Direct vs. Indirect Distribution Channel: An Overview
A distribution channel is a chain of businesses or intermediaries through which a good or service passes until it reaches the end consumer. Channels are broken into direct and indirect forms.
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 get to the consumer.
Firms that use direct distribution require their own logistics teams and transport vehicles. Those with indirect distribution channels must set up relationships with third-party selling systems.
Produced goods and services have to find a way to reach consumers. The role of the distribution channel is to transfer goods and services efficiently. They can either be sent to a retail store or directly to a customer’s residence.
There are advantages and disadvantages to direct distribution channels. The same goes for indirect channels. It is the job of the managers and others involved in corporate governance to find the most effective means based on the firm’s specific needs.
What Is The Difference Between A Direct And An Indirect Distribution Channel?
Direct Distribution
A direct distribution channel is organized and managed by the manufacturer itself. Direct channels tend to be more expensive to set up at the beginning and can sometimes require significant capital investment. Warehouses, logistics systems, trucks and delivery staff will need to be set up. However, once those are in place, the direct channel is likely to be shorter and less costly 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 to 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 cutting out inefficiencies, adding new services and setting prices.
Indirect Distribution
An indirect distribution channel relies on intermediaries to perform most or all distribution functions, otherwise known as wholesale distribution. The most challenging part of indirect distribution channels is that another party has to be entrusted with the manufacturer’s products and customer interaction. However, the most successful logistics companies are experts at delivering receivables in a way that most manufacturers cannot be.
Indirect channels also free the manufacturer from any startup costs. With the right relationship, they are much simpler to manage than direct distribution channels. Indirect distribution channels add layers of cost, vendors and bureaucracy. This can increase the cost to the consumer, slow down delivery and take control out of the manufacturer’s hands. On the other hand, indirect distribution could bring in new levels of expertise. A manufacturing company is not a shipping company. While a company may be an expert in manufacturing a certain good, shipping it efficiently is a different area of expertise. The company may choose to focus on its core competency while farming out its shipping service to a company that focuses exclusively on that.
Key Takeaways
- Direct distribution is a direct-to-consumer approach, where the manufacturer controls all aspects of distribution.
- Indirect distribution involves third parties, like warehouses, wholesalers, and retailers.
- Direct distribution gives companies more control over the whole process.
- Indirect distribution may allow companies to focus on their core business while outsourcing distribution to an expert.