If there is a surplus production of a commodity at some physical location and some one needs it , an exchange (trade) can take place . When many such exchanges take place between producers and consumers , channel of distribution need to developed .
A channel of distribution can be defined as collection of organization units , either internal or external to the manufacturer , which performs the functions involved in products marketing . The various marketing functions are buying , selling , transporting , grading , financing market risk and providing marketing information . Any organizational unit , institution or agency that perform one or more of the marketing functions is a member of the channel of distribution .
The structure of a distribution channel is determined by the marketing functions performed by the concerned organization . Some organizations perform only a single marketing function . For example ; Carriers may only transport products and public warehouses may only store products . Some organization such as wholesalers , could be performing multiple functions .
There are many types of distribution channels . A direct channel distribution - manufacturer to user - gives greater control over the performance of marketing functions . In this case the distribution costs are normally higher , making it necessary for the firm to have either market concentration or substantial sales volume . In indirect channel distribution , external institution or agencies ( warehouse , wholesalers or retailers ) assumes much of the costs burden and risk . But the manufacturer receives less revenue per unit .
