Chapter 4 Chopra

8/11/2019 Chapter 4 Chopra

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Marketing Chann els and Supp ly

Chain Managem en t



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Objectives

Know why companies use distributionchannels and understand the functions thatthese channels perform.Learn how channel members interact andhow they organize to perform the work of

the channel.Know the major channel alternatives thatare open to a company.



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Objectives

Comprehend how companies select,motivate, and evaluate channelmembers.Understand the nature and importanceof marketing logistics and integratedsupply chain management.



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Dominates world’smarkets for heavyconstruction andmining equipment.Independent dealers arekey to successDealer network islinked via computers

Caterpillar stresses dealer profitability, extraordinarydealer support, personalrelationships, dealer

performance and full,

honest, and frequentcommunications

c

Caterpillar



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Definition

Value Delivery Network

– The network made up of the company,suppliers, distributors, and ultimatelycustomers who “partner” with each other

to improve the performance of the entiresystem.



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In building its

value deliverynetwork, Palmmanages a wholecommunity of

suppliers,assemblers,resellers andcomplementorswho must workeffectivelytogether.


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Channel choices affect otherdecisions in the marketing mixA strong distribution systemcan be a competitive advantageChannel decisions involvelong-term commitments toother firms

Nature & Importance of MarketingChannels



Figure 13-1:

How Channel Members Add Value



How Channel Members AddValue – Intermediaries

» Require fewer contacts to movethe product to the final

purchaser.» Help match product assortment

demandwith supply.

» Help bridge major time, place,and possession gaps





Key Functions Performed

by Channel MembersInformation

PromotionContactMatching

Negotiation

PhysicalDistributionFinancing

Risk taking



Figure 13-2a:

ConsumerMarketing Channels



Figure 13-2b:

BusinessMarketing Channels



Number of Channel Levels – The number of intermediary levels indicates

the length of a marketing channel.» Direct Channels

» Indirect Channels – Producers lose more control and face greaterchannel complexity as additional channellevels are added.




L.L. Bean sells direct via the Internet,telephone, and mail catalogs




Channel Members Are Connected

Via A Variety of FlowsPhysical FlowPayment Flow

InformationFlow

PromotionFlow

Flow of Ownership



Channel Conflict – Occurs when channel members disagree on

roles, activities, or rewards. – Types of Conflict:

» Horizontal conflict: occurs among firms at thesame channel level» Vertical conflict: occurs among firms at

different channel levels

Channel Behavior andOrganization



Figure 13-3:

Conventional Versus VerticalMarketing System



Vertical Marketing Systems – Corporate VMS – Contractual VMS

» Manufacturer-sponsoredretailer franchise system

» Manufacturer-sponsoredwholesaler franchise system» Service-firm-sponsored

retailer franchise system – Administered VMS




Horizontal MarketingSystems – Two or more companies

at one level join

together to follow a newmarketing opportunity.


Nestle and General Mills work together to

market cereal outside of North America



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Figure 13-4:

Multichannel DistributionSystem



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Multichannel DistributionSystems – Also called hybrid marketing

channels – Occurs when a firm uses two

or more marketing channels – Hybrid marketing has many

advantages

Channel Behavior and

Organization



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Step 1: AnalyzingConsumer Needs – Cost and feasibility

of meeting needs must beconsidered

Channel Design Decisions



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Step 2: Setting Channel Objectives – Set channel objectives in terms of

targeted level of customer service – Many factors influence channel

objectives




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Step 3:

Identifying Major Alternatives


Types of Intermediaries

Company salesforce

Manufacturer’sagency

Industrialdistributors



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Manufacturer’s Agents: Also called reps, agents,manufacturers’representatives, salesagencies or even brokers.

What Do They Do?Act as outsourced providersof field sales services tomultiple manufacturers ofcomplementary products.

Compensation: Work on commission and paytheir own expenses.

Employment Terms: Contractual agreement to be theexclusive “agent” of themanufacturers they represent in agiven territory, market, or forspecific accounts.

