Part 5Part 5Distribution Distribution DecisionsDecisions

marketingmarketing 16e16eHult | Pride | Ferrell

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14: Supply-Chain Management and 14: Supply-Chain Management and Marketing ChannelsMarketing Channels

15: Retailing, Wholesaling, and 15: Retailing, Wholesaling, and Direct MarketingDirect Marketing

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Learning Objectives

To describe the foundations of supply-chain management

To explore the role and significance of marketing channels and supply chains

To identify types of marketing channels

To understand factors that influence marketing channel selection

To identify the intensity of market coverage

To examine strategic issues in marketing channels, including leadership, cooperation, and conflict

To examine physical distribution as a part of supply-chain management

To explore legal issues in channel management

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Foundations of the Supply Chain

Supply ChainAll the activities associated with the flow and transformation of product from raw materials through to the end consumer

Operations ManagementThe total set of managerial activities used by an organization to transform resource inputs into products

Logistics ManagementPlanning, implementing and controlling the efficient and effective flow and storage of products and information from the point of origin to consumption

Supply ManagementThe processes that enable the progress of value from raw materials to final customer and back to redesign and final disposition

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Supply-Chain Management

A set of approaches used to integrate the functions of operations management, logistics management, supply management and marketing channel management so products are produced and distributed in the right quantities, the right locations and at the right timeThe goal is to achieve optimal levels of efficiency and service

The supply chain includes all entities that facilitate product distribution and benefit from cooperative efforts

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Key Tasks in Supply Chain Management

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Supply Chain Management Issues

Technology• Information technology has created almost

seamless distribution processes

• Information sharing has reduced costs

• Increased speed, flexibility, and cooperation

Technology has improved service • Increasing number of innovative goods

• Increased involvement of firms in management supply chain

Effective supply-chain management is closely linked to a market orientation

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The Role of Marketing Channels in Supply Chains

Marketing Channel (Channel of Distribution, Distribution Channel)

A group of individuals and organizations that direct the flow of products from producers to customers within the supply chain

Marketing Intermediaries

Middlemen that link producers to other intermediaries or ultimate consumers through contractual arrangement or through the purchase and reselling of products

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Discussion Question

Which marketing channels does Dunkin’ Donuts use for its packaged coffee?

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Marketing Channel Activities Performed by Intermediaries

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The Significance of Marketing Channels

Marketing channel decisions influence the rest of the marketing mix

Channel decisions determine: A product’s market presence Buyer’s accessibility to the product

Effective marketing channels required for organizational success

Entail long-term commitments among a variety of firms• Difficult to change/undo marketing channel

decisions

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Firms to Know: Pepsi Beverages Company

Formed from the merger of Pepsi Bottling Group and PepsiAmericas• Focus on the North American beverages

market

Received the Supply Chain Innovation Award from the Council of Supply Chain Management Professionals• Utilized technology to reduce the labor

required for in-store delivery

• Improved quality, service and return on investment

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Marketing Channels Create Utility

Time Utility• Having products available when the customer

wants them

Place Utility• Making products available in locations where

customers wish to purchase them

Possession Utility• Customers have access to the product to use now

or store for future use

Form Utility• Formed by assembling, preparing, or otherwise

refining the product to suit customer needs

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Marketing Channels Facilitate Exchange Efficiencies

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Typical Marketing Channels for Consumer Products

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Think About It: Banana Republic

Banana Republic has retail stores across the country, as well as offers sales through its website

Banana Republic and The Gap recently began offering sales in Europe through their websites

What distribution channels do you think Banana Republic utilizes to sell its goods?

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Typical Marketing Channels for Business Products

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Think About It

The Internet and smartphones have created new distribution channels

Magazines and newspapers sell content via smartphone and iPad apps

How does this change the distribution system for print media?

From a marketers perspective, what are potential problems with selling books, magazines, and newspaper via apps?

