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Value Chain Management and Logistics
Evans & Berman
Chapter 14
Copyright Atomic Dog Publishing, 2002
Chapter ObjectivesTo discuss the role of the value chain and the value
delivery chain in the distribution processTo explore distribution planning and review its
importance, distribution functions, the factors used in selecting a distribution channel, and the different types of distribution channels
To consider the nature of distribution contracts, cooperation and conflict in a channel of distribution, the special aspects of a distribution channel for industrial products, and international distribution
To examine logistics and demonstrate its importanceTo discuss transportation alternatives and inventory
management issues
Copyright Atomic Dog Publishing, 2002
Value Delivery Chain
Value Chain
Total Delivered Product
Level of Satisfaction
Supplier/ Manufacturer
Goals
Distribution Intermediary
Goals
Customer Goals
The Distribution Process
Copyright Atomic Dog Publishing, 2002
Key Points of the Distribution Process
The goals of various channel members are considered as inputs to the value chain and value delivery chain.
The value chain and value delivery chain are parallel processes.
The total delivered product is the actual result of the value chain and value delivery chain.
Satisfaction is based on the perceived value received from the value chain and value delivery chain.
Feedback regarding service gaps and breakdowns must be handled systematically in the process.
Goals Satisfaction
Copyright Atomic Dog Publishing, 2002
Functions Performed in a Channel of Distribution
PromotionCustomer Services
Buying Product Planning
Marketing Research
Distribution
Pricing
Channel Functions
Copyright Atomic Dog Publishing, 2002
Distribution and the Web
The Internet affects marketing functions and logistics by:
Speedily conveying information. Improving communication with
channel members. Allowing firms to reach distant parts of
the world. Providing customers with the option of
worldwide vendors. Offering Web-enhanced services for
each distribution function.
Copyright Atomic Dog Publishing, 2002
Factors to Consider in Selecting a Distribution Channel
The Consumer The Company The Product The Competition Distribution Channels Legalities
Copyright Atomic Dog Publishing, 2002
A Direct Distribution Channel
Manufacturer
200,000 Customers
In this direct channel, an umbrella manufacturer sells directly to final consumers. It
makes 200,000 separate transactions, one for each
customer.
Copyright Atomic Dog Publishing, 2002
An Indirect Distribution Channel
Manufacturer
Wholesaler (East U.S.)
Wholesaler (South U.S.)
Wholesaler (North U.S.)
Wholesaler (West U.S.)
50 Retailers 50 Retailers 50 Retailers50 Retailers
1,000 Customers per
Retailer
1,000 Customers
per Retailer
1,000 Customers per Retailer
1,000 Customers per Retailer
In this indirect channel, an umbrella manufacturer makes only 4 transactions. It sells to regional wholesalers, which resell to 50 retailers each. The retailers each sell to 1,000 final consumers.
Copyright Atomic Dog Publishing, 2002
Typical Indirect Channels of Distribution
Manufacturer/ Service Provider
Manufacturer/ Service Provider
Manufacturer/ Service Provider
Manufacturer/ Service Provider
Retailer
Final Consumer
Final Consumer Organizational
Consumer
Retailer
WholesalerMerchant
Wholesaler or Sales Agent
Organizational Consumer Distributor
Merchant Wholesaler or Sales Agent
1 2 3 4
Copyright Atomic Dog Publishing, 2002
Manufacturer/ Service Provider
Distribution Intermediaries
Consumers
Pushing Versus Pulling Strategies
ConsumersDistribution Intermediaries
Manufacturer/ Service Provider
PushingPushing
PullingPulling
Copyright Atomic Dog Publishing, 2002
Intensity of Channel Coverage
ExclusiveDistribution
SelectiveDistribution
IntensiveDistribution
A firm severely limits the number of resellers in an area. It seeks a prestige image, channel
control, and high profit margins and accepts lower total sales.
A firm employs a moderate number of resellers inan area. It tries to combine some channel control
and a solid image with good sales volume and profits.
A firm uses a large number of resellers in an area.Its goals are to have wide market coverage,
channel acceptance, and high total sales andprofits. Per-unit profits are low.
Copyright Atomic Dog Publishing, 2002
International Distribution Planning
International distributionInternational distribution requires additional considerations and planning:
The channel length may depend on a nation’s stage of economic development.
