Value Chain Management and Logistics Evans & Berman Chapter 14

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


Value Delivery Chain

Value Chain

Total Delivered Product

Level of Satisfaction

Supplier/ Manufacturer

Goals

Distribution Intermediary

Goals

Customer Goals

The Distribution Process


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


Functions Performed in a Channel of Distribution

PromotionCustomer Services

Buying Product Planning

Marketing Research

Distribution

Pricing

Channel Functions


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 Customers

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 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.


Typical Indirect Channels of Distribution

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



Distribution Intermediaries

Consumers

Pushing Versus Pulling Strategies

ConsumersDistribution Intermediaries


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 andprofits. Per-unit profits are low.


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.


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.


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.

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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 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


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

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.


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.


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.

Documents

Value Chain Management and Logistics Evans & Berman Chapter 14