CHAPTER 13: DISTRIBUTION AND PRICING
Right Product, Right Person, Right Place, Right Price
DISTRIBUTION: GETTING YOUR PRODUCT TO YOUR CUSTOMER
Producer Wholesaler Consumer
Channel of Distribution – the network of organizations and processes
that links producers to consumers
Distribution is a key element of the marketing mix Where should the product be sold? How will it get to the location(s) from the factory?
DISTRIBUTING DIRECTLY TO THE CONSUMER
Producer Consumer
Direct Channel – Distribution process that links the producer and the customer with
no intermediaries.
For example, Dell
CHANNEL INTERMEDIARIES
Channel Intermediaries – informally called middlemen. They facilitate the movement of products from the producer to the consumer.
Producer Wholesaler Consumer
THE ROLE OF DISTRIBUTORS: ADDING VALUE (Utility)
Form Utility: Turning inputs into finished goods
Time Utility: Providing products at the right time
Place Utility: Offering products at the right place
Ownership Utility:
Providing credit, cashing checking, delivering products
Information Utility:
Offering helpful information
Service Utility: Providing fast, friendly, personalized service
Jamba Juice
Vending Machines
ATM’s, Gas Stations
Pay Pal
Home Depot Service
Makeover stations
DISTRIBUTORS: STREAMLINING CONSUMER TRANSACTIONS
THE MEMBERS OF THE CHANNEL
Retailers – the distributors that sell products directly to the ultimate users
Wholesalers – distributors that buy
products from producers and sell them to other
businesses or non-final users.
WHOLESALERS: SORTING OUT THE OPTIONS
Merchant Wholesalers Take legal possession/title Full-service Limited Service
Drop Shippers Cash and Carry Truck Jobbers
Agents/Brokers Don’t take title of the goods
Amazon
Sam’s Club
Coke Distributor
RETAILERS: THE CONSUMER CONNECTION
Store Retailers Non-Store
Retailers Online Direct Response Direct Selling Vending
eBay, AmazonCatalogs,
telemarketingDoor-to-door
Best Buy at airports
DISTRIBUTION STRATEGY
INTENSIVE DISTRIBUTION
SELECTIVE DISTRIBUTION
EXCLUSIVE DISTRIBUTION
Placing your product in as many stores as possible
Placing your products with “preferred retailers”
Placing your products with only one retail outlet in a given area
Price / Product
Tiffany, Bentley automobiles
Paintball equipment
Starbucks, People magazine
MULTICHANNEL RETAILING
Retailers are encouraging
consumers to buy through multiple
channels
Store Online
PHYSICAL DISTRIBUTION: PLANES, TRAINS, AND MUCH, MUCH MORE
Determining the best distribution channels for your product is only half
the distribution strategy.
How will the product flow through the channel from producer to consumer?
Supply Chain Management – planning and coordinating the movement of products along
the supply chain
Logistics – focuses on the tactics involved in moving the products
ELEMENTS OF THE SUPPLY CHAIN
SUPPLY CHAIN MANAGEMENT DECISIONS
Warehousing Materials Handling Inventory Control Order Processing Customer Service Transportation Security
TRANSPORTATION DECISIONS
Mode
Percentage of U.S.
Volume
Cost SpeedOn-Time
Dependability
Flexibility in
Handling
Frequency of
Shipments
Availability
Rail 40.2% Medium Slow Medium Medium Low Extensive
Truck 40.0% High Fast High Medium High Most Extensive
Ship 9.0% Lowest Slowest Lowest Highest Lowest Limited
Plane 0.2% Highest Fastest Medium Low Medium Medium
Pipeline ** Low Slow Highest Lowest Highest Most Limited
MODES OF TRANSPORTATION:
PRICING : A HIGH STAKES GAME
Pricing plays a key role in the demand for products
Price is a tough variable Legal constraints Intermediary pricing (ie. wholesalers,
distributors) Stable pricing is not the norm
Prices must constantly be evaluated
PRICING OBJECTIVES AND STRATEGIES
Building Profitability Matching the
Competition Creating Prestige
Skimming Pricing
Boosting Volume Penetration Pricing Every-day-low
Pricing High/Low Pricing Loss Leader Pricing
Usually for newly introduced items, rock-bottom pricing to drive high
volumeWalMart, need I say more!
Special sales on limited items (to attract customers), higher prices on
the restPricing selected items below cost to attract customers
Prestige pricing – offering a new product at premium price – attract
price insensitive buyers
PRICING IN PRACTICE: A REAL WORLD APPROACH
Breakeven Point (BP) = Total fixed cost (FC)
Price/Unit (P) – Variable cost/unit (VC)
Breakeven analysis – the process of determining the number of units that must be sold to
cover costs.
USING BREAKEVEN ANALYSIS
Businesses make decisions to adjust the product price and/or costs.
Raise prices Decrease variable costs Decrease fixed costs
Outsource labor, use cheaper components?
Move your plant to Mexico, advertise less?
FIXED MARGIN PRICING
Cost-Based Pricing
Demand-Based Pricing
Profit Margin – the gap between cost and the priceper product.
CONSUMER PRICING PERCEPTIONS: THE STRATEGIC WILD CARD
Consumer price perceptions can defy logic!
The link between price and perceived quality can be powerful Consumers will use price as a quality
indicator Does odd pricing like $196 or $199
always mean a bargain?
PSYCHOLOGICAL PRICING
A recent survey of
1,200 prices, found
that 57% ended in .99
cents, and another
11% ended in .97
or .98 cents. Only
about 3% were whole
dollar amounts.
CHAPTER 17: OPERATIONS MANAGEMENT
Putting It All Together
OPERATIONS MANAGEMENT: IT ISN’T GLAMOROUS, BUT IT MATTERS….
Operations Management – planning, organizing, leading and controlling all the activities in creating value by producing goods and services and distributing them to customers
Good Operations Management:
Most efficient and effective processes
Produce the right goods and services
Produce the right quantities
Distribute products to the right customers at the right time
Operations Management – planning, organizing, leading and controlling all the activities in creating value by producing goods and services and distributing them to customers
Good Operations Management:
Most efficient and effective processes
Produce the right goods and services
Produce the right quantities
Distribute products to the right customers at the right time
EFFECTIVENESS VS. EFFICIENCY
Efficiency – producing output
or achieving a goal at the lowest cost.
Effectiveness – completing tasks
and producing products that
create the greatest value.
“There is nothing so useless as doing efficiently that which should not be done at all”
Peter Drucker, Management Expert
Doing things rightDoing the right
thing
GOODS VS. SERVICES
GOODS SERVICES
Tangible, physical form, can be touched, seen, handled
Intangible, they can be “experienced”, no physical form
Can be stored and inventoried
Must be consumed when they are produced
Can be shipped Must be consumed, where they are provided
Are produced independently of the consumer
Often require customer involvement
Can measure some aspects of quality
Quality is based on customer perceptions
WHAT DO OPERATIONS MANAGERS DO?
Facility Location
Process Selection and Facility Layout
Inventory Control
Scheduling
Quality
FACILITY LOCATION
General Location Factors
Examples of Specific Considerations
Adequacy of utilities
Is the supply of electricity reliable? Is clean water available?
Land Is adequate land available for a facility? How much does the land cost?
Labor market conditions
Are workers with the right skills available? How expensive is labor?
Transportation factors
Is the location near customers and suppliers? Is appropriate transportation nearby?
Quality of life What is the climate like? Are adequate health care facilities available?
Legal and political environment
Does the local government support new business? What are the local taxes, fees, and regulations?
GOING OVERSEAS
Low-wage labor is a key reason firms focus overseas but, low wages do not always translate into low cost
There are a variety of opportunities in rapidly growing foreign markets
Key to balance advantages with drawbacks: Different laws and customs Inadequate infrastructure Inexperienced workers Political instability
PROCESS SELECTION AND FACILITY LAYOUT
Flow Shops Produce Large Batches Standardized Products Specialized Machinery Standardized Tasks Assembly Line is a Flow Shop Process
Job Shops Produce Small Batches Variety of Products General-purpose Machinery Flexible Processes
TECHNOLOGY OF OPERATIONS
Automation – replacing human operations and control of machinery
and equipment with some form of programmed control.
Robot – a programmable machine that is capable of manipulating
materials in order to perform tasks.
AUTOMATION: LET THE MACHINES DO IT
ROBOTS
• Robots are well suited for dangerous, tedious, dirty and physically demanding tasks.
• Robots don’t get tired
• Robots are flexible
INVENTORY CONTROL: DON’T JUST SIT THERE
Why hold inventories… Smooth out production schedules Meet demand increases Reduce switching costs Compensate for forecast errors
Why not… Unsold inventory ties up funds Inventory must be warehoused and managed Risk of losses due to spoilage, obsolescence
and pilferage
REDUCING INVESTMENT IN INVENTORY: JUST-IN-TIME TO THE RESCUE
Produce goods and services to meet actual demand. Minimize inventoriesat all stages of the supply chain through coordination.
MANAGING SUPPLY CHAINS
Supply chains can be complex Wide range of functions Involve many firms Heavy use of
technology RFID Chips
Internet has provided great tools for supply chain management
TRADE-OFF BETWEEN VERTICAL INTEGRATION AND OUTSOURCING
Vertical Integration Gain control over
supply chain Begin producing
its own parts Buying suppliers
Outsourcing Use outside firm
for producing supplies
Focus on key production areas
Cost savingsThe trend has been to rely more on outsourcing
which has become a controversial issue.
ENTERPRISE RESOURCE PLANNING (ERP) : CREATING ONE BIG SYSTEM
The goal of ERP is to integrate the flow of information
ERP systems can be costly and challenging to implement
Most firms that complete implementation of ERP systems, report being satisfied with the results
FOCUS ON QUALITY
Quality improves effectiveness and efficiency
Quality helps achieve competitive advantage
Lower costs, increases value Poor quality costs
DEMING CHAIN REACTION
Costs decrease because of less rework, fewer mistakes, fewer delays and snags,
and better use of time and materials
Improve Quality
Productivity Improves
Capture the market with better quality and lower price
Stay in business
Provide jobs and more jobs
W. Edwards Deming, viewed as the father of
the quality movement, first
proposed the relationship
between quality and business in the early 1950s.
HOW AMERICAN FIRMS RESPONDED TO THE QUALITY CHALLENGE
A broad concept of quality: Total Quality Management: Customer Focus Build quality throughout the organization Empowerment of employees Focus on prevention of errors Long-run commitment to continuous
improvement
INTERNATIONAL ORGANIZATION FOR STANDARDIZATION
Founded in 1947 Network of national standards institutes
in 150 nations ISO 9000 Certification
Generic quality standards Updated and modified, latest version is ISO
9000:2005 Environmental management focused
standards: ISO 14000
THE BALDRIGE NATIONAL QUALITY PROGRAM
Created by Congress in 1987 to encourage global competition
Participating firms are extensively evaluated
Detailed reports of company strengths and weaknesses
The 2011 Baldrige Award recipients include: Concordia Publishing House, St. Louis, Mo. (nonprofit)Henry Ford Health System, Detroit, Mich. (health care)Schneck Medical Center, Seymour, Ind. (health care)Southcentral Foundation, Anchorage, Alaska (health care)
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