Distribution Channel in the Logistics Management of Petroleum Products

Distribution Channel in the Logistics Management of Petroleum Products

Definition Of Channel System

According to Keegan (1998) channels are the internal and external organizational and units that perform functions that add utility to a product or service, and channel captain to ensure addition of utility to a product or service. The major sources of utilities to a product or service. The major source of utilities creates by channels are: place or the availability of a product or service in location that is convenient to a potential customer;

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time utility or the availability of a product or service at a time that fulfills a customer’s need ; and possession utility that provides information but answers question, and communicates useful product and application of knowledge to potential customer, since these main utilities are basic sources of  complete advantage and ”product” value, one of the key policy level is what channel system to adopt. From the foregoing, it can be understood that channels are used in the distribution of goods and service (channels of distribution)

According to the American Marketing Association (1990) a channel of distribution is define as the structure of intra company organization, unit and extra company gents and dealers, wholesaler and retailer through which a commodity, product or service is managed or marketed.

Distribution, according to Keegan (1998) is the physical flow of goods through channels.  Webster (1994) described distribution as “including two other storing products, and the management of distribution organization of agent middlemen and other forms of resellers.  The former is usually called physical distribution management and the latter is referred to as channel system or channel of distribution management in marketing literature.

Dalrymple, and parsons (1996), identified distribution management with selecting, and locating middlemen to efficiently more products from factories to consumers, and postulated that you can not eliminate the middlemen, and save a bundle on the distribution of goods and services because the work of distribution, such as finding a location to sell, someone to bring the merchandise, transportation pricing, promotion etc, must be done with or without the middlemen.

Channel of distribution according to Mc Carthly and William (2000) is any series of firms or individuals who participate in the flow of goods and services from producer to final user or consumer.  Also, in realization of the importance of distribution channels Mc Carthly and William (2000) said “that manager shouldn’t only think about place; making products available in the right qualities and locations when customer want them.

Types Of Channel

According to Mc Carthly and William (2000) channels are divided into two main types, Direct and Indirect channels, Indirect channels can be subdivided into; Traditional, Administered, Contractual and Corporate.

Direct channel system may be best sometimes some producers prefer to handle the whole distribution job themselves.  They don’t want to rely on independent middlemen who have different objectives or they think they can adjust the discrepancies as well as available middlemen.  And some just want to control a large organization.  One of the major advantages of direct channel system is that it affords the organization the opportunity of being aware of changes in customers attitude and thus, be in a better position to adjust it is marketing mix quickly.  On the other hand indirect channel of distribution may be best a times.  Some channel captain or producers prefer to meet the end user through channel members.

  TYPES OF INDIRECT CHANNEL SYSTEM

TYPES OF CHANNEL                   VERTICAL MARKETING SYSTEM

Characteristics Traditional Administered Contractual Corporate
Amount of

Co-operation

Little or none Some to good Fairly good

To good

Complete
Control maintain by

Channel captain

None Economic

 

Power and

Leadership

Contracts Owned by

 

Company

Examples Typical

Channel of

Independents

General for Electric millers beer O.M scoth &

(Lawn product

Mc Donalds

Holding inn,

19A, supper

value, coca cola chevvolet

Florishiem

Shoes, Forestone

Tyre.

 

 

However, according to Mc Carthly William (2000) the best channel system should achieve ideal market exposure – ideal market exposure make a product available widely enough to satisfy target customers need but not exceed them.  Too much exposure only increases the total cost of marketing.  Ideal exposure may be intensive, selective or exclusive.  Intensive Distribution is selling a product through all responsible and suitable wholesalers or retailers who will stock and sell the product.

Selective Distribution is selling through only those middlemen who will give the product special attention.

Management Of Logistics / Channel System

The various channel system create problems of selection and management.  Johnson (1991) found that problem of channel management can be thought of the under four broad heading V12

  1. Restraints on response to change
  2. Constraints on marketing operations
  3. Problem of control through the channel
  4. Conflict in channel management

Johnson (1991) went on to explain the dilemma – facing channel managers in terms of conflict they face while seeking stable channel relationship and maximizing market opportunities.  He contended that channel system must be design to suit the prevailing market environment.

Darlrymple and Parson (1998) stated, that managing the channel captain should

  1. Know that dealers are in business to make money and naturally would want to stock and promote that would increase their profit.
  2. Design attractive products, and marketing programme
  3. Understand dealers strengths and weakness.
  4. Know that their job extend through after sales serving and should coordinate his programme with that of the dealers.
  5. Set up good communicate system with feedback on performance.
  6. Realize that the dealers problem are also theirs.
  7. Reimburse dealers for warranty work and other services they are expected to provide to customers.

