Advantages and shortcomings of a multi-layered distribution network

By Priya Chetty on May 8, 2020

Every business strives to expand its operations and capture the maximum possible market share. With globalization gaining momentum and domestic market competition intensifying, it is inescapable for businesses to explore opportunities across borders. Companies are making strategic decisions to expand geographically and increase sales and revenues. However, big corporate houses with excellent business records do not emphasize solely on a preset supply chain. Today’s business culture stresses on customization of supply chains as per requirements of the product, geographical markets, and target customers. This results in the development of a multi-layered distribution network.

The relevance of the multi-layered distribution network in the age of e-commerce

It is a strategic challenge for a supply chain manager to design an all-inclusive and universally applicable multi-layered distribution network that is compliant with the competitive and corporate strategy. Supply chain strategies intend to attain the predetermined objectives of a business along with those of stakeholders while keeping the speed, cost, reliability, and flexibility intact (Cetinkaya et al., 2011). However, simplistic or conventional supply chains do not respond well to dynamic business changes.

With industry competition, business enterprises have to be highly flexible and quick in responding to changing market scenarios. Hence, all participating channel partners of the supply chain like producers, suppliers, distributors, retailers, and customers need to desegregate their functions into the multi-layered distribution network. This should be done such that multiple products and markets can be handled simultaneously in a cost-effective manner (Chou, 2009). Japanese electronics giant Sony and South Korea based Samsung are examples of successful multi-layered supply chains.

Process of a multi-layered distribution network

Generally, there are two alternatives for the companies to ensure that their products reach the markets. Either the manufacturer directly reaches out to the customer or seeks the help of the intermediary channel partners. Multi-layered distribution system includes hiring of many channel partners at different levels of the supply chain to smoothly expedite the transfer of finished goods from the production facility to the customer. There is no direct contact between the customers and the manufacturers. There is a temporary indirect transfer of ownership of goods to channel partners at various levels of distribution (Stokes and Wilson, 2010).

Usually, the manufacturer ships the finished stock to the central warehouse from where it is distributed amongst clearing and forwarding agents. These are the channel partners that handle the bulk shipment of finished products. It is from these agents that the bulk stock is further divided into smaller quantities and distributed to various retailers who act as the final link of the supply chain between the company and the buyer. All these channel partners at various layers of distribution are involved in contracts with manufacturers who pay them a commission which is included in the final cost of the product. Hence, it is essential for the firms to keep the number of intermediaries at the lowest possible level to optimize costs and improve efficiency (Langer and Kelkar, 2008; Lasgaa, 2007).

Drawbacks of a multi-layered distribution network

Tse and Tan (2012) highlighted the drawbacks of having a multi layered distribution network. Manufacturers and customers are equally susceptible to the risk of quality and safety of the product involved in the elongated supply chain. The main cause for the extension of the supply chain and inclusion of multiple channel partners is globalization which results in further complications of the supply network. It is difficult for businesses to ensure and sustain the product quality through the multi-layer distribution network as it has lower tracking possibilities.

Operational disadvantages

There is a rise in the risk of operational inefficiencies as the process depends on individual capabilities of the channel partners. Moreover, there is a lot of disintegration and fragmentation of the supply and distribution processes due to duplication at each level of transition and handling of products.

Lastly, there are very great chances of clashes and conflicts between the manufacturer and the channel partners over commonly shared business objectives, money and operational dysfunctionalities. Channel partners may promote the products as per their preferences rather than those of the manufacturing company (Aryasi, 2006; Astashkina, 2012; Gattarona, 1998; Lamb, Heir and McDaniel, 2012).

Consumer-side disadvantages

There are several drawbacks of employing a multi-layered distribution system for the supply of goods to the final customers. The most prominent is higher costs. Because of this, the firm’s competitiveness in price-sensitive markets is at stake wherein manufacturers having shorter supply chains or such as eCommerce can sell their products at a lower cost (Jain, 2016).

The next concern is regarding customer feedback as backward communication is possible only through intermediaries and there is a high risk of information getting lost while passing through numerous channels. The quality and safety of the product go beyond the direct control of the manufacturer as products are handled by so many different channel partners and geographical transitions.

Advantages of multi-layered distribution network

In spite of the illustrated disadvantages, there are advantages to adopting a multi-layered distribution network. Multi-layered distribution strategies provide many business expansion opportunities as they enable massive coverage of markets, both in terms of geographical terrains and penetration of existing markets (Matthew, Samuel and Patrick, 2012). The system is characteristically more convenient for both the manufacturers and the consumers.

The manufacturers are relieved from the tedious process of inventory management. Consumers on the other hand get the product effortlessly from the retail outlet where they can compare and buy products from various producers as well. This distribution network proves to be a boon for the small and medium enterprises that lack resources and expertise to reach out to the customers in different geographical locations (Li, 2007).

It is also advantageous for manufacturers to develop a reliable business network of agents and retailers. This helps them with facilitating the launch of new products with lesser investment and efforts. Elongated supply chains bring about economies of scale as the company can use expert services for mass warehousing and distribution and avoid the high cost of establishing and maintaining an in-house logistics department.

“Glocalization” is the buzzword for today’s strategic marketing decision making and having an effective distribution system enables the manufacturer to get a better understanding of the local market through the information intermediaries provides  (Aryasi, 2006; Astashkina, 2012; Gattarona, 1998; Lamb, Heir and McDaniel, 2012).

References

  • Aryasri, A., 2006. Economics, Accountancy and Management: For JNTU. New Delhi: Tata McGraw-Hill.
  • Astashkina, E., 2012. On Intermediaries in Supply Chains with many Suppliers, Dissertation, Bielefeld University: The Institute of Mathematical Economics.
  • Cetinkaya, B., Cuthbertson, R., Ewer, G., Klaas- Wissing,T., Piotrowicz, W. and Tyssen, C., 2011. Sustainable Supply Chain Management: Practical Ideas for Moving Towards Best Practice, London: Springer
  • Chou, S., 2009. Global Perspective for Competitive Enterprise, Economy and Ecology, London: Springer
  • Gattorna, J., 1998. Strategic Supply Chain Alignment: Best Practice in Supply Chain Management, Hampshire: Gower Publishing
  • Jain, A. (2016). Winning a billion consumers. New Delhi: Sage.
  • Lamb, C., Hair, J. and Mc Daniel, C., 2012. Essentials of Marketing, 7th Ed., Mason: South-Western Cengage Learning
  • Langer, E. and Kelkar, A., 2008. Pharmaceutical Distribution in India: Drug Manufacturers in India are Struggling to Cope with the Highly Fragmented Nature of Distribution Network, Bio Pharm International, September 2008
  • Lasgaa, M., 2007. Why Multilayered Distribution Works Best in Europe, CSCMP’s Supply Chain Quarterly,3, 2007
  • Li, L., 2007. Supply Chain Management: Concepts, Techniques and Practices: Enhancing Value through Collaboration, Danvers: World Scientific Publishing
  • Matthew, K., Samuel, T., and Patrick, K. (2012). Examining the effect of multi-channel product distribution on firms’ performance. International Journal of Economics and Management Sciences, 1 (12), 90-103.
  • Tse, Y. and Tan, K., 2012.Managing Product Quality Risk and Visibility in Multi-Layer Supply Chain, International Journal of Production Economics, 139(1), Pp.49-57
  • Stokes, D., and Wilson, N. (2010). Small business management and entrepreneurship. Mason: Cengage
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