Chapter 14 Evans Berman

Copyright Atomic Dog Publishing, 2007

Chapter 14:“Value Chain Management and Logistics”

Joel R. Evans & Barry Berman

Marketing, 10e: Marketing in the 21st Century


Chapter Objectives

• To discuss the role of the value chain and the value delivery chain in the distribution process

• To 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 importance

• To discuss transportation alternatives and inventory management issues


The Distribution Process

Value Delivery Chain

Value Chain

Total Delivered Product

Level of

Satisfaction

Supplier/ Manufacturer

Goals

Distribution

Intermediary Goals

Customer Goals


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


Channel Functions

Functions Performed in a Channel

of Distribution

PromotionCustomer Services

Buying Product Plannin

g

Marketing Research

Distribution

Pricing


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.


Factors to Consider in Selecting a Distribution Channel

• The Consumer

• The Company

• The Product

• The Competition

• Distribution Channels

• Legalities


A Direct Distribution Channel

Manufacturer

200,000 Custome

rs

In this direct channel, an umbrella

manufacturer sells directly to final

consumers. It makes 200,000 separate

transactions, one for each customer.


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

maker has only 4

transactions. It sells to regional

wholesalers, which resell to

50 retailers each. The

retailers each sell to 1,000

final consumers.


Typical Indirect Channels of Distribution

Manufacturer/ Service Provider




Retailer

Final Consumer

Final Consumer

Organizational Consumer

Retailer

Wholesaler Merchant Wholesaler or Sales Agent

Organizational Consumer

Distributor

Merchant Wholesaler or Sales

Agent

1 2 3 4


Pushing Versus Pulling Strategies


Distribution Intermediaries

Consumers

ConsumersDistribution Intermediarie

s


PushingPushing

PullingPulling


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 and

profits. Per-unit profits are low.


International Distribution Planning

International 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.


Logistics

• Logistics, also known as physical distribution, encompasses the activities concerned with efficiently delivering raw materials, parts, semi-finished items, and finished products to designated places.

• It includes customer service, shipping, warehousing, inventory control, trucking operations, packaging, receiving, materials handling, and plant, warehouse, and store location planning.

• It affects costs, the value of customer service, its relationship with other functional areas.


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.


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


An Illustration of the Total-Cost Approach in Distribution

Carrier

Air

Rail

Truck

$1.6 mill.

Annualfreight costs$100,000

Annualwarehousing costs

Annual costs of lost sales due to being out of stock

Costs

$500,00

$1.5 mill

$300,000 $800,000 $300,000

$1.4mil.

$1.2 mil.$500,000

$200,000


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


5 Transportation Forms for Shipping

Next Day, Inc.

Railroads carry heavy, bulky items over long distances but have high fixed costs due to facility investments.

Motor Carriers usually transport small shipments short distances and handle most U.S. shipments 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 low costs.


Inventory Management

• Good inventory management matches the quantity of goods kept in inventory with customer demand.

• To improve efficiency, many firms use a just-in-time inventory system and electronic data interchange.

• Four specific aspects of inventory management are stock turnover, when to reorder, how much to reorder, and warehousing.

• Stock turnover refers to the number of times during a stated period that average inventory on hand is sold.

• A reorder point depends on lead time, usage, and safety stock.

• The economic order quantity (EOQ) is the order volume corresponding to the lowest sum of order-processing and inventory-holding costs.


Chapter Summary

• This chapter discusses the role of the value chain and the value delivery chain in distribution.

• 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 distribution intermediary contracts, cooperation and conflict in a distribution channel, special aspects of a distribution channel for industrial products, and international distribution.

• It examines logistics and shows its importance.• It discusses transportation alternatives and

inventory management issues.

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Chapter 14 Evans Berman