Less-developed and developing nations tend to use shorter, more direct channels than industrialized ones.
Limited transportation and communication networks foster local shopping.
Cultural norms always affect channel member interactions.
Copyright Atomic Dog Publishing, 2002
Logistics LogisticsLogistics, also known as physical physical
distributiondistribution, encompasses the broad range of activities concerned with efficiently delivering raw materials, parts, semi-finished items, and finished products to designated places.
Logistics includes customer service, shipping, warehousing, inventory control, trucking operations, packaging, receiving, materials handling, and plant, warehouse, and store location planning.
Logistics affects costs, the value of customer service, and its relationship with other functional areas.
Copyright Atomic Dog Publishing, 2002
Logistics and Other Functional Areas
There is a critical interaction between logistics and each of the firm’s marketing functions and this requires careful coordination.
Product variations (color, size, features, styles) may impose a burden on distribution facilities.
Logistics planning is related to overall channel strategy.
Promotion campaigns must realistically coordinate with potential logistics delivery.
Pricing may be the firm’s differential advantage based on superior logistical service.
$
Copyright Atomic Dog Publishing, 2002
Selected Physical Distribution Activities Involved in a Typical Order Cycle
Production scheduled
Inventory on hand checked
Supplier receives and enters order
Customer places an order
Orders shipped to individual customers
Goods stored until enough orders are
placed
Goods packaged,
sorted, tagged, and sent to local
warehouse
Insufficient goods in stock
Sufficient goods in stock
Copyright Atomic Dog Publishing, 2002
An Illustration of the Total-Cost Approach in Distribution
Carrier
Air
Rail
Truck
$1.6 mil.Annualfreight costs
$100,000
Annualwarehousing costs
Annual costs of lost sales due to being out of stockCosts
$500,00
$1.5 mil.
$300,000 $800,000 $300,000
$1.4 mil.
$1.2 mil.$500,000
$200,000
Copyright Atomic Dog Publishing, 2002
What Happens When a Firm Has Stock Shortages
Most Desirable Action Least Desirable Action
Wait until merchandise is
available
Purchase a substitute
product from the same seller
Switch to a new seller while
merchandise is not available
Permanently switch to a new seller for all
purchases
When a firm runs out of stock,
customers can
Copyright Atomic Dog Publishing, 2002
5 Transportation Forms for Shipping
Wal Mart
• Railroads carry heavy, bulky items over long distances but have high fixed costs due to facility investments.
• Motor Carriers usually transport small shipments over short distances and handle 80% of U.S. shipments weighing less than 500 or 1,000 pounds.
• Waterways in the U.S. include barges on inland rivers, and tankers and freighters on Great Lakes, and intercoastal shipping.
• Airways are fast and expensive but move high-value perishable and emergency goods. Speed may provide a differential advantage.
• Pipelines move gas and petroleum products with minimum handling and labor costs.
Copyright Atomic Dog Publishing, 2002
Inventory Management
Good inventory managementinventory management provides a continuous flow of goods and matches the quantity of goods kept in inventory as closely as possible with customer demand.
To improve their inventory management, many firms are applying a just-in-just-in-time inventory systemtime inventory system and electronic data interchangeelectronic data interchange.
Four specific aspects of inventory management are stock turnoverstock turnover, when to when to reorderreorder, how much to reorderhow much to reorder, and warehousingwarehousing.
Stock turnoverStock turnover refers to the number of times during a stated period (usually one year) that average inventory on hand is sold. It shows the relationship between a firm’s sales and the inventory level it maintains.
A reorder pointreorder point depends on order lead time, the usage rate, and safety stock The economic order quantity (EOQ)economic order quantity (EOQ) is the order volume corresponding to the
lowest sum of order-processing and inventory-holding costs.
Copyright Atomic Dog Publishing, 2002
Chapter Summary This chapter discusses the role of the value chain and the
value delivery chain in the distribution process. It explores distribution planning and examines its
importance, distribution functions, the factors used in selecting a distribution channel, and the different types of distribution channels.
It considers the nature of distribution intermediary contracts, cooperation and conflict in a channel of distribution, the special aspects of a distribution channel for industrial products, and international distribution.
It examines logistics and demonstrates its importance. It discusses transportation alternatives and inventory
management issues.
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