Chapter 11: Deliver the goods: determine the distribution strategy

logistics

The process of designing, managing, and improving the movement of products through the supply chain. Logistics includes purchasing, manufacturing, storage, and transport.

exclusive distribution

selling a product only through a single outlet in a particular region

intensive distribution

selling a product through all suitable wholesalers or retailers that are willing to stock and sell the product

11.1 types of distribution channels and wholesale intermediaries

11.1 Explain what a distribution channel is, identify types of wholesaling intermediaries, and describe the different types of distribution channels. So you've done all the work to understand your target market. You've created your product, and you've priced it too. Your Facebook page is attracting legions of brand fans. But sorry, you're still not done with the marketing mix—now you need to get what you make out into the marketplace (i.e., distribute it). The delivery of goods to customers involves physical distribution, which refers to the activities that move finished goods from manufacturers to final customers. As introduced in Chapter 1, a channel of distribution is the series of firms or individuals that facilitates the movement of a product from the producer to the final customer. In many cases, these channels include an organized network of producers (or manufacturers), wholesalers, and retailers that develop relationships and work together to make products conveniently available to eager buyers. And, as Michael Ford's decision at BDP International illustrates, the delivery of goods across national borders requires an in-depth understanding of laws and regulations specific to a particular nation or international governing body. Distribution channels come in different shapes and sizes. The bakery around the corner where you buy your cinnamon rolls is a member of a channel, as are the baked-goods section at the local supermarket, the Starbucks that sells biscotti to go with your double-mocha cappuccino, and the bakery outlet store that sells day-old rolls at a discount. A channel of distribution consists of, at a minimum, a producer—the individual or firm that manufactures or produces a good or service—and a customer. This is a direct channel, and when you buy a loaf of bread at a mom-and-pop bakery, you're buying through a direct channel. Firms that sell their own products directly to customers through websites, catalogs, toll-free numbers, or factory outlet stores also use direct channels. But life (and marketing) usually isn't that simple: Channels often are indirect because they include one or more channel intermediaries—firms or individuals, such as wholesalers, agents, brokers, and retailers, who in some way help move the product to the consumer or business user. For example, a bakery may choose to sell its cinnamon buns to a wholesaler that will in turn sell boxes of buns to supermarkets and restaurants that in turn sell them to consumers. Another older term for intermediaries is middlemen. Functions of Distribution Channels Channels that include one or more organizations or intermediaries often can accomplish certain distribution functions more effectively and efficiently than can a single organization. As we saw in Chapter 2, this is especially true in international distribution channels, where differences among countries' customs, beliefs, and infrastructures can make global marketing a nightmare. Even small companies can succeed in complex global markets when they rely on distributors such as BDP that know local customs and laws. Overall, channels provide the place, time, and possession utility we described in Chapter 1. They make desired products available when, where, and in the sizes and quantities that customers desire. Suppose, for example, you want to buy that perfect bouquet of flowers for a special someone. You could grow them yourself or even "liberate" them from a cemetery if you were really desperate (very classy!). Fortunately, you can probably accomplish this task with just a simple phone call or a few mouse clicks, and "like magic" a local florist delivers a bouquet to your honey's door. Distribution channels provide a number of logistics or physical distribution functions that increase the efficiency of the flow of goods from producer to customer (more on this later in the chapter). How would we buy groceries without our modern system of supermarkets? We'd have to get our milk from a dairy, our bread from a bakery, our tomatoes and corn from a local farmer, and our flour from a flour mill. And forget about specialty items, such as Coca-Cola or Little Debbie snack cakes. The companies that make these items would have to handle literally millions of transactions to sell to every individual who craves a junk-food fix. Distribution channels create efficiencies because they reduce the number of transactions necessary for goods to flow from many different manufacturers to large numbers of customers. This occurs in two ways. The first is breaking bulk. Wholesalers and retailers purchase large quantities (usually cases) of goods from manufacturers but sell only one or a few at a time to many different customers. Second, channel intermediaries reduce the number of transactions when they create assortments; they provide a variety of products in one location so that customers can conveniently buy many different items from one seller at one time. Figure 11.1 provides a simple example of how distribution channels work. This simplified illustration includes five producers and five customers. If each producer sold its product to each individual customer, 25 different transactions would have to occur—not exactly an efficient way to distribute products. But with a single intermediary who buys from all 5 manufacturers and sells to all 5 customers, we quickly cut the number of transactions to 10. If there were 10 manufacturers and 10 customers, an intermediary would reduce the number of transactions from 100 to just 20. Do the math: Channels are efficient. The transportation and storage of goods is another type of physical distribution function. That is, retailers and other channel members move the goods from the production point to other locations where they can hold them until consumers want them. Channel intermediaries also perform a number of facilitating functions that make the purchase process easier for customers and manufacturers. For example, intermediaries often provide customer services, such as offering credit to buyers. Many of us like to shop at brick-and-mortar department stores because if we are not happy with the product, we can take it back to the store, where cheerful customer service personnel are happy to give us a refund (at least in theory). But the same facilitating function happens online with Zappos, Lands' End, and a host of other customer-friendly retailers. These same customer services are even more important in business-to-business (B2B) markets where customers purchase larger quantities of higher priced products. And channel members perform risk-taking functions. For example, if a retailer buys a product from a manufacturer and it just sits on the shelf because no customers want it, he or she is stuck with the item and must take a loss. But hey, that's what outlet malls are for, right? Perishable items present an even greater risk of spoilage and loss, and as such they're potentially a high risk. Blueberries in the U.S. are in season for only a very short period of time. Retailers want to stock up to meet the annual high demand; on the other hand, a carton of semisoft blueberries on the shelf a few weeks past prime is beyond unappealing. Finally, intermediaries perform communication and transaction functions by which channel members develop and execute both promotional and other types of communication among members of the channel. Wholesalers buy products to make them available for retailers, and they sell products to other channel members. Retailers handle transactions with final consumers. Channel members can provide two-way communication for manufacturers. They may supply the sales force, advertising, and other types of marketing communication necessary to inform consumers and persuade them that a product will meet their needs. And the channel members can be invaluable sources of information on consumer complaints, changing tastes, and new competitors in the market.

11.2 develop a channel strategy

11.2 List and explain the steps to plan a distribution channel strategy. Do customers want products in large or small quantities? Do they insist on buying them locally, or will they purchase from a distant supplier? How long are they willing to wait to get the product? Inquiring marketers want to know! Channel of distribution planning works best when marketers follow the steps in Figure 11.4. In this section, we first look at how firms decide on distribution objectives, then we examine what influences distribution decisions, and finally we talk about how firms select different distribution strategies and tactics. Firms that operate within a channel of distribution—manufacturers, wholesalers, and retailers—do distribution planning, which is a process of developing distribution objectives, evaluating internal and external environmental influences on distribution, and choosing a distribution strategy. Step 1: Develop Distribution Objectives The first step in a distribution plan is to develop objectives that support the organization's overall marketing goals. How can distribution work with the other elements of the marketing mix to increase profits? To increase market share? To increase sales volume? In general, the overall objective of any distribution plan is to make a firm's product available when, where, and in the quantities customers want at the minimum cost. More specific distribution objectives, however, depend on the characteristics of the product and the market. For example, if the product is bulky, a primary distribution objective may be to minimize shipping costs. If the product is fragile, a goal may be to develop a channel that minimizes handling. In introducing a new product to a mass market, a channel objective may be to provide maximum product exposure (like BDP's work with its client Quaker) or to make the product available close to where customers live and work. Sometimes marketers make their product available where similar products are sold so that consumers can compare prices.

