale are: Advising the buyer as to kind and quality of goods, and where they can be secured, creating an effective desire, and securing an agreement as to price and terms.

These principal distributive activities or functions are performed by the producer and by various types of middlemen. Accordingly, the next question is concerned with who middlemen are and with what they do.

Definition of middlemen

Middlemen are individuals, firms, or corporations that stand between prime producers and ultimate consumers and that specialize in the transfer of title to goods and in the performance of other essential marketing services. These individuals, firms, or corporations, are in business for themselves and attempt to conduct their enterprises in a way not only to be paid for the costs of their services, but also to make a profit in addition for the risks they assume.

Salesmen are not middlemen. They are excluded according to the definition because they are not in business for themselves, do not assume the risks of an entrepreneur, and do not receive any profit, as such, from their sales. Hence, a manufacturer who sells his products exclusively through salesmen who call upon ultimate consumers from door to door, is not selling through middlemen.

Classification of middlemen

All middlemen may be classified according to their relationship to the transfer of title to goods. In fact, the relationship of middlemen to the ownership of goods and to the transfer of title to goods is one of the most logical and useful factors in defining the position of any group of middlemen, both from a legal and an economic point of view. On this basis, middlemen may be classified as merchants and as functional middlemen.

Merchant middlemen

Those middlemen who buy goods outright, and thus take title to the goods are called merchants. This class of middlemen generally performs all or most of the distributive functions. Wholesale receivers, jobbers, and retailers are the most important members of the merchant class of middlemen.

Functional middlemen

Those middlemen who assist directly in bringing about a transfer of title, but who do not themselves take title to goods, are called functional middlemen. This class of middlemen generally specializes in the performance of a limited number of the marketing functions, one of which has reference to the transfer of title through assembling or selling, or both. Selling agents, brokers, and commission men are the most important members of the functional class of middlemen. There is a tendency in some cases to include in the classification of functional middlemen other individuals, firms, and corporations specializing in the performance of a part or all of the work involved in some one type of market service.

Such agencies as railroads, cold storage plants, public warehouses, inspectors, graders, banks and insurance companies, by acting in some specialized capacity facilitate certain distributive activities for the producer, the middleman, and the consumer. They are not bona fide middlemen, however, and they should not be thus classified, even in the functional group, for they render no direct assistance in the transfer of title.

The problem of distribution

The problem of distribution for a particular distributor is the problem of determining upon the extent to which the various distributive functions must be carried out, and of deciding who can carry them out most effectively and most economically. In some cases it is becoming possible and economical to do without middlemen entirely in the process of distribution. In others a smaller number of middlemen are being used. But these facts do not mean that the middleman is disappearing from modern business nor that the distributive functions are being eliminated.

The producer in most cases uses the services of middlemen. This is an age of indirect exchange of goods. As a system, the indirect exchange of goods is really much simpler and much less expensive than a plan under which every producer tries to deal directly with the final consumer. We are all specialists in one narrow groove in industry, and we have no time to hunt out for ourselves all the other specialists whose goods we need. Usually individual producers cannot perform the marketing functions effectively and economically without calling upon the middleman in some degree.

Criticism of the middleman

The middleman, is an important figure in the distribution of most goods. Hence, when the present distributing system is criticized, the middleman bears the burden of the attack. Some of this fault-finding is justified, but much of it is founded on a misunderstanding of who the middleman is and what he does.

The word "middleman" is often incorrectly applied to mean only the jobber or other type of wholesaler. Of course, the jobber is a middleman, but so, too, is the retailer. When critics generalize about "middlemen" they are talking about no one group of distributors but about every individual and every factor standing between the manufacturer and the consumer.

Moreover, the middleman exists because he has been called into existence, on the one hand, by the necessities of large-scale and specialized production and, on the other hand, by the necessities of consumers, also highly specialized in their activities and constantly demanding more and more in the way of service which the distant manufacturer, in most cases, must rely upon the middleman to give. Obviously, from time to time, some middlemen will be eliminated from the distributive system. The functions of others will change. But it is safe to say that the complete elimination of middlemen as a class is an economic impossibility in our complex industrial system.

Indeed, whether or not a particular middleman may be economically eliminated in a distributive situation rests on answers to these questions : (a) Is the middleman performing useless functions? (b) Is he performing necessary functions in an inefficient and uneconomical manner ? ( c ) Can producer, consumer or other middlemen perform the necessary functions more effectively and economically?

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