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Distribution Methods for International Businesses

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  • 0:00 International…
  • 1:31 Centralized…
  • 3:49 Decentralized…
  • 5:42 Choosing a Distribution Method
  • 6:10 Lesson Summary
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Instructor: Greg Hanichak

Greg has a Bachelor of Business Administration degree from the University of Scranton and is an operations manager with a leading logistics provider.

There are two basic methods for distributing product to international markets: centralization and decentralization. This lesson explores those methods as well as the tools available to decide which best suits your business.

International Distribution Methods

There are many decisions to be made when a company is expanding into an international market. In addition to financial, marketing, and legal considerations, another important decision is the way in which the business will model its distribution network.

There are two basic methods of distributing product internationally: a centralized approach and a decentralized approach. Centralized distribution models concentrate inventory, operations, and decision-making power in one or a few distribution centers serving many markets directly. Decentralized distribution models employ many distribution centers or retail locations spread throughout a company's global footprint, each serving its local market.

The terms 'centralized' and 'decentralized' mean just what they sound like in the context of international distribution models. In a centralized model, the distribution is concentrated at the center, with everything beginning and ending at that one central location. A decentralized model has numerous points of distribution, all serving different markets.

While most companies use some combination of the two, every distribution model will tend toward one of these two methods. Let's take a look at the advantages and disadvantages of each and discuss the methodologies for choosing which method best fits your distribution needs.

Centralized Distribution Method

A company using a centralized distribution model concentrates inventory, operations, and decision-making power in one or a few distribution centers serving many markets directly. Let's look at an example of such a network to better understand the concept.

Steve operates a website that sells custom-made headwear. In addition to his domestic business, Steve has customers in Europe, Africa, Asia, and the Middle East. Steve's company fulfills all orders from its shop in Philadelphia and ships from Philadelphia to his customers all over the world. All of Steve's business is handled through this one facility, and orders are distributed directly to the buyer via parcel carriers, like UPS. Why did Steve choose the centralized method for his business?

Well, the centralized distribution method does have many advantages, particularly for smaller businesses. First, centralization allows for tremendous cost savings over a decentralized model. A company has to purchase or lease only one facility rather than many buildings, reducing initial investment. Having only one facility also lowers operational costs, such as utilities, labor, and insurance.

A centralized approach also gives a business owner or manager greater control over each delivery. With all orders shipping from one location, shipments could be standardized and monitored to meet the necessary specifications. This is especially important in international shipping because customs documentation is complicated and requires specialized staff to prepare. Having one centralized location allows a company to pay only a few of these specialists and ensure every shipment is compliant with applicable regulations.

There are some disadvantages as well. For one, it is considerably more expensive to service each delivery from a centralized point rather than a remote point local to the customer. There is also an inherent risk in having all of your assets in one location. A fire or natural disaster could put a company out of business, or a weather system in one city could halt all shipments worldwide.

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