11.3 logistics and the supply chain

11.3 Discuss the concepts of logistics and supply chain. Some marketing textbooks tend to depict the practice of marketing as 90 percent planning and 10 percent implementation. Not so! In the "real world" (and in our book), many managers argue that this ratio should be reversed. Marketing success is very much the art of getting the timing right and delivering on promises—implementation. That's why marketers place so much emphasis on efficient logistics: the process of designing, managing, and improving the movement of products through the supply chain. Logistics includes purchasing, manufacturing, storage, and transport. From a company's viewpoint, logistics takes place both inbound to the firm (raw materials, parts, components, and supplies) and outbound from the firm (work in process and finished goods). Logistics is also a relevant consideration regarding product returns, recycling and material reuse, and waste disposal—reverse logistics.19 As we saw in previous chapters, this is becoming even more important as firms start to more seriously consider sustainability as a competitive advantage and put more effort into maximizing the efficiency of recycling to save money and the environment at the same time. So you can see that logistics is an important issue across all elements of the supply chain. Let's examine this process more closely. The Lowdown on Logistics Have you ever heard the saying, "An army travels on its stomach"? Logistics was originally a term the military used to describe everything necessary to deliver troops and equipment to the right place, at the right time, and in the right condition. In business, logistics is similar in that its objective is to deliver exactly what the customer wants—at the right time, in the right place, and at the right price. As Figure 11.5 shows, logistics activities include order processing, warehousing, materials handling, transportation, and inventory control. This process impacts how marketers physically get products where they need to be, when they need to be there, and at the lowest possible cost. When a firm does logistics planning, however, the focus also should be on the customer. In the old days when managers thought of logistics as physical distribution only, the objective was to deliver the product at the lowest cost. Today, forward-thinking firms consider the needs of the customer first. The customer's goals become the logistics provider's priorities. And this means that when they make most logistics decisions, firms must decide on the best trade-off between low costs and high customer service. The appropriate goal is not just to deliver what the market needs at the lowest cost but rather to provide the product at the lowest cost possible as long as the firm meets delivery requirements. Although it would be nice to transport all goods quickly by air (even by drone), that is certainly not practical. But sometimes air transport is necessary to meet the needs of the customer, no matter the cost. When they develop logistics strategies, marketers must make decisions related to each of the five functions of logistics depicted in Figure 11.5. For each decision, managers need to consider how to minimize costs while maintaining the service customers want. Let's look closely at each of the five logistics functions. Order Processing Order processing includes the series of activities that occurs between the time an order comes into the organization and the time a product goes out the door. After a firm receives an order, it typically sends it electronically to an office for record keeping and then on to the warehouse to fill it. When the order reaches the warehouse, personnel there check to see if the item is in stock. If it is not, they put the order on back-order status. That information goes to the office and then to the customer. If the item is available, the company locates it in the warehouse, packages it for shipment, and schedules it for pickup by either in-house or external shippers. Fortunately, many firms automate this process with enterprise resource planning (ERP) systems. An ERP system is a software solution that integrates information from across the entire company, including finance, order fulfillment, manufacturing, and transportation. Data need to be entered into the system only once, and then the organization automatically shares this information and links it to other related data. For example, an ERP system ties information on product inventories to sales information so that a sales representative can immediately tell a customer whether the product is in stock. Warehousing Whether we deal with fresh-cut flowers, canned goods, or computer chips, at some point goods (unlike services) must be stored. Storing goods allows marketers to match supply with demand. For example, gardening supplies are especially big sellers during spring and summer, but the factories that manufacture them operate 12 months of the year. Warehousing— storing goods in anticipation of sale or transfer to another member of the channel of distribution—enables marketers to provide time utility to consumers by holding on to products until consumers need them. Part of developing effective logistics means making decisions about how many warehouses are needed and where and what type of warehouse each should be. A firm determines the location of its warehouse(s) by the location of customers and access to major highways, airports, or rail transportation. The number of warehouses often depends on the level of service that customers require. If customers generally demand fast delivery (today or tomorrow at the latest), then it may be necessary to store products in a number of different locations from which the company can quickly ship the goods to the customer. For example, Amazon has invested billions of dollars in high-tech fulfillment centers across the U.S. and abroad to keep up with customer demand and ensure that products get to consumers as quickly as possible (increasingly, the same day as ordered). They operate more than 75 fulfillment centers and 25 sortation centers across North America alone, and the company's warehouses cover more than 77 million square feet! Availability of Amazon's same-day, one-hour, and Sunday delivery options depends on a customer's location, but with 50 percent of the U.S. population living within 20 miles of an Amazon warehouse, it's no surprise delivery is becoming faster and faster.20 Firms use private and public warehouses to store goods. Those that use private warehouses have a high initial investment, but they also lose less of their inventory as a result of damage. Public warehouses are an alternative that allows firms to pay for a portion of warehouse space rather than having to own an entire storage facility. Most countries offer public warehouses in all large cities and many smaller cities to support domestic and international trade. A distribution center is a warehouse that stores goods for short periods of time and that provides other functions, such as breaking bulk. Most large retailers have their own distribution centers so that their stores do not need to keep a lot of inventory in the back room. Materials Handling Materials handling is the moving of products into, within, and out of warehouses. When goods come into the warehouse, they must be physically identified, checked for damage, sorted, and labeled. Next, they are taken to a location for storage. Finally, they are recovered from the storage area for packaging and shipment. All in all, the goods may be handled over a dozen separate times. Procedures that limit the number of times a product must be handled decrease the likelihood of damage and reduce the cost of materials handling.

cross-docking

A supply chain efficiency technique in which products are transferred off a supplier's truck directly onto a buyer's truck bound for the next distribution point, such as a retail store.