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Channels for Business Products

Industrial Distributor: An independent business that takes title to products and carries inventories

• Usually sells standardized items, although some carry a wide variety of items

• Cost effective when a product has broad market appeal, is easily stocked and serviced, is sold in small quantities and is needed on demand

Manufacturers’ Agent: An independent businessperson who sells complementary products and is compensated by commissions

• Does not acquire title or take possession

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Multiple Marketing Channels and Channel Alliances

Dual Distribution

The use of two or more marketing channels to distribute the same product to the same target market

Strategic Channel Alliance

The products of one organization are distributed through the marketing channels of another

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Selecting Marketing Channels

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Selecting Marketing Channels continued

Customer Characteristics

Consumer market or business market?• Business customers often prefer to deal directly

with producers; are more likely to buy complex products and in large quantities

Product Attributes

Complex/Expensive or standardized?

Durable or Fragile?

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Selecting Marketing Channels continued

Type of Organization

Large or small?• Large firms are often in a better position to have

more distribution centers, which reduce delivery times

• Smaller firms may be in a better position to serve smaller-scale regional needs

Degree of Competition

High or low?• Highly competitive markets require companies to

keep costs and prices low

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Selecting Marketing Channels continued

Environmental ForcesEconomic considerations will force organizations to make compromisesTechnology may help a firm modify/improve its channel strategyGovernment regulations and trade agreements can affect channel strategy

Characteristics of IntermediariesIf an intermediary is not adequately promoting an organization’s products, it may reconsider channel choices

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Intensity of Market Coverage

IntensiveUses all available outlets to distribute a productFor most convenience productsMultiple channels may be used

SelectiveUses only some available outlets to distribute a productFor shopping productsDesirable when a special effort is important to customers

ExclusiveUses a single outlet in a fairly large geographic areaFor products purchased infrequently, consumed over a long period of time, or requiring service and informationOnly authorized dealers are used

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Discussion Question

Wrigley’s Doublemint gum is a classic choice for gum lovers

What intensity of coverage is most common for the distribution of a convenience product like chewing gum?

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Intensity of Market Coverage continued

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Discussion Question

What level of intensity of market coverage would you select for products sold by the following brands?• Montblanc

• Carhartt

• Reebok

• Chanel

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Strategic Issues in Marketing Channels

Channel Integration

Channel Leadership,

Coordination, and Conflict

Competitive Priorities

Strategic Issues

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Competitive Priorities in Marketing Channels

Supply chains can provide a competitive advantage for many marketers

Supply chain decisions cut across all functional areas of a business

An effective and efficient supply chain can sustain a business in a variety of competitive environments• Inefficient supply chains can lead to increased

costs

• Integrated supply chains lead to a holistic view of the supply chain

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Channel Leadership

Channel Captain (Channel Leader)

The dominant leader of a marketing channel or a supply chain

May be a producer, wholesaler, or retailer

Channel Power

The ability of one channel member to influence other channel members’ goal achievements

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Channel Cooperation

Cooperation is vital if each channel member is to gain something from the others

Enables retailers, wholesalers, suppliers and logistics providers to: Speed up inventory replenishment

Improve customer service

Cut the costs of bringing products to customers

A marketing channel should be viewed as a unified supply chain

Members should work toward common objectives

Channel member tasks must be clearly defined

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Channel Conflicts

Channel conflict occurs when: Self-interest creates misunderstanding about role

expectations of channel members

Communication is poor between channel members

There is increased use of multiple channels has increased the chance for miscommunication and conflict

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Vertical Channel Integration

Combines two or more stages of the marketing channel under one management

Participants coordinated efforts to reach a desired target market

Often effective against competition because of increased bargaining power and shared information and responsibilities

Vertical Marketing Systems (VMSs): A single channel member coordinates or manages channel activities to achieve low-cost distribution aimed at satisfying target market customers• Takes on corporate, administered, or contractual

forms

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Horizontal Channel Integration

Combines organizations at the same level of operation under one management

Creates economies of scale

Not the best method for improving distribution

Large size may decrease flexibility, increase coordination problems and require additional research and planning

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Physical Distribution in Supply-Chain Management

Physical Distribution (Logistics)

Activities used to move products from producers to consumers and other end users

Outsourcing

The contracting of physical distribution tasks to third parties• Most distribution activities can be outsourced to

firms with expertise in specific areas

Cycle Time

The time needed to complete a process

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Goals of Physical Distribution