Manufacturer’s Agencies In-Depth



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Benefits: Reps’ View

Manufacturer’s agentscan leverage their timeso that sales for multiplemanufacturers can bemade to the samecustomer, often duringthe same sales call.Multiple products meansreps can offer the bestproduct to suit needs

Benefits: Firm’s View

– Sales costs vary predictablywith sales

– Lower sales, turnover, andtraining costs

– Increased sales;experienced sales force

– Flexibility; immediateaccess to markets

– Enables systems sales

Manufacturer’s Agencies In-Depth



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Step 3:

Identifying Major Alternatives – Number of marketing intermediaries

» Intensive distribution» Selective distribution» Exclusive distribution

– Responsibilities of channel members




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Step 4: Evaluating

Major Alternatives – Economic criteria» Sales, costs,

profitability

– Control issues – Adaptive criteria




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Designing InternationalDistribution Channels – Global marketers usually adapt their

channel strategies to structures thatexist within foreign countries

– Key challenges:» Channels may be complex

or hard to penetrate» Channels may be

scattered, inefficient, ortotally lacking




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Selecting Channel Members

– Identify characteristics thatdistinguish the best channelmembers

Managing and MotivatingChannel Members – Partner relationship management

(PRM) is key

Channel Management Decisions



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Evaluating Channel

Members – Performance should be

checked againststandards

– Channel members

should be rewarded orreplaced as dictated by

performance

Channel Management Decisions



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Exclusive distribution – Only certain outlets are

allowed to carry a firm’s products

Exclusive dealing – Exclusive territorial

agreements – Tying agreements

Public Policy and Distribution

Decisions



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Marketing Logistics – Outbound distribution – Inbound distribution

– Reverse distribution – Involves the entire supply chain

management system

Marketing Logistics and

Supply Chain Management



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Figure 13-5:

Supply ChainManagement



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Why Greater Emphasis is Being Placed onLogistics: – Offers firms a competitive advantage – Can yield cost savings – Greater product variety requires improved logistics – Improvements in distribution efficiency are possible

due to information technology







13- 37

Major Logistics Functions – Warehousing – Inventory Management – Transportation – Logistics Information Management





13- 38

Marketing Logistics and Supply

Chain ManagementTransportation Carrier Options

TruckRail

Water

PipelineAir

Internet

Intermodal transportation is becomingmore common



13- 39

Integrated LogisticsManagement – Cross-functional

teamwork inside thecompany is critical

– Logistics partnershipsare also built throughshared projects





13- 40

– Outsourcing oflogistic firms to third

party firms is becoming more

common





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Designing the DistributionNetwork in a Supply Chain

Supply Chain ManagementPart-2



4-42

Outline

The Role of Distribution in the Supply ChainFactors Influencing Distribution Network DesignDesign Options for a Distribution NetworkE-Business and the Distribution NetworkDistribution Networks in PracticeSummary of Learning Objectives



4-43

The Role of Distributionin the Supply Chain

Distribution : the steps taken to move and store a product from the supplier stage to the customer stagein a supply chain

Distribution directly affects cost and the customerexperience and therefore drives profitabilityChoice of distribution network can achieve supplychain objectives from low cost to high responsivenessExamples: Wal-Mart, Dell, Proctor & Gamble, HP,Apple





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Factors InfluencingDistribution Network Design

Elements of customer service influenced by network structure: – Response time – Product variety – Product availability – Customer experience – Order visibility – Returnability

Supply chain costs affected by network structure: – Inventories – Transportation – Facilities and handling – Information



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Service and Number of Facilities(Fig. 4.1)

Number ofFacilities

Response Time



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Inventory Costs and Numberof Facilities (Fig. 4.2)

InventoryCosts

Number of facilities



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The Cost-Response Time Frontier

Local FG

Mix

Regional FG

Local WIPCentral FG

Central WIP

Central Raw Material and Custom production

Custom production with raw material at suppliers

Cost

Response Time H iLow

Low

H i



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Transportation Costs andNumber of Facilities (Fig. 4.3)

TransportationCosts


l d b



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Facility Costs and Numberof Facilities (Fig. 4.4)

FacilityCosts




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Transportation

Total Costs Related toNumber of Facilities

T o

t a l C

o s t s

Number of Facilities

Inventory

Facilities

Total Costs



D i O i f



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Design Options for aDistribution Network

Manufacturer Storage with Direct ShippingManufacturer Storage with Direct Shipping and In-Transit Merge

Distributor Storage with Carrier DeliveryDistributor Storage with Last Mile DeliveryManufacturer or Distributor Storage with Consumer

PickupRetail Storage with Consumer Pickup

M f S i h



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Manufacturer Storage withDirect Shipping (Fig. 4.6)

Manufacturer

Retailer

Customers

Product Flow

Information Flow



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Manufacturer Storage withDirect Shipping

Delivering direct from manufacturer to customer after retailer collects theorders. (drop shipping) No inventory at retailer.Specially used for slow moving items (Nordstrom, WWGrainger, ebags)Package carriers are used to ship the product.Biggest advantage aggregation of inventory at manufacturer. Benefit is

biggest for items with high-value, low and unpredictable demand. This istrue if manufacturer owns the inventory it holds, instead of allocating toretailers (retailer’s own the inventory.

