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Lesson 4 Historical market flow: The distribution channel
Objective Understand where ebusiness begins to deviate from business as usual.

Digital Market Flow

Question: What is the relationship between the "digital market flow" and the "distribution channel" in ebusiness?
The relationship between digital market flow and the distribution channel in eBusiness is an essential aspect of modern commerce. By leveraging the power of digital technologies, companies have dramatically transformed the way products and services reach end-users.
  1. Direct Distribution: One of the most significant changes brought about by digital market flow is the shift towards direct distribution. Traditionally, products often moved from producers to wholesalers, then to retailers, and finally to consumers. The digital revolution, however, has facilitated direct-to-consumer (DTC) models, where producers can sell directly to end-users via online platforms. This eliminates intermediaries, reduces costs, and allows companies to control every aspect of the customer experience.
  2. Global Reach: Digital market flow has also expanded the reach of businesses. Through digital distribution channels like websites and eCommerce platforms, businesses can reach a global audience, without needing a physical presence in multiple locations. This has significantly broadened market access, especially for small and medium enterprises.
  3. 24/7 Availability: With digital distribution channels, businesses are no longer bound by traditional operating hours. Products and services can be accessed and purchased 24/7, enhancing customer convenience and boosting sales potential.
  4. Personalization: Digital market flow enables personalized distribution, where product recommendations, pricing, and even delivery options can be tailored to individual customer preferences and behaviors. This personalization is driven by data and analytics and enhances customer satisfaction and loyalty.
  5. Speed and Efficiency: Digital distribution channels streamline the delivery of products and services. Digital products like software or eBooks can be delivered instantly, while physical products benefit from efficient logistics driven by digital technologies. Moreover, automation, AI, and machine learning can further optimize the distribution process.
  6. Dynamic Pricing: Digital market flow enables dynamic pricing, where prices can be adjusted in real time based on supply and demand conditions. This can maximize profitability and ensure competitive pricing.
  7. Interactivity and Engagement: Digital distribution channels are not just transactional; they're also platforms for interaction and engagement. Businesses can use these channels to provide customer support, solicit feedback, and engage customers with content and community.

In conclusion, digital market flow and distribution channels in eBusiness are intricately linked. Together, they have fundamentally transformed the way businesses distribute products and services, improving efficiency, reach, and customer experience. As technology evolves and consumer behavior continues to change, businesses must stay agile and innovative to leverage the full potential of digital market flow.

Historical Interaction between Producers and Distributors

Historically, producers interacted with distributors and generic information about the product was a core component of the relationship.
Historical Flow
Producer generates a physical product which is sent to a Distributor

There are six key items that move within the historic distribution channel:
  1. Physical product
  2. Product information
  3. Generic information
  4. Transaction information (order, information about the order, payment process, and all the information around the transaction)
  5. Needs information (information on consumer demand)
  6. Location information
In the historical market flow, everything about the distribution channel was optimized for the distribution of physical goods.

Distribution Channels

To anticipate the quantity of product to produce, a manufacturer must compile demand forecasts from downstream supply chain members. Forecasting accuracy is paramount because it is the basis for effective and efficient management of supply chains. The root challenge of SCM is to minimize costs and maintain flexibility in the face of uncertain demand. This is accomplished through capacity and inventory management. Similarly, marketers attempt to maximize revenues through demand management practices of pricing and promotion. Therefore, it is vital that
  1. marketing and
  2. operations
departments collaborate on forecasts and share harmonious incentive structures. The degree of coordination among order acquisition, supply acquisition, and production process directly affects how smoothly a firm operates. Likewise, the coordination level of buyers, suppliers, and producers directly affects how smoothly the supply chain operates. More specifically, accurate information flows between channel members are essential to SCM[1].

What makes up a Distribution Channel ?

A distribution channel is typically composed of a
  1. manufacturer,
  2. a wholesaler,
  3. a distributor, and
  4. a retailer.
The bull-whip effect[2], is a classic illustration of dysfunction in a "distribution channel" due to a lack of information sharing. This effect is characterized by increasing variability in orders as the orders are transferred from the retailer upstream to the distributor, then to the wholesaler, and finally to the manufacturer. Distorted demand information induces amplifications in variance as orders flow upstream. Therefore, the manufacturer bears the greatest degree of order variability. It is for this reason that manufacturers often initiate collaborative efforts with downstream channel members. Four sources of the bull-whip effect that correspond to respective channel practices or market conditions have been analyzed. The first two causes are a direct consequence of channel practices, whereas the latter two causes are market-driven. The first source, demand signal processing, is largely due to the use of past demand information to modify demand forecasts. Each channel member modifies her or his forecasts and resulting orders in isolation. These multiple forecasts blur end demand. This problem is exacerbated as lead time lengthens. Current practices employed to remedy this source of information distortion include contractual agreements to provide point of sale data from retailers to manufacturers, vendor managed inventory to centralize ordering decisions, and quick response manufacturing to decrease lead times for order fulfillment.
  1. Information Distortion: The second source of information distortion, order batching, arises mainly from periodic review ordering practices and processing costs of placing orders. Without specified ordering times, the timing of order placement for several vendors may coincide as a result of fiscal period delineations. Additionally, a buyer may accumulate orders to minimize high costs of ordering and shipping. Measures that can alleviate these causes are automated and fixed-time ordering, electronic data interchange (EDI), and the use of third-party logistics providers to offset less than truckload diseconomies. These first two causes of information distortion generally result from each channel member individually optimizing inventory decisions.
  2. Price fluctuations: The third cause of the bullwhip effect are price fluctuations, which result from marketing efforts such as trade promotions to generate increases in sales volumes. Wholesale price discounts result in forward buying by retailers. The lower price motivates retailers to stock up on the product for current and future periods. This strategy results in uneven production schedules for manufacturers and excess inventory carrying costs for retailers. The push for everyday low prices is an effort to do away with trade-promotion-induced order[3] variability. The final cause of the bullwhip effect occurs when there exists a perceived shortage of product supply. If the supplier adopts a rationing scheme that is proportional to the quantity ordered, buyers will simply inflate their orders to ensure receipt of their true requirements. This type of gaming can be avoided by rationing based on historical market share of buyers and information sharing between buyers and suppliers to prevent supply shortages.
  3. Determining what the Consumer is Thinking: The burning question is, how can consumer and retail companies achieve this nirvana of consumer mindreading? How can they identify and keep pace with the behaviors and preferences of customers today and tomorrow? How can they ensure their online strategy is acutely tailored to attract and win the diverse and dynamic customer segments they serve?

As you will learn in the next lessons, this flow changed with the advent of the internet and ecommerce.

[1] Supply chain management: Supply chain management is the management of the flow of goods and services and includes all processes that transform raw materials into final products.
[2] bullwhip effect: The bullwhip effect is a supply chain phenomenon in which there are inefficiencies in forecast and supply chain. The bullwhip effect refers to the fluctuating swings in response to the demands of the customer, which has a cascading impact on the supply chain.
[3] trade-promotion-induced order:A trade promotion which is caused by fluctuations in the order process.

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