Dalrymple and Parsons (1998) went on to describe techniques used to gain dealers co-operation in terms of

  1. Price concession i.e. discount structure and discount substitutes.
  2. Financial assistance in terms of conventional lending arrangement and extend dating.
  3. Protective provisions in terms of price protection, inventory protection and territorial protection.

Conflict In Channel Management:

The problem of conflict and co-operation are ineradicably linked with power relationship among channel participants.  Stern and Gorman (1989) suggested reasons for conflict and these are:

–                     Differences in perception

–                     Expectations

–                     Goals

Assael (1988) in the same vein identified three sources of channels conflict, there are

  1. Manufacturers wanting to stock load distributions to get sales.
  2. Absorption by one member of the role or perceived role of another.
  3. Differing interpretation of roles by channel members.

According to Mc Carthly and William (2000).  Conflicts in channel cannot be horizontal or vertical (e.g. horizontal conflicts occurs when middlemen territories overlap and they argue overtaking each other business).  Vertical conflicts also occurs (e.g. Policies that may be “good” for the producer – perhaps expanding its sales) by covering  suggested retail prices (by reducing the middlemen margins) may not be quiet as “good” for the middlemen.

Mc Carthly and William (2000) also identified that channels conflicts can easily happen unless channel systems are carefully planned.

Webster (1994) said that the interest of the distributors and the manufacturers are conferment, both want to sell more goods more efficiently and more profitably but there is an inherent conflicts in the relationship.  This conflict has two dimensions.

First, there is an “joint pay off function which means that both contribute to, and benefit from, a sales result that must be shared between them.

Secondly, there is the issue of who controls the relationship with the ultimate customer.  Profit margin and commissions rates are based on some assessment of fair distribution of rewards, supposedly as a function of effective selling efforts.  The distributors are expected to contribute more to the selling effort if the margin is higher.  But there, if conflict emerges it is not uncommon for the manufacturer to feel that its trade margin is higher while the distributor thinks it is lower.

However, distributors based their claim on the fact the higher the profit margin, the more attractive it is for the manufacturer to take their functions.

Dalryemple and parson (1998) confirming stern and German (1989) said conflicts normally arise between manufacturers and distributors due to difference in economic goals and imbalance in power and differences in the ability of channel numbers to apply pressure for dealers to morasses sales volume. Other sources of conflict are manufacturers three of franchise or lease cancellation if they fail to accept additional inventory, or engage in certain promotional activities and the absorption by one party of distribution functions previously performed by another. Conflict can also develop over the proper role of wholesalers and retailers in the channel distribution over limits of sales territories and size of functional discounts.

Dalyemple and Parsons (1998) went to suggest that a way to resolve the conflict is for the manufacturers and his distributors to work out their own solution recognizing the detergent roles and economic goals of each party. This approach has the advantage that it avoids the bitterness and disruption that often occurs when disputes are left to the passage of legislations.

Co-Operation By Channel Participants

According to Nwokoye (1999), vertical co-operation by channel participants at different levels of distribution is a sine-qua-non for the existence of any channel. Even though channel members co-operate for mutual benefits of interest do often arise.

Nwokoye (1999) tables such conflicts as:

       1. Goal Conflict.  In this, goal of the manufacturer may be high sales volume as a result of his high fix cost while the dealers may be interested in profits.

2. Discounts allowed to dealers may be another cause of conflicts.

3.  The Manufacturer may went greater sales effort by the dealers on one particular products while the dealers may link otherwise.

 Nwokoye (1999) found in the absence of an association between the dealers and oil marketing companies that an association of dealers could have great impacts on:

  1. The operating problem dealers.
  2. Channel relations

On the impact of lack of an association of dealers on the operating problems of phenol dealerships, Nwokoye identified six major problems such as:

  1. Not getting all the fuel the dealer paid for: This usually caused by malpractices of tanke4 drivers or refinery officials or collusion by both. The end result is shortage in product delivered to the outlet. A national association could solve this by opening better wages to drivers, boycotting such transporters or arranging to have tankers “haulage” or capacity accurately determined and calculated.
  2. Menace or roadside fuel demand: These operators patronize tanker drivers who siphon dealers fuel. Their activities could be halted if adequate hold on tanker drivers operation by association of dealers.
  3. Inadequate sale commission: A lot of dealers complain of inadequate sales commission which individually they could not tackle with the oil companies except in a body.
  4. Cumbersome method of purchasing supplies: A national association could effectively tackle problems of (a) Payment pattern which are usually cash, pre-payments and bank drafts. No credit is allowed. (b) Delays and bottleneck in collecting suppliers.
  5. Overtaking by government: Tax is paid on volume of products sold and these volumes are usually supplied by the companies. Figures supplied are usually higher than actual sales due to the already outlined malpractices.
  6. Problem with pump maintenance: Lot of pump breakdowns occur due to lack of spares. Channel relations could be fostered between the oil companies and the association by the companies considering the views of the dealers before decisions was taken on major issues. A national body would also look into the problem or poor services to consumers by station staff.