Not much advantage if the item is low value and with predictable demand(detergent)

Can increase the inventory turns by a factor of 6.Advantages; Postponement of customization after order is placed, and theaggregation on component level (Dell).Good if orders have few sourcing locations.



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Manufacturer Storage withDirect Shipping

Cost Factor – Inventory; lower cost because of aggregation – Transportation; increased distance, higher cost – Facilities and handling; lower cost because of aggregation especially if manufacturer can

handle small shipments – Information; high investment to integrate manufacturer and retailers, order visibility and

tracking.Service factor – Response time; tend to be long, longer distance, two levels of ordering, may vary by

product, complicating receiving. – Product variety; easy to provide high variety – Product availability; high availability – Customer experience; good in terms of home delivery, but can suffer from partial

fullfilment. – Time to market; fast – Order visibility; Difficult and important. Needs integra tion of retailer’s and

manufacturer ’s information systems. – Returnability; More difficult and expensive return process. An order can involve several

items.





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In-Transit Merge NetworkPieces of order from different locations is merged before sending tocustomer. Dell uses this with Sony.Similar to drop-shipping, it offers inventory aggregation and

postponement opportunity.Main advantage is improved customer service, reducedtransportation cost compared to drop shipping. Requires additionaleffort for merging though.Appropriate for low-medium demand, high value, orders with limitednumber of sources, four or five.Cost factors – Inventory; similar to drop-shipping, aggregation of inventory and postponement – Transportation cost; lower than drop-shipping. Fewer delivery to customer. – Facility and handling; somewhat higher. Extra facility for merging the order.

Less processing for customer to receive the order. – Information system; more coordination need, more sophisticated system needed



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In-Transit Merge Network

Service factors; – Response time slightly higher, product variety, product

availability, time to market are similar to drop shipping – Customer service is likely to be better. One delivery to

customer. – Order visibility; after the merging, order can be tracked as a

single unit. – Returnability are similar to drop-shipping, problems are

likely.





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Distributor Storage withCarrier Delivery

Inventory is held at the distributor/retailer in intermediate warehouses,instead of manufacturer.Amazon, WWGrainger used this option together with drop shippingAppropriate for medium to fast moving items, not for slow moving items.Postponement is possible if DC has some assembly capacity.Cost factors – Inventory; higher inventory cost because aggregation is done at distributor

instead of manufacturer, lower level of aggregation. – Transportation cost; lower. Lower inbound cost to distributor, and lower

outbound cost to customer (single shipment) – Facility and handling; Facility costs are higher compared to storage in

manufacturer (less aggregation). Handling is similar to manufacturer storageoption.

– Information; significantly less than the previous network. The distributor acts as buffer reducing the need for coordination between customer and manufacturers.

b h



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Distributor Storage withCarrier Delivery

Service factors – Response times; faster than previous networks – Product variety; lower

– Product availability; More expensive than previousnetworks – Customer experience; Better than drop-shipping especially.

Single shipment to customer

– Time to market is higher than previous options. Extrastorage time at the distributor. – Order visibility is less of an issue. Single unit delivery to

customer.



Di ib S i h



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Distributor Storage withLast Mile Delivery

Distributor/retailer delivers the product to the customer. Webvan, Peapod,Albertsons used this method in grocery industry.More and close-to-customer warehouses are needed for lowering deliverycostsAppropriate for fast moving and predictable items. Especially for byulky

products that customer values home delivery.It is justified if the customer is ready for paying for the convenience.Cost factors – Inventory; higher inventory than the previous options because of lower level of

aggregation. – Transportation cost; highest among all network configurations especially if the

density of customers are low and products are not bulky. – Facility and processing; high facility cost (although lower than retail stores)

handling cost are higher than retail because of home-delivery. – Information; similar to previous network. Extra effort for scheduling deliveries.

Di ib S i h



4-65


Service factors; – Response times; faster than using package carriers. – Product variety; lower than distributor storage and carrier

delivery. – Product availability; More expensive to provide compared

to previous networks other than retail stores. – Customer experience; very good especially for bulky items.

– Order visibility is less of an issue since the deliveries areusually within 24 hours. – Returnability; easy since the delivery trucks can pick up the

returns. More expensive than retail stores.

Di ib S i h



4-66


This option is hard to justify on efficiency base andusually is a good option if it is implemented using anexisting logistic facility structure – Example; Albertsons

» uses existing grocery stores and employees to provide homedelivery.

» A portion of the grocery store fulfills the online orders and alsoreplenishes the store.

This option is justifiable if the customer order size islarge enough to provide some economies of scale – Example; Peapod requires orders to be $50 or more with a

delivery charge of $9,95.

Manufacturer or Distributor Storage



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Manufacturer or Distributor Storagewith Customer Pickup (Fig. 4.10)

Factories

Retailer

Pickup Sites

Product FlowInformation Flow

Cross Dock DC

Customer Flow

Customers




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Manufacturer or Distributor Storagewith Customer Pickup

Inventory is stored at the distributor or manufacturerOrders are shipped to designated pickup points wherecustomers come and pick up their order7dream.com, operated by seven-eleven Japan, allowscustomers to pick their orders from a designated store. Seven-Eleven utilizes already existing logistic structure.Cost factors – Inventory; is low, aggregation at the manufacturer or distributor – Transportation is lowest when using package carrier due to aggregation

at pickup locations

– Facility and handling; facility costs are high if pick-up location does notexist already. Handling costs at pickup locations are high. – Information system; More elaborative and sophisticated, extra system at

the pickup locations.




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Service factors; – Response times; comparable to delivery with package carriers – Customer experience; worse since customer has to pickup the item

himself. On the other hand, since customer do not need to wait at home

for delivery and customer can pay cash at the pickup location instead of paying online in advance, some customers may like pickup option better.

– Time to market is similar to other options with manufacturer storage – Order visibility is very important. Customers should be informed when

their orders arrive. – Returns are easier to handle at pickup location. Returns can be

aggregated and shipped back from pickup locations.




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Main advantage; It can lower the transportation cost,and expand the product variety and customer baseserved.

Main disadvantage; Increased facility cost and xxtrahandling at pickup location. This network optionmakes sense if already existing logistics structure isused.



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Retail storage with customer pickups

Inventories are stored in retail stores, customers walk into the store to pickthe items they want or items they have ordered online or by phone. Mixedorder placement options. Most traditional option. – Albertsons; Grocery chain. Uses part of its stores as an online fulfillment center.

Local inventory. – WW Grainger; customers can order online, by phone, or in person and can

pickup items from retail outlets. Some items are stored locally and somecentrally.

– Inventory costs are higher than other options as the inventories aredisaggregated and held locally

– Transportation costs are lower than other solutions. Inexpensive modes can beused to replenish inventories at retail outlets.

– Facility costs are high. Many local facilities. – Information system; Minimal if there is no online ordering option. For online

option more complex information system especially for order visibility.

Comparative Performance of Delivery



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Comparative Performance of DeliveryNetwork Designs (Table 4.7)

Information

Facility & Handling

Transportation

Inventory

Returnability

Order Visibility

Customer Experience

Product Availability

Product Variety

Response Time

Manufacturerstorage with pickup Distributorstorage with lastmile delivery

Distributor Storagewith PackageCarrier Delivery

ManufacturerStorage with In-Transit Merge

ManufacturerStorage with DirectShipping

Retail Storagewith CustomerPickup

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

2

2

2

2

2

2

2

2

2

2

3

3

3

3

3

3

3

3

3

3

4

4

4

4

4

4

4

4

4

4

4

4

4

5

5

5

5

55

5

6

6

5

Linking Product Characteristics and



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Linking Product Characteristics andCustomer Preferences to Network Design

Low customer effort

High product variety

Quick desired response

High product value

Many product sources

Very low demand product

Low demand product

Medium demand product

High demand product

Manufacturer

storage withpickup

Distributor storage

with last mile delivery

Distributor Storage

with Package CarrierDelivery

Manufacturer

Storage with In-Transit Merge

Manufacturer

Storage withDirect Shipping

Retail Storage

withCustomerPickup

+2

+2

+2

+2

+2

+2

+2 +2 +2

+2

+1

+1

+1

+1

+1

+1

+1

+1

+1

+1

+1

+1

+1

+1

+1

0

0

0

0

0

0

0

0 0

0

-1

-1

-1

-1

-1 -1

-1

-1

-1

-1

-1

-2 -2

-2

-2

-2

-2 -2

-2

E-Business and the Distribution



4-74

E Business and the DistributionNetwork

Impact of E-Business on Customer ServiceImpact of E-Business on CostUsing E-Business: Dell, Amazon, Peapod, Grainger



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Distribution Networks in Practice

The ownership structure of the distribution networkcan have as big as an impact as the type of distributionnetwork

The choice of a distribution network has very long-term consequencesConsider whether an exclusive distribution strategy isadvantageousProduct, price, commoditization, and criticality havean impact on the type of distribution system preferred

by customers



Summary of Learning Objectives

What are the key factors to be considered whendesigning the distribution network?What are the strengths and weaknesses of various

distribution options?What roles do distributors play in the supply chain?

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Chapter 4 Chopra