place: pulling it all together through the supply chain

A supply chain includes all the activities necessary to turn raw materials into a good or service and put it into the hands of the consumer or business customer. Sam's Club and its sister company, Walmart, are iconic when it comes to global supply chain effectiveness. To both reduce overall excess inventory and more effectively meet the needs of consumers who increasingly shop both in the company's physical locations and on its website, Walmart has put a strategy in place that enables greater agility within the company's supply chain. Specifically, the retail giant has reduced its total inventory, increased the variety of products sold, and shifted more of its inventory from its physical stores to its distribution centers. They have even implemented cross-docking with many of their suppliers where products are transferred off the supplier's truck directly onto a Walmart truck bound for a store with no warehousing at all. With an increasing number of consumers shopping online, these significant operational changes allow Walmart to serve those customers more nimbly. The company can avoid the big increase in overall inventory costs it would incur if it had to maintain separate approaches to inventory management for online versus in-store shoppers. In addition, distribution centers are much more efficient at getting products to stores when an expected increase in demand is observed at one location versus implementing an inventory transfer between stores—incredibly, every Walmart store is within 130 miles of a distribution facility. Yet another added benefit of this change is that it frees up in-store employees to focus more on other value-added activities (such as assisting customers) because less time is required to manage inventory in the stock room. All of that said, a reduction of inventory in each store potentially means that some customers will not be able to get a specific product exactly when they wanted it due to increased stock-outs.26 Metrics Moment One of the most used measures of inventory control is inventory turnover, or inventory turns, which is the number of times a firm's inventory completely cycles through during a defined time frame (usually in one year). Marketers can measure inventory turnover by using the value of the inventory at cost or at retail, or this metric can even be expressed in units. Just make sure that you're using the same unit of measurement in both the numerator and the denominator!27 One of the most common formulas is the following: Inventroy turnover×Annual⁢ cost of sales÷Average inventorylevel for the period However, the formula requires waiting until the end of the year (or the end of the business's fiscal year). An alternative is using the following "snapshot" number, which takes a rolling approach so that turns can be calculated at any time by looking at cost of sales for the immediately prior 12 months and the current inventory at the end of that period: Inventory turnover × Rolling 12-month cost of sales ÷ Current inventory Benchmarks for inventory turnover vary greatly by industry and product line. High-volume/low-margin settings, like supermarkets, may have 12 or more inventory turns per year overall, but some staple goods, like milk and bread, that are bought on every trip may have significantly higher turnover rates. All else equal, a firm can increase its profitability substantially by targeting increases in inventory turnover—selling through Product A 15 times a year instead of 12 naturally improves the bottom line (so long as Product A is profitable). However, if price reductions or promotional expense increases are needed to increase the turns, management will have to carefully calculate whether the increased volume really adds to profits (this is where marketers can get into trouble with the old saying, "We're losing money, but we'll make it up in volume!"). Apply the Metrics Spider's Auto Parts Store ended its fiscal year last month with a cost of sales of $3,000,000 and an average inventory of $400,000. What is Spider's inventory turnover for that fiscal year? Spider's would like to boost its turns to 10 during the next fiscal year. What suggestions do you have for actions they should take that will help them accomplish this objective? Amazon and Walmart clearly understand the potential for supply chain practices to enhance organizational performance and profits, and scores of other firms across most every industry with physical products benchmark against them for best practices. The truth is that distribution may be the "final frontier" for marketing success. To understand why, consider these facts about the other three Ps of marketing. After years of hype, many consumers no longer believe that "new and improved" products really are new and improved. Nearly everyone, even upscale manufacturers and retailers, tries to gain market share through aggressive pricing strategies. Advertising and many other forms of promotion are so commonplace today that they have lost some of their impact. Even hot new social media strategies can't sell overpriced or poorly made products, at least not for long. Marketers have come to understand that place (the "distribution P") may be the only one of the four Ps to offer an opportunity for really long-term competitive advantage—especially because many consumers now expect "instant gratification" by getting just what they want instantaneously when the urge strikes. That's why savvy marketers are always on the lookout for novel ways to distribute their products. A large part of the marketer's ability to deliver a value proposition rests on the ability to understand and develop effective supply chain strategies. Often, of course, firms may decide to bring in outside companies to accomplish these activities—this is outsourcing, which as we learned about in Chapter 6 occurs when firms obtain outside vendors to provide goods or services that might otherwise be supplied in-house. In the case of supply chain functions, outsource firms are most likely organizations with whom the company has developed some form of partnership or cooperative business arrangement. Supply chain management is the coordination of flows among the firms in a supply chain to maximize total profitability. These "flows" include not only the physical movement of goods but also the sharing of information about the goods—that is, supply chain partners must synchronize their activities with one another. For example, they need to communicate information about which goods they want to purchase (the procurement function), about which marketing campaigns they plan to execute (so that the supply chain partners can ensure there will be enough product to supply the increased demand that results from the promotion), and about logistics (such as sending advance shipping notices to alert their partners that products are on their way). Through these information flows, a company can effectively manage all the links in its supply chain, from sourcing to retailing. In his classic book The World Is Flat: A Brief History of the Twenty-First Century, author Thomas Friedman addresses a number of high-impact trends in global supply chain management.28 One such development is the trend whereby companies we traditionally know for other things remake themselves as specialists who take over the coordination of clients' supply chains for them. UPS is a great example of this trend. UPS, which used to be "just" a package delivery service, today is much more because it also specializes in insourcing. This process occurs when companies contract with a specialist who services their supply chains. Unlike the outsourcing process where a company delegates nonessential tasks to subcontractors, insourcing means that the client company brings in an external company to run its essential operations. Although we tend to associate UPS with those little brown trucks that zip around town delivering boxes, the company actually positions itself in the B2B space as a broad-based supply chain consultancy! Finally, in case you're wondering about the difference between a supply chain and a channel of distribution, the major distinguishing feature is the number of members and their functions. A supply chain is broader, consisting of those firms that supply the raw materials, component parts, and supplies necessary for a firm to produce a good or service plus the firms that facilitate the movement of that product to the ultimate users of the product. This last part—the firms that get the product to the ultimate users—is the channel of distribution.

Step 2: evaluate internal and external environmental influences

After they set their distribution objectives, marketers must consider their internal and external environments to develop the best channel structure. Should the channel be long or short? Is intensive, selective, or exclusive distribution best? Short, often direct channels may be better suited for B2B marketers for whom customers are geographically concentrated and require high levels of technical know-how and service. Companies frequently sell expensive or complex products directly to final customers. Short channels with selective distribution also make more sense with perishable products because getting the product to the final user quickly is a priority. However, longer channels with more intensive distribution are generally best for inexpensive, standardized consumer goods that need to be distributed broadly and that require little technical expertise. The organization must also examine issues such as its own ability to handle distribution functions, what channel intermediaries are available, the ability of customers to access these intermediaries, and how the competition distributes its products. Should a firm use the same retailers as its competitors? It depends. Sometimes, to ensure customers' undivided attention, a firm sells its products in outlets that don't carry the competitors' products. In other cases, a firm uses the same intermediaries as its competitors because customers expect to find the product there. For example, you will find Harley-Davidson bikes only in selected Harley "boutiques" and Piaggio's Vespa scooters only at Vespa dealers (no original sales through Amazon for those two!), but you can expect to find Coca-Cola, Colgate toothpaste, and a Snickers bar in every possible outlet that sells these types of items (remember our discussion in Chapter 8 about the nature of convenience products). Finally, when they study competitors' distribution strategies, marketers learn from their successes and failures. If the biggest complaint of competitors' customers is delivery speed, developing a system that allows same-day delivery can make the competition pale in comparison.

