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Difficulty: HardWholesale Trade and Functions of Wholesalers

A large-scale manufacturing enterprise producing fast-moving consumer goods decides to eliminate merchant wholesalers from its channel of distribution and supply directly to thousands of small-scale retailers scattered across rural regions. Which of the following is the most direct operational consequence of this decision on the manufacturer?

  1. The manufacturer must absorb the warehousing, credit financing, and risk-bearing functions previously undertaken by the wholesaler.Answer
  2. B
    The manufacturer automatically reduces its working capital requirements by transferring product holding costs to small retailers.
  3. C
    The total economic cost of distribution is eliminated because commercial auxiliaries are no longer needed in direct sales.
  4. D
    The manufacturer must issue debit notes to rural retailers prior to dispatch to legally transfer risk of loss during transit.

Answer

The manufacturer must absorb the warehousing, credit financing, and risk-bearing functions previously undertaken by the wholesaler.
Middlemen can be eliminated from a distribution channel, but their underlying functions cannot. When a manufacturer bypasses merchant wholesalers to sell directly to scattered small retailers, the manufacturer must set up its own storage facilities, bear the risk of price fluctuations and damage, and extend credit lines directly to retailers.

Step-by-Step Solution

1
Analyze the principle of middleman elimination in distribution channels.
Recognize that while a middleman (wholesaler) can be bypassed, the essential wholesale marketing functions cannot be eliminated.
Wholesalers perform necessary tasks such as bulk breaking, holding buffer stocks, granting credit, and absorbing storage risks.
2
Evaluate the capacity of small unit retailers to take over wholesale functions.
Determine that small retailers lack financial depth and storage facilities to buy in bulk or bear storage risks.
Retailers buy in small quantities as needed and rely on credit terms.
3
Deduce the burden shifted onto the manufacturer.
The producer must establish regional storage, manage credit accounts for thousands of retailers, and assume storage and transport risks.
Direct distribution forces the producer to assume all operational responsibilities formerly carried by the wholesaler.

Key Concept

Channel Elimination and Retaining Wholesale Functions
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Topics

Wholesale Trade and Functions of Wholesalers

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