McCarthy and William (2000) said that these conflicts (discrepancies) which normally come out in business, discrepancies of quality and assortment can be resolved by channel specialist. This channel specialist can resolve the discrepancies by accumulator producers. Bulk breaking involves dividing larger qualities into smaller qualities as products get closer to the final marketing.

Adjusting Association discrepancies by sorting and assorting. Two types of regrouping activities may be needed sorting separating products into grades and qualities desired by different target markets assorting-putting together a variety of products to give a target market what it wants. Channel specialist often ensure co-operation by complains and members together.

Channels Of Distribution In Petroleum Products

According to Adirika, Ebue and Nnoli (1997), distribution channel has been variously defined in marketing literature as

  1. “The pipeline through which a product flow on its way to the consumer”
  2. “The course taken in the transfer of title to a commodity”
  3. “A pathway taken by goals as they flow from point of production to point of consumption”
  4. “The route taken in transferring the title of a product from its first owner to the last owner, the businesses user or ultimate consumer.

Also according to Adirka, Ebue and Nnolin (1997) it is inadequate to dilute distribution channel as just a pipeline, route or pathway through which a product flows from manufacturer to a user either ultimate or business. This is because such a definition implies that channel for physical flow of goods from its owner to user are also distribution channels in the marketing sense but they are not since the channel for title flow alone is a distribution channel. In this sense, therefore definition (1) and (3) are deficient, it is also important that a definition of distribution channel should explicit recognized both manufactured as well as un-manufactured products as the object of title flow in the distribution channel.

For the above reasons, therefore, the authors defined “A distribution channel as a rout or course taken in transferring the title to a product (manufactured) or otherwise from its producer or first owner to its last owner, an industrial user or the ultimate consumer.

Types Of Distribution Channels

According to Adirika, Ebue and Nnolin (1997) four types of distribution channels can be identified, namely

1    Direct                         channel

2    Indirect                     [

3    Integrated                [

4    Non-integrated       [

Direct Channel: A direct distribution channel is one with no interfering middlemen between the producer and the ultimate consumer or industrial user. It is direct because the product is channeled directly from the producer to the consumer or industrial user.

Indirect Channel: These are distribution channel with intervening middlemen as the products change title from the producer to the consumer.

Integrated Channel: Integrated channels of distribution are channels where the intervening middlemen and the producer belong to the same organization or co-operate to active marketing objectives.

Non-Integrated Channel: The non-integrated channels are typical of conventional channels of distribution. In non-integrated channels, there is indirect distribution through independent middlemen.

However, to carry out a study on the channel of distribution in petroleum products marketing a brief review of the channel structure o9f the petroleum products marketing industry in necessary. All the petroleum products marketing companies purchase their main product from NNPC depot Emene. They then sale the product to their retail outlets (filling stations) or dealer owned/built outlets  who finally sell directly to consumers. A supply structure is detailed in figure 2.3

In a paper presented at the petroleum products marketing conference Warri, Nwokoye (1991) gave a retailed structure of channel of distribution from petroleum products (figure 2.4). He identified two types of distributions channels on the petroleum products marketing industry. These are

1       Dumped bulk liquid channel and

2       Packed products channel

In the pumped bulk liquid type, the petroleum products marketing companies purchase in bulk from the NNPC refinery such main products like petrol, diesel kerosene and distributes these through their own to dealer owned outlets from where the consumers buy them.

The physical distribution is done to the outlets by the use of company-owned or dealer owned tankers. In some far distance products are supplied by railway tankers and use of pipelines to various storage depots. Such storage depots from supply points to the petroleum products marketing companies in designated areas.

The package products channels are for product which in most cases were imposed or blended locally. These products includes various lubricating oils and grease, air fresher, insecticides, brake fluids, detergents etc.

The engine oils were blended locally. In times of raw materials storage they may be imported to complement local efforts, physical distribution of these products to the outlets are done by tankers and heavy Lorries.

Factors Affecting Petroleum Products

Channel Selection

Dalymple and parson (1998) found that selection of middlemen for use in distribution channel should be made on basis of profit consideration which means that the firm must balance the cost of employing different types of channel members against the review generated by alternative distribution method. With a wholesaler in the channel, the manufacturers sales and communication costs are reduced and it may be more profitable to let the wholesaler sell to the final consumers.