step 4: Develop distribution tactics

As with planning for the other marketing Ps, the final step in distribution planning is to develop the tactics for distribution necessary to implement the distribution strategy. These decisions are usually about the type of distribution system to use, such as a direct or an indirect channel or a conventional or an integrated channel. Distribution tactics relate to two aspects of the implementation of these strategies: (1) how to select individual channel members and (2) how to manage the channel. We provide insights into making each of these two decisions. First, it is essential to understand that these two decisions are important because they often have a direct impact on customer satisfaction; nobody wants to have to wait for something they've bought! For many small businesses, partnering with Amazon to take advantage of its great distribution prowess is highly attractive. For a competitive fee, fulfillment by Amazon offers third parties the ability to outsource the storage and shipping of products to them. A company such as Instant Pot, which has upended the home-cooking industry and doubled sales every year since 2011, relies on Amazon as a channel member to distribute its products efficiently and at a competitive price. Consumers who are signed up for Amazon Prime and thus get access to free two-day shipping provide an added bonus for companies that sell their products through Amazon. From its earliest days, Instant Pot took advantage of Amazon's Fulfillment by Amazon program—Amazon warehouses, ships, and handles paperwork for retailers in exchange for a fee. Because of Amazon's size, companies such as Instant Pot can feel more confident that as they scale out their business, Amazon will be able to stay ahead of their need for increased distribution. In times of peak demand, a real advantage of outsourcing distribution versus an internal approach is that Amazon can easily flex to handle the spikes in demand. This flexibility saves a firm like Instant Pot a lot of stress.16 Decision 1: Select Channel Partners When firms agree to work together in a channel relationship, they become partners in what is normally a long-term commitment. Like a marriage, it is important to both manufacturers and intermediaries to select channel partners wisely, or they'll regret the match-up later (and a divorce can be really expensive!). In evaluating intermediaries, manufacturers try to answer questions such as the following: Will the channel member contribute substantially to our profitability? Does the channel member have the ability to provide the services customers want? What impact will a potential intermediary have on channel control? For example, what small to midsize firm wouldn't jump at the chance to have retail giant Walmart distribute its products? With Walmart as a channel partner, a small firm could double, triple, or quadruple its business. But believe it or not, some firms that recognize that size means power in the channel actually decide against selling to Walmart because they are not willing to relinquish control of their marketing decision making. There is also a downside to choosing one retailer and selling only through that one retailer. If that retailer stops carrying the product, for example, the company will lose its one and only customer (perhaps after relinquishing other smaller customers), and it will be back to square one. Another consideration in selecting channel members is competitors' channel partners. Because people spend time comparing different brands when purchasing a shopping product, firms need to make sure they display their products near similar competitors' products. If most competitors distribute their electric drills through mass merchandisers, a manufacturer has to make sure its brand is there also. A firm's dedication to social responsibility may also be an important determining factor in the selection of channel partners. Many firms run extensive programs to recruit minority-owned channel members. Coca-Cola Company offers a supplier training program aimed at helping female-owned businesses successfully break into its supply chain. The concept behind this supplier diversity program is the belief that when women succeed, economies and communities greatly benefit.17 Decision 2: Manage the Channel Once a manufacturer develops a channel strategy and aligns channel members, the day-to-day job of managing the channel begins. The channel leader, or channel captain, is the dominant firm that controls the channel. A firm becomes the channel captain because it has more channel power relative to other channel members. Channel power is the ability of one channel member to influence, control, and lead the entire channel based on one or more sources of power. This power comes from different potential sources, among which are the following: A firm has economic power if it has the ability to control resources. A firm such as a franchiser has legitimate power if it has legal authority to call the shots. A producer firm has reward or coercive power if it engages in exclusive distribution and has the ability to give profitable products and to take them away from the channel intermediaries. Historically, producers have held the role of channel captain. P&G, for example, developed customer-oriented marketing programs, tracked market trends, and advised retailers on the mix of products most likely to build sales. But as large retail outlets have evolved, giants like Amazon, Home Depot, Target, Walmart, and Walgreens began to assume a channel leadership role because of the sheer size of their operations. Today, it is much more common for the big retailers to dictate their needs to producers instead of producers controlling what products they offer to retailers. In a classic example, Amazon tried to use its formidable channel power to "persuade" publisher Hachette to meet Amazon's terms regarding e-book pricing by subjecting its books to artificial purchase delays and by limiting the visibility of some Hachette titles in search results. During the time of the dispute, some popular Hachette titles no longer were available for preorder. Ultimately, Amazon and Hachette reached a settlement in which the publisher was still able to set its own prices, but evidence suggests the publisher made some concessions as well behind closed doors.18 Because producers, wholesalers, and retailers depend on one another for success, channel cooperation helps everyone. Channel cooperation is stimulated when the channel leader takes actions that make its partners more successful. Examples of this, such as high intermediary profit margins, training programs, cooperative advertising, and expert marketing advice, are invisible to end customers but are motivating factors in the eyes of wholesalers and retailers. Of course, relations among members in a channel are not always full of sweetness and light. Because each firm has its own objectives, channel conflict may threaten a manufacturer's distribution strategy. Such conflict most often occurs between firms at different levels of the same distribution channel. Incompatible goals, poor communication, and disagreement over roles, responsibilities, and functions cause conflict. For example, a producer is likely to feel the firm would enjoy greater success and profitability if intermediaries carry only its brands, but many intermediaries believe they will do better if they carry a variety of brands. In this section, we've been concerned with the distribution channels firms use to get their products to customers. In the next section, we'll look at the area of logistics—physically moving products through the supply chain—and end by introducing the concept of the supply chain.

types of distribution channels

Firms face many choices when they structure distribution channels. Should they sell directly to consumers and business users? Would they benefit if they included wholesalers, retailers, or both in the channel? Would it make sense to sell directly to some customers but use retailers to sell to others? Of course, there is no single best channel for all products. The marketing manager must select a channel structure that creates a competitive advantage for the firm and its products based on the size and needs of the target market. Let's consider some of the factors these managers need to think about. When they develop distribution (place) strategies, marketers first consider different channel levels. This refers to the number of distinct categories of intermediaries that make up a channel of distribution. Many factors have an impact on this decision. What channel members are available? How large is the market? How frequently do consumers purchase the product? What services do consumers require? Figure 11.3 summarizes the different structures a distribution channel can take. The producer and the customer are always members, so the shortest channel possible has two levels. Using a retailer adds a third level, a wholesaler adds a fourth level, and so on. Different channel structures exist for both consumer and B2B markets. And what about services? You will learn in Chapter 12 that services are intangible, so there is no need to worry about storage, transportation, and the other functions of physical distribution. In most cases, the service travels directly from the producer to the customer. However, an intermediary we call an agent can enhance the distribution of some services when he helps the parties complete the transaction. Examples of these agents include insurance agents, stockbrokers, and travel agents (no, not everyone books their travel online). Consumer Channels As we noted previously, the simplest channel is a direct channel. Why do some producers sell directly to customers? One reason is that a direct channel may allow the producer to serve its customers better and at a lower price than is possible if it included a retailer. A baker who uses a direct channel makes sure that customers enjoy fresher bread than if the tasty loaves are sold through a local supermarket. Furthermore, if the baker sells the bread through a supermarket, the price will be higher because of the supermarket's costs of doing business and its need to make its own profit on the bread. In fact, sometimes this is the only way to sell the product because using channel intermediaries may boost the price above what consumers are willing to pay. Another reason to use a direct channel is control. When the producer handles distribution, it maintains control of pricing, service, and delivery—all elements of the transaction. Because distributors and dealers carry many products, it can be difficult to get their sales forces to focus on selling one product. In a direct channel, a producer works directly with customers, so it gains insights into trends, customer needs and complaints, and the effectiveness of its marketing strategies. Even for a consumer-packaged goods giant, such as P&G, that is able to maintain a strong presence within the storefronts of the largest physical and digital retailers, the allure of a direct channel is appealing, as evidenced by the company's launch of the "P&G Shop." This move was heavily driven by the desire to be where consumers shopped and to have the opportunity to listen to and engage with them online in a different way. P&G certainly does not have plans to cut ties with its retailers, but the creation of a direct-to-consumer channel offers the company some interesting opportunities to further engage with consumers and bolster sales.4 Why do producers choose to use indirect channels to reach consumers? A reason in many cases is that customers are familiar with certain retailers or other intermediaries; it's where they always go to look for what they need. Getting customers to change their normal buying behavior—for example, convincing consumers to buy their laundry detergent or frozen pizza from a catalog or over the Internet instead of from the corner supermarket—can be difficult. In addition, intermediaries help producers in all the ways we described previously. By creating utility and transaction efficiencies, channel members make producers' lives easier and enhance their ability to reach customers. The producer-retailer-consumer channel in Figure 11.3 is the shortest indirect channel. Samsung uses this channel when it sells TVs through large retailers such as Best Buy (either their brick-and-mortar stores or their online store). Because the retailers buy in large volume, they can obtain inventory at a low price and then pass these savings on to shoppers (this is what gives them a competitive advantage over smaller, more specialized stores that don't order so many items). The size of these retail giants also means they can provide the physical distribution functions that wholesalers handle for smaller retail outlets, such as transportation and storage. The producer-wholesaler-retailer-consumer channel is a common distribution channel in consumer marketing. An example would be a single ice cream factory that supplies, say, four or five regional wholesalers. These wholesalers then sell to 400 or more retailers, such as grocery stores. The retailers, in turn, each sell the ice cream to thousands of customers. In this channel, the regional wholesalers combine many manufacturers' products to supply grocery stores. Because the grocery stores do business with many wholesalers, this arrangement results in a broad selection of products. You'll read more about retailers in Chapter 12, but given the preceding discussion, this is a good spot to bring up the current and growing craze for instant customer gratification via same-day delivery for virtually anything! If you've never done so, do a quick check online of Google Express. There you can get fast delivery on everyday essentials from stores like Walmart, Costco, Target, and Walgreens. Visit the Postmates website, whose tagline is "You crave. We get it." If your zip code is in their service area, you likely will find a wide variety of restaurant meal items available for delivery quicker than getting in your car, picking it up, and driving home. And goPuff messages "Goodbye convenience store. Hello goPuff" for "thousands of products delivered super fast, with nothing but a few clicks in between." Think of college students ordering late-night munchies and having them delivered to their dorm room quicker than going to the closest 7-11. In the service sector, TaskRabbit's homepage features this headline: "The convenient and fast way to get things done around the house. Choose from over 60,000 carefully vetted and feedback rated Taskers to get quick help" on things like furniture assembly, moving and packing, heavy lifting, mounting and installation, and other tasks. The online and mobile marketplace is owned by IKEA and matches freelance labor with local demand to provide immediate assistance.5 B2B Channels B2B distribution channels, as the name suggests, facilitate the flow of goods from a producer to an organizational or business customer. Generally, B2B channels parallel consumer channels in that they may be direct or indirect. For example, the simplest indirect channel in industrial markets occurs when the single intermediary—a merchant wholesaler we refer to as an industrial distributor rather than a retailer—buys products from a manufacturer and sells them to business customers. Direct channels are more common in B2B markets versus consumer markets. As we saw in Chapter 6, this is because B2B marketing often means that a firm sells high-dollar, high-profit items (a single piece of industrial equipment may cost hundreds of thousands of dollars) to a market made up of only a few customers. In such markets, it makes sense financially for a company to develop its own sales force and sell directly to customers—in this case, the investment in an in-house sales force pays off. Dual and Hybrid Distribution Systems Figure 11.3 illustrates how simple distribution channels work. But, once again, we are reminded that life (or marketing) is rarely that simple: Producers, dealers, wholesalers, retailers, and customers alike may actually participate in more than one type of channel, as illustrated earlier by P&G adding its own online store. Similarly, bedding manufacturer Boll & Branch opened its first physical location in 2017 in a luxury mall in New Jersey despite the fact that its bedding doesn't carry a luxury price tag. The company had a desire to prove that its less expensive bedding was actually better than some of the options with much higher prices—the only way to show the skeptics was to give them an opportunity to feel the difference.6 And even venerable online distribution channel Amazon took the plunge into bricks-and-mortar in the grocery space when it acquired Whole Foods, with the intent to use the stores for product pickup. We call these approaches dual or multiple distribution systems. The pharmaceutical industry provides a good example of multiple-channel usage. Pharmaceutical companies distribute their products in at least three types of channels: They sell to hospitals, clinics, and other organizational customers directly. These customers buy in quantity, and they purchase a wide variety of products. Because hospitals and clinics dispense pills one at a time rather than in bottles of 50, these outlets require different product packaging than when the manufacturer sells medications to other types of customers. They rely on an indirect consumer channel when they sell to large drugstore chains, like Walgreens, that distribute the medicines to their stores across the country. Alternatively, some of us would rather purchase our prescriptions in a more personal manner from the local independent drugstore where we can still get an ice cream soda while we wait. In this version of the indirect consumer channel, the manufacturer sells to drug wholesalers that, in turn, supply these independents. Finally, the companies sell directly to third-party payers such as HMOs, PPOs, and insurance companies. Make no mistake though; pharmaceutical firms in the U.S. are mindful that the future of healthcare distribution channels is far from clear, despite the failure to repeal the Affordable Care Act. Instead of serving a target market with a single channel, some companies combine channels—direct sales, distributors, retail sales, and direct mail—to create a hybrid marketing system.7 Believe it or not, the whole world of business actually has not gone paperless (amazing, isn't it)! Hence, companies actually do still buy copying machines (sounds so 1999)—and in large quantities. At one time, you could buy a Xerox copier only directly through a Xerox salesperson. Today, unless you are a very large business customer, you likely will purchase a Xerox machine from a local Xerox authorized dealer or possibly through the Shop Xerox website.8 Xerox turned to an enhanced dealer network for distribution because such hybrid marketing systems offer companies certain competitive advantages, including increased coverage of the market, lower marketing costs, and a greater potential for customization of service for local markets.