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Proportional Cost of Each Physical Distribution Function as a % of Total Distribution Cost

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Order Processing

The receipt and transmission of sales order information• Order Entry: Begins when customers place

orders

• Order Handling: Product availability and customer credit-worthiness is verified; order assembly occurs

• Order Delivery: Delivery is scheduled with a carrier

Electronic Data Interchange (EDI): A computerized means of integrating order processing with production, inventory, accounting and transportation

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Inventory Management

Developing and maintaining adequate assortment of products to meet customers’ needs

• Stockouts: Shortages of products that can result in loss of customers

• Reorder Point: The inventory level that signals the need to place a new order

• Order Lead Time: The average time lapse between placing the order and receiving it

• Usage Rate: The rate at which inventory is used/sold

• Safety Stock: The extra inventory a firm keeps

Just-in-Time (JIT): An inventory-management approach in which supplies arrive just when needed for production or resale

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Materials Handling

The physical handling of tangible goods, supplies and resources

Also involves transportation from points of production to points of consumption

Efficient materials handling can reduce costs, the number of times a good is handled, improve customer service and increase customer satisfaction

Radio Frequency ID: Radio waves are used to track materials using scanners

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Warehousing

The design and operation of facilities for storing and moving goods• Creates time utility

• Helps stabilize prices and the availability of seasonal items

The choice of warehouse is an important strategic consideration• The correct warehouse can reduce transportation

and inventory costs and improve customer service

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Types of Warehouses

Private Warehouses

Company-operated facilities for storing and shipping products

Public Warehouses

Storage space and related physical distribution facilities that can be leased by companies

Distribution Centers

Large, centralized warehouses that focus on moving rather than storing goods

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Transportation

The movement of products from where they are made to intermediaries and end users

The most expensive physical distribution functionTransportation Mode

Railroads Heavy, bulky freight; long distances over land

Trucks The most flexible schedules and routes; more expensive and vulnerable to weather; size and weight restrictions

Waterways Cheapest method; heavy, low-value nonperishables; markets must be accessible by water

Airways Fastest and most expensive; high-value, low-bulk, or perishable goods

Pipelines Most automated; dependable; contents subject to shrinkage

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Characteristics and Ratings of Transportation Modes by Selection Criteria

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Coordinating Transportation

Intermodal TransportationTwo or more transportation modes are used in combinationContainerization: piggyback (truck and rail), fishyback (truck and water), birdyback (truck and air) modes

Freight ForwardersOrganizations that consolidate shipments from several firms into efficient lot sizes

MegacarriersFreight transportation companies that offer several shipment methods

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Legal Issues in Channel Management

Dual DistributionRuns the risk of being viewed as anti-competitive

Restricted Sales TerritoriesCourts have conflicting opinions on restricting intermediaries to certain sales territories

Tying AgreementA supplier furnishes a product to a channel member with the stipulation that the channel member purchases other productsCourts only accept tying agreements when the supplier is the only one able to provide products of a certain quality and the intermediary can also carry competing products

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Legal Issues in Channel Management continued

Exclusive DealingA manufacturer forbids an intermediary to carry products of competing manufacturersOnly considered legal if the deal blocks competitors from less than 15% of the market, the sales volume is small and the producer is smaller than the retailerRefusal to DealProducers have the right to choose channel membersSuppliers cannot legally refuse to do business with certain wholesalers because of their policies resist anticompetitive actions

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Important Terms

Distribution Dual distribution

Supply chain Strategic channel alliance

Operations management Intensive distribution

Logistics management Selective distribution

Supply management Exclusive distribution

Supply-chain management Channel captain

Marketing channel Channel power

Marketing intermediaries Vertical channel integration

Industrial distributor Vertical marketing systems

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Important Terms continued

Horizontal channel integration Private warehouses

Physical distribution Public warehouses

Outsourcing Distribution centers

Cycle time Transportation

Order processing Intermodal transportation

Electronic data interchange (EDI)

Freight forwarders

Inventory management Megacarriers

Just-in-time (JIT) Tying agreement

Materials handling Exclusive dealing

Warehousing