In the same view, Nwokoye (1991) in his analysis of steps taken in designing a distribution system found out fire factors affecting channel selection and these are :-

  1. market coverage desired by the producer.
  2. The degree of channel control desired by the producer.
  3. Product characteristics.
  4. Market (buyer) characteristics.
  5. Producer’s characteristics.

The aim of this selection is to efficiently more goods and services to the point of final consumption. In realizing this aim the firm must organize groups of brokers. Distributors, wholesalers, sales branches and retailers to meet the needs of customers without exceeding the resources available.

Managers have the option of relying on the distribution efforts of independent middlemen, selecting franchised dealers, or owing and operating the channel themselves once appropriate middlemen have been selected, managers must find a way to care for and control channel members to assured their continued co-operation and survival.

 Managing Marketing Channels Of Petroleum Products   

The subject of marketing channels and inter-organisation management focuses basically on delivery of the products, which is consumer satisfaction. Mis-management of the petroleum products channel could lead to consumers not getting the desired utilities of time, place and possession. It is therefore through effective and efficient distribution channel that public and private goods can be made available for consumption. Therefore, managing channel systems effectively would create consumer satisfaction and satisfy other various demand of marketing.

According to Kotler (2000) In today’s economy, most producers do not sell their goods directly to the final users. Between them and the final users stand a host of marketing intermediaries performing variety of functions and bearing a variety of names? Intermediaries such as wholesalers and retailers- buy, take title to and resell merchandise. The are called merchant middlemen.

Discussing further on managing marketing or distribution channel, Bucklin (1996) said every product seeks to link together the set of marketing intermediaries he called the marketing channel, trade channel of distribution. Commenting on channels is in less-developed countries (LDCS) with its feature of remarkable number of people engaged in selling merchandise usually in very small qualities, Baulker (1994) has this to say :

‘These criticisms rest on a misunderstanding the system in (LDCS) in a logical adaptation to certain fundamental factors in the west African. Economies which  will persist for many years to come. So far from being wasteful, it is highly economic in saving and salvaging those resources which are particularly scare in west African (above all real capital) by using the resources which are largely redundant and for which there is very little demand and thus it is productive by any national economic criteria.’

Mc Carthy and William (2000) suggested that effective management of marketing\distribution channel of petroleum products could be achieved through vertical and horizontal co-operation of both the channel captain and members.

The Benefits Of Using Efficient Channel System As A Means Of Distributing Petroleum Products.

Earlier in this work, it was identified that two types of distributions channel are used in the marketing management of petroleum products. These two channels are packaged products channels and dumped bulk liquid channels.

However, from the research conducted at the PIPELINE PRODUCTS MARKETING COMPANY EMENE (a subsidiary of Nigeria petroleum corporation (NNPC), it was found that two channels exists for the distributing of pumped bulk liquid product, these channels are the INDEPENDENT MARKETERS AND MAJOR OIL MARKETERS otherwise known as the big eight(these incoulde- shell petroleum, Mobil, Texaco, Total, Oando and National )these companies have dealers who operate in many towns and villages to ensure that the petroleum products are available at the right place, time, quality and quantity, thus ensuring consumer satisfaction.

The products the companies distribute to their dealers include; premium motor spirit (P.M.S) Agro- Gas oil (AGO) and Dual purpose kerosene (D.P.K) it was also found that three (3) channels exist for the distribution of these packaged products, these are :-major oil marketing companies, motor parts dealers and petrol station dealers. From the foregoing, the following benefits were identified to accrue from efficient channel system. Addition of place, time possession, form and information utilities, from the research conducted, it was found that the use of efficient channel system mourned by effective channel members add the above enumerated utilities through the following ways.

Place utilities: the use of dealers build their petrol station at  strategic points where buyers can easily get them and relied on the major distribution for the supply and marketing  of the products.

Time utilities: The availability of the products at the right place also creates time utility for the consumers who buy the product without wasting mush time.

Form utilities: During the research it was noticed that the information utility is not always create by the use of the efficient channels, but is created generally by the state government through its media house (s), high sale rare, on the course of this research it was found that the use of efficient channels (major oil marketers, and independent marketers) increases the sales rare of the pipeline products marketing company.

Meanwhile, it was found that non of the channels is better than the other, rather the only edge the major oil marketers have over their independent marketers counterpart is during the time off scarcity they normally have products, and secondly they normally have many retail outlines, thus recording greater sales.

—————-not complete———–not complete————–—-

This article was extracted from a Project Research Work Topic “AN EVALUATION OF DISTRIBUTION CHANNEL IN THE LOGISTICS MANAGEMENT OF PETROLEUM PRODUCTS (A CASE STUDY OF OANDO PLC ENUGU) ”

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