Channel intermediaries

Firms or individuals such as wholesalers, agents, brokers, or retailers who help move a product from the producer to the consumer or business user. An older term for intermediaries is middlemen.

the evolution of distribution functions

In the future, channel intermediaries that physically handle the product may become obsolete. Already companies are eliminating many traditional intermediaries because they find that they don't add enough value in the distribution channel—a process we call disintermediation (of the channel of distribution). Literally, disintermediation means removal of intermediaries! For marketers, disintermediation reduces costs in many ways: fewer employees, no need to buy or lease expensive retail property in high-traffic locations, and no need to furnish a store with fancy fixtures and decor. You can also see this process at work when you pump your own gas, withdraw cash from an ATM, or book a roundtrip flight and a hotel stay with a website such as Kayak. As with many other aspects of marketing, the Internet is radically changing how companies coordinate among members of a supply chain to make it more effective in ways that end consumers never see. These firms develop better ways to implement knowledge management, which refers to a comprehensive approach that collects, organizes, stores, and retrieves a firm's information assets. Those assets include databases and company documents as well as the practical knowledge of employees whose past experience may be relevant to solve a new problem. In the world of B2B, this process probably occurs via an intranet, which, as you read in Chapter 4, is an internal corporate communication network that uses Internet technology to link company departments, employees, and databases. But it can also facilitate sharing of knowledge among channel partners because it is a secure and password-protected platform. This more strategic management of information results in a win-win situation for all the partners. But as with most things cyber, the Internet as a distribution channel brings pain with pleasure. One of the more vexing problems with Internet distribution is the potential for online distribution piracy, which is the theft and unauthorized repurposing of intellectual property via the Internet. At the core, such piracy amounts to copyright infringement, which is the use of works protected by copyright law without the permission of the copyright holder. Bringing things close to home, the college textbook industry has high potential for online piracy. It's not uncommon for U.S.-produced textbooks to make their way to unscrupulous individuals outside the home country who translate the core content into the native language and post it online for distribution. This practice completely devalues the knowledge contained therein and results in zero return to the knowledge creators (namely, your humble textbook authors!). Many students don't realize that the only people who profit from used or pirated books are the middlemen who have obtained them (sometimes illegally). Used books do sell for less, but because the publisher does not see any revenue from these sales, it is forced to raise prices to return a profit. This results in a vicious cycle as new books become more and more expensive, which motivates more students to buy them illegitimately, and so the madness continues. Let's look at a similar distribution issue in a product category that's probably more familiar to you. Unauthorized downloads of music continue to pose a major challenge to the "recording" industry—to the point where the whole nature of the industry has turned topsy-turvy in search of a new business model that works. Many in the music business are rethinking exactly what—and where—is the value-added for what they do. To the majority of modern consumers of music, the value of a physical CD has plummeted—to the point where many listeners are unwilling to pay anything at all for the artist's work. And more and more musical artists, like Chance the Rapper and Nipsey Hussle, have defected from traditional record labels to introduce their tunes online, where they can control at least some of the channel of distribution.1 On the other hand, other stars, such as Garth Brooks and Aaliyah, decline to make their albums available on Spotify so that fans can stream them.2 There's still a lot of turbulence in this channel! In addition to music, TV shows and movies also tend to be obvious targets for piracy online. For a company such as Netflix that legally partners with content providers to make their content available online for a fee, distribution piracy is a serious issue for both parties. A new popular messaging app, Telegram, has become a forum for people sharing stolen login credentials for services like Netflix and Spotify.3 Interestingly, Netflix actually adjusts its prices lower in markets outside the U.S. that have higher rates of piracy to attract a larger number of consumers to the legitimate offerings through the company website. In addition, Netflix believes that making legal access to content an easier and more convenient experience can lead to decreases in piracy. So far, we've learned what a distribution channel is and talked about some of the functions it performs. Now let's find out about specific types of channel intermediaries and channel structures. Wholesaling Intermediaries How can you get your hands on a new Drake T-shirt or hoodie? You could pick one up at your local music store, at a trendy clothing store like Hot Topic, or maybe at its online store. You might join hordes of others and buy an "official Drake concert T-shirt" from vendors during a show. Alternatively, you might get a "deal" on a bootlegged, unauthorized version of the same shirt that a shady guy who stands outside the concert venue sells from a battered suitcase. Perhaps you shop online at www.drakeofficial.com. Each of these distribution alternatives traces a different path from producer to consumer. Let's look at the different types of wholesaling intermediaries and at different channel structures. Note that we will hold off focusing on retailers, which are usually the last link in the chain, until Chapter 12. Retailers are a big deal and deserve a chapter of their own. Figure 11.2 portrays key intermediary types, and Table 11.1 summarizes the important characteristics of each. Table 11.1Types of Intermediaries Intermediary Type Description Advantages Independent intermediaries Do business with many different manufacturers and many different customers Used by most small to medium-size firms Merchant wholesalers Buy (take title to) goods from producers and sell to organizational customers; either full or limited function Allow small manufacturers to serve customers throughout the world with competitive costs Cash-and-carry wholesalers Provide products for small-business customers who purchase at wholesaler's location Distribute low-cost merchandise for small retailers and other business customers Truck jobbers Deliver perishable food and tobacco items to retailers Ensure that perishable items are delivered and sold efficiently Drop shippers Take orders from and bill retailers for products drop shipped from manufacturer Facilitate transactions for bulky products Mail-order wholesalers Sell through catalogs, telephone, or mail order Provide reasonably priced sales options to small organizational customers Rack jobbers Provide retailers with display units, check inventories, and replace merchandise for retailers Provide merchandising services to retailers Merchandise agents and brokers Provide services in exchange for commissions Maintain legal ownership of product by the seller Manufacturers' agents Use independent salespeople; carry several lines of noncompeting products Supply sales function for small and new firms Selling agents, including export/import agents Handle entire output of one or more products Handle all marketing functions for small manufacturers Commission merchants Receive commission on sales price of product Provide efficiency primarily in agricultural products market Merchandise brokers, including export/import brokers Identify likely buyers and bring buyers and sellers together Enhance efficiency in markets where there are many small buyers and sellers Manufacturer-owned intermediaries Limit operations to one manufacturer Create efficiencies for large firms Sales branches Maintain some inventory in different geographic areas (similar to wholesalers) Provide service to customers in different geographic areas Sales offices Carry no inventory; availability in different geographic areas Reduce selling costs and provide better customer service Manufacturers' showrooms Display products attractively for customers to visit Facilitate examination of merchandise by customers at a central location Wholesaling intermediaries are firms that handle the flow of products from the manufacturer to the retailer or business user. There are many different types of consumer and B2B wholesaling intermediaries. Some of these are independent, but manufacturers and retailers can own them too. Independent Intermediaries Independent intermediaries do business with many different manufacturers and many different customers. Because no manufacturer owns or controls them, they make it possible for many manufacturers to serve customers throughout the world while they keep prices low. Merchant wholesalers are independent intermediaries that buy goods from manufacturers and sell to retailers and other B2B customers. Because merchant wholesalers take title to the goods (i.e., they legally own them), they assume certain risks and can suffer losses if products are damaged, become outdated or obsolete, are stolen, or just don't sell. On the other hand, because they own the products, they are free to develop their own marketing strategies, including setting the prices they charge their customers. Wait, it gets better: There are several different kinds of merchant wholesalers: Full-service merchant wholesalers provide a wide range of services for their customers, including delivery, credit, product-use assistance, repairs, advertising, and other promotional support—even market research. Full-service merchant wholesalers often have their own sales force to call on businesses and organizational customers. Some general merchandise wholesalers carry a large variety of different items, whereas specialty wholesalers carry an extensive assortment of a single product line. For example, a candy wholesaler carries only candy and gum products but stocks enough different varieties to give your dentist nightmares for a year. In contrast, limited-service merchant wholesalers provide fewer services for their customers. Like full-service wholesalers, limited-service wholesalers take title to merchandise but are less likely to provide services such as delivery, credit, or marketing assistance to retailers. Specific types of limited-service wholesalers include the following: Cash-and-carry wholesalers provide low-cost merchandise for retailers and industrial customers that are too small for other wholesalers' sales representatives to call on. Customers pay cash for products and provide their own delivery. Some popular cash-and-carry product categories include groceries, office supplies, and building materials. Truck jobbers carry their products to small business customer locations for their inspection and selection. Truck jobbers often supply perishable items, such as fruit and vegetables, to small grocery stores. For example, a bakery truck jobber calls on supermarkets, checks the stock of bread on the shelves, removes outdated items, and suggests how much bread the store needs to reorder. Drop shippers are limited-function wholesalers that take title to the merchandise but never actually take possession of it. Drop shippers take orders from and bill retailers and industrial buyers, but the merchandise is shipped directly from the manufacturer. Because they take title to the merchandise, they assume the same risks as other merchant wholesalers. Drop shippers are important to both the producers and the customers of bulky products, such as coal, oil, or lumber. Mail-order wholesalers sell products to small retailers and other industrial customers, often located in remote areas, through catalogs rather than a sales force. They usually carry products in inventory and require payment in cash or by credit card before shipment. Mail-order wholesalers supply products such as cosmetics, hardware, and sporting goods. Rack jobbers supply retailers with specialty items, such as health and beauty products and magazines. Rack jobbers get their name because they own and maintain the product display racks in grocery stores, drugstores, and variety stores. These wholesalers visit retail customers on a regular basis to maintain levels of stock and refill their racks with merchandise. Think about how quickly magazines turn over on the rack; without an expert who pulls old titles and inserts new ones, retailers would have great difficulty ensuring that you can buy the current issue of People magazine on the first day it hits the streets. Merchandise agents or brokers are a second major type of independent intermediary. Agents and brokers provide services in exchange for commissions. They may or may not take possession of the product, but they never take title; that is, they do not accept legal ownership of the product. Agents normally represent buyers or sellers on an ongoing basis, whereas clients employ brokers for a short period of time: Manufacturers' agents, or manufacturers' reps, are independent salespeople who carry several lines of noncompeting products. They have contractual arrangements with manufacturers that outline territories, selling prices, and other specific aspects of the relationship but provide little if any supervision. Manufacturers normally compensate agents with commissions based on a percentage of what they sell. Manufacturers' agents often develop strong customer relationships and provide an important sales function for small and new companies. Selling agents, including export/import agents, market a whole product line or one manufacturer's total output. They often work like an independent marketing department because they perform the same functions as full-service merchant wholesalers but do not take title to products. Unlike manufacturers' agents, selling agents have unlimited territories and control the pricing, promotion, and distribution of their products. We find selling agents in industries such as furniture, clothing, and textiles. Commission merchants are sales agents who receive goods, primarily agricultural products, such as grain or livestock, on consignment—that is, they take possession of products without taking title. Although sellers may state a minimum price they are willing to take for their products, commission merchants are free to sell the product for the highest price they can get. Commission merchants receive a commission on the sales price of the product. Merchandise brokers, including export/import brokers, are intermediaries that facilitate transactions in markets such as real estate, food, and used equipment, in which there are lots of small buyers and sellers. Brokers identify likely buyers and sellers and bring the two together in return for a fee they receive when the transaction is completed. Manufacturer-Owned Intermediaries Sometimes manufacturers set up their own channel intermediaries. In this way, they can operate separate business units that perform all the functions of independent intermediaries while still maintaining complete control over the channel: Sales branches are manufacturer-owned facilities that, like independent wholesalers, carry inventory and provide sales and service to customers in a specific geographic area. We find sales branches in industries such as petroleum products, industrial machinery and equipment, and motor vehicles. Sales offices are manufacturer-owned facilities that, like agents, do not carry inventory but provide selling functions for the manufacturer in a specific geographic area. Because they allow members of the sales force to locate close to customers, they reduce selling costs and provide better customer service. Manufacturers' showrooms are manufacturer-owned or leased facilities in which products are permanently displayed for customers to visit. Merchandise marts are often multiple buildings in which one or more industries hold trade shows, and many manufacturers have permanent showrooms. Retailers can visit either during a show or all year long to see the manufacturer's merchandise and make B2B purchases.

direct channel

a channel of distribution in which a manufacturer of a product or creator of a service distributes directly to the end customer

vertical marketing system

a channel of distribution in which there is formal cooperation among members at the manufacturing, wholesaling, and retailing levels

knowledge management

a comprehensive approach to collecting, organizing, storing, and retrieving a firm's information assets

Franchise organization

a contractual vertical marketing system that includes a franchiser who allows an entrepreneur to use the franchise name and marketing plan for a fee

gray market

a distribution channel in which a product's sale to a customer may be technically legal, but is at a minimum considered inappropriate by the manufacturer of the related product. Gray markets often emerge around high-end luxury goods sold through exclusive distribution

slotting allowance

a fee paid in exchange for agreeing to place a manufacturer's products on a retailer's valuable shelf space

retailer cooperative

a group of retailers that establishes a wholesaling operation to help them compete more effectively with the large chains

level loading

a manufacturing approach intended to balance the inventory holding capabilities and production capacity constraints of a manufacturer for a particular product through the implementation of a consistent production schedule, employed both during and beyond periods of peak demand

hybrid marketing system

a marketing system that uses a number of different channels and communication methods to serve a target market

conventional marketing system

a multiple-level distribution channel in which channel members work independently of one another

subscription boxes

a new business model for distribution that supplies surprises by sending out a box each month filled with items you never knew you wanted but you just have to have

insourcing

a practice in which a company contracts with a specialist firm to handle all or part of its supply chain operations

Enterprise Resource Planning (ERP)

a software system that integrates information from across the entire company, including finance, order fulfillment, manufacturing, and transportation, and then facilitates sharing of the data throughout the firm

dual or multiple distribution systems

a system where producers, dealers, wholesalers, retailers, and customers participate in more than one type of channel

corporate vms

a vertical marketing system in which a single firm owns manufacturing, wholesaling, and retailing operations

Administered VMS

a vertical marketing system in which channel members remain independent but voluntarily work together because of the power of a single channel member

contractual vms

a vertical marketing system in which cooperation is enforced by contracts (legal agreements) that spell out each member's rights and responsibilities and how they will cooperate

distribution center

a warehouse that stores goods for short periods of time and that provides other functions, such as breaking bulk

inventory control

activities to ensure that goods are always available to meet customers' demands

supply chain

all the activities necessary to turn raw materials into a good or service and put it in the hands of the consumer or business customer

horizontal marketing system

an arrangement within a channel of distribution in which two or more firms at the same channel level work together for a common purpose

diverter

an entity that facilitates the distribution of a product through one or more channels not authorized for use by the manufacturer of the product

intranet

an internal corporate communication network that uses internet technology to link company departments, employees, and databases

channel leader or channel captain

the dominant firm that controls the channel

disintermediation (of the channel of distribution)

the elimination of some layers of the channel of distribution in order to cut costs and improve the efficiency of the channel

supply chain management

the management of flows among firms in the supply chain to maximize total profitability

transportation

the mode by which products move among channel members

materials handling

the moving of products into, within, and out of warehouses

channel levels

the number of distinct categories of intermediaries that make up a channel of distribution

distribution intensity

the number of supply chain members to use at each level of the supply chain

Inventory Turnover, or inventory turns

the number of times a firm's inventory completely cycles through during a defined time frame

online distribution piracy

the theft and unauthorized repurposing of intellectual property via the internet

copyright infringement

the use of works protected by copyright law without the permission of the copyright holder

take title

to accept legal ownership of a product and assume the accompanying rights and responsibilities of ownership

create assortments

to provide a variety of products in one location to meet the needs of buyers

full-service merchant wholesalers

wholesalers that provide a wide range of services for their customers, including delivery, credit, product-use assistance, repairs, advertising, and other promotional support

limited-service merchant wholesalers

wholesalers that provide fewer services for their customers

stock-outs

zero-inventory situations resulting in lost sales and customer dissatisfaction

emerging trends in logistics and supply chain

As a marketing student today, you are poised to experience the impact of several major trends, some disruptive to markets, that will change the face of the field. In fact, in marketing planning and strategy, staying cutting-edge in these areas often yields very high potential for competitive advantages as many firms fail to invest in state-of-the-art logistics and supply chain capabilities. Technology will drive its share of these opportunities. For example, while the full potential of integrating drones into the distribution mix hasn't yet been realized, it won't be long before it is commonplace to get a pizza air-dropped to your front porch—and this is just the tip of the iceberg. Artificial intelligence (AI), introduced in Chapter 1, is a key enabling capability behind autonomous, or "driverless," vehicles. Think of how much of the transportation of products in the future can be shifted to autonomous means and what a cost savings this will be for both firms and consumers. Imagine, for example, a whole fleet of Walmart trucks without drivers!29 Amazon continues to lead the charge toward many of the disruptive changes in logistics and supply chain. In Chapter 5 we defined anticipatory shipping as a system of delivering products to customers before they place an order, utilizing predictive analytics to determine what customers want and then shipping the products automatically. For Amazon, their anticipatory shipping algorithm for orders literally gives them the capability to make highly accurate supply and shipping decisions even before a customer's next purchase decisions are fully finalized. At the core, the concept is intended to reduce the time from order to receipt of goods, which creates a win-win outcome for supplier and customer (assuming a high level of accuracy in the algorithm's estimates, of course). This system is so valuable to Amazon's future that they applied for and received a patent on the process, which is officially described by the patent office as "a method for shipping a package of one or more items to the destination geographical area without completely specifying the delivery address at the time of shipment, with the final destination defined en route." Wow—talk about getting ahead of the game! And just because Amazon's approach is patented doesn't mean that other retailers aren't working on perfecting their own versions of the same concept.30 In Chapter 1, you were introduced to the concept of the sharing economy in which non-ownership forms of consumption have grown increasingly popular as more consumers continue to turn toward the renting, sharing, lending, and bartering of products and services. This trend has several obvious implications for the future of not only logistics and supply chain but also, more broadly, channels and physical distribution in general. For example, Task Rabbit (mentioned earlier in the chapter) and other similar crowdsourcing websites enable direct peer-to-peer collaborations for time and skill sharing and contribute to a decreased demand for access to products and services from the traditional corporate marketplace—both business-to-business (B2B) and business-to-consumer (B2C) markets. The key question becomes, how should the elements of supply chain and related aspects be optimally set up and executed in a customer-to-customer (C2C) marketplace instead of those familiar B2C or B2B market scenarios? That is, the trend toward a sharing economy clearly impacts consumer behaviour and marketing communication, but don't underestimate its potential impact on market planning and strategy development on how goods and services are distributed as well. In the end, these examples reinforce the fact that you are very fortunate to be studying marketing at a time of exciting possibilities as well as disruptive changes, both of which create many opportunities for savvy marketers. We believe that logistics and supply chain innovation and optimization represents a huge opportunity for firms to improve their performance with customers, reduce costs, and thus improve their overall competitiveness in the marketplace.

Ethics in the distribution channel

Companies' decisions about how to make their products available to consumers through distribution channels can create ethical dilemmas. For example, because their size gives them great bargaining power when they negotiate with manufacturers, many large retail chains force manufacturers to pay a slotting allowance—a fee in exchange for agreeing to place a manufacturer's products on a retailer's valuable shelf space. Although the retailers claim that such fees pay the cost of adding products to their inventory, many manufacturers feel that slotting fees are more akin to highway robbery. Certainly, the practice prevents many smaller manufacturers that cannot afford the slotting allowances from getting their products into the hands of consumers. It may seem odd to you that in some cases products end up being sold through one or more channels that the manufacturer did not authorize. This practice is known as product diversion, and it can be a big problem for manufacturers due to loss of control that results once the product is in the hands of unauthorized distributors and retailers. An additional concern for many manufacturers is that their products, once diverted, will end up being sold at a price or in a form that damages both the brand and the firm's relationship with its authorized distributors. Such practices are common for beauty products that are sold exclusively through salons and other hair care professionals. Salon-quality brands like Tigi, Redken, Pureology, Kérastase, and others actively message to consumers about potential risks associated with buying their products outside of the established professional salon distribution channel, including product counterfeits, old or out-of-date merchandise, diluted formulas, and other safety concerns with their use, such as contamination.12 So who perpetrates product diversion? Most often, a diverter turns out to be one or more of the manufacturer's own regular customers that purposefully overbuys product when it is offered at special promotional prices, holds it in inventory until the promotion is over, and then sells the product within the channel. Also, retailers or distributors may be tempted to simply divert incidental excess inventory of a product that they do not expect to be able to sell through legitimate means. Another ethical issue involves the sheer size of a particular channel intermediary—be it manufacturer, wholesaler, retailer, or other intermediary. Walmart, the poster child for giant retailers, has been vilified for years as contributing to the demise of scores of independent competitors (i.e., mom-and-pop stores). In more recent years, the company has begun a very visible program to help its smaller rivals. The program offers financial grants to hardware stores, dress shops, and bakeries near its new urban stores; training on how to survive with a Walmart in town; and even free advertising in Walmart stores. Although certainly beneficial to the small fry, Walmart also hopes to benefit from the program in urban settings like Los Angeles and New York, where its plan to build new stores in inner-city neighborhoods has met with mixed reactions from local communities.13 Overall, it is important for all channel intermediaries to behave and treat each other in a professional, ethical manner—and to do no harm to consumers (financially or otherwise) through their channel activities. Every intermediary in the channel wants to make money, but behavior by one to maximize its financial success at the expense of others' success is a doomed approach, as ultimately cooperation in the channel will break down. Instead, it behooves intermediaries to work cooperatively in the channel to distribute products to consumers in an efficient manner—making the channel a success for everybody participating in it (including consumers)! Win-win!

transportation

Logistics decisions take into consideration options for transportation, the mode by which products move among channel members. Again, making transportation decisions entails a compromise between minimizing cost and providing the service customers want. As Table 11.3 shows, modes of transportation, including railroads, water transportation, trucks, airways, pipelines, and the Internet, differ in the following ways: Dependability: The ability of the carrier to deliver goods safely and on time Cost: The total transportation costs to move a product from one location to another, including any charges for loading, unloading, and in-transit storage Speed of delivery: The total time to move a product from one location to another, including loading and unloading Accessibility: The number of different locations the carrier serves Capability: The ability of the carrier to handle a variety of different products, such as large or small, fragile, or bulky Traceability: The ability of the carrier to locate goods in shipment Each mode of transportation has strengths and weaknesses that make it a good choice for different transportation needs. Table 11.3 summarizes the pros and cons of each mode: Railroads: Railroads are best to carry heavy or bulky items, such as coal and other mining products, over long distances. Railroads are about average in their cost and provide moderate speed of delivery. Although rail transportation provides dependable, low-cost service to many locations, trains cannot carry goods to every community. Water: Ships and barges carry large, bulky goods and are very important in international trade. Water transportation is relatively low in cost but can be slow. Trucks: Trucks or motor carriers are the most important transportation mode for consumer goods, especially for shorter hauls. Motor carrier transport allows flexibility because trucks can travel to locations missed by boats, trains, and planes. Trucks also carry a wide variety of products, including perishable items. Although costs are fairly high for longer-distance shipping, trucks are economical for shorter deliveries. Because trucks provide door-to-door service, product handling is minimal, and this reduces the chance of product damage. Air: Air transportation is the fastest and also the most expensive transportation mode. It is ideal to move high-value items such as important mail, fresh-cut flowers, and live lobsters. Passenger airlines, air-freight carriers, and express delivery firms, such as FedEx, provide air transportation. Ships remain the major mover of international cargo, but air transportation networks are becoming more important as international markets continue to develop. Drones are an interesting option for transporting items over short distances by air. Amazon has heavily invested in drone technology to enhance its logistics operations. Where applicable, Amazon Prime Air service pledges to deliver packages to customers in 30 minutes or less using a fleet of these small unmanned aerial vehicles.21 And UberEats already delivers "flying burgers" to residents in San Diego as Uber ramps up its drone food delivery service.22 Just be careful not to get hit by a flying ketchup packet. Pipeline: Pipelines carry petroleum products, such as oil and natural gas and a few other chemicals. Pipelines flow primarily from oil or gas fields to refineries. They are very low in cost, require little energy, and are not subject to disruption by weather. The Internet: As we discussed previously in this chapter, marketers of services such as banking, news, and entertainment take advantage of distribution opportunities the Internet provides. Amazon is experimenting with an Amazon Prime Air drone delivery service that has the potential to add a whole new dimension to transportation options for logistics companies. Polaris/Newscom Table 11.3A Comparison of Transportation Modes Transportation Mode Dependability Cost Speed of Delivery Accessibility Capability Traceability Most Suitable Products Railroads Average Average Moderate High High Low Heavy or bulky goods, such as automobiles, grain, and steel Water Low Low Slow Low Moderate Low Bulky, nonperishable goods, such as automobiles Trucks High High for long distances; low for short distances Fast High High High A wide variety of products, including those that need refrigeration Air High High Very fast Low Moderate High High-value items, such as electronic goods and fresh flowers Pipeline High Low Slow Low Low Moderate Petroleum products and other chemicals Internet High Low Very fast Potentially very high Low High Services such as banking, information, and entertainment Inventory Control Another component of logistics is inventory control, which means developing and implementing a process to ensure that the firm always has sufficient quantities of goods available to meet customers' demands—no more and no less. This explains why firms work so hard to track merchandise in order to know where their products are and where they are needed in case a low-inventory situation appears imminent. Some companies are even phasing in a sophisticated technology (similar to the EZ Pass system many drivers use to speed through tollbooths) known as radio frequency identification (RFID). As we saw in Chapter 2, RFID lets firms tag clothes, pharmaceuticals, or virtually any kind of product with tiny chips that contain information about the item's content, origin, and destination. This technology has the potential to revolutionize inventory control and help marketers ensure that their products are on the shelves when people want to buy them. Great for manufacturers and retailers, right? But some consumer groups are creating a backlash against RFID, which they refer to as "spy chips." Through blogs, boycotts, and other anti-company initiatives, these groups proclaim that RFID is a personification of the privacy violations George Orwell predicted in his classic book 1984.23 Firms store goods (i.e., they create an inventory) for many reasons. For manufacturers, sometimes the pace of production may not match seasonal demand, and as a result, a firm might engage in a practice known as level loading. This is a manufacturing approach intended to balance the inventory holding capabilities and production capacity constraints of a manufacturer for a particular product through the implementation of a consistent production schedule, employed both during and beyond periods of peak demand. For example, it may be more economical to produce snow skis year-round and pay to store them for the colder months than to produce them only during the winter season. This is a result of capacity issues related to the number of snow skis that a manufacturer can produce in a given span of time on existing production lines and with its available work force. Similarly, for channel members that purchase goods from manufacturers or other channel intermediaries, it may be economical to order a product in quantities that don't exactly parallel demand. For example, delivery costs make it prohibitive for a retail gas station to place daily orders for just the amount of gas that people will use that day. Instead, stations usually order truckloads of gasoline, holding their inventory in underground tanks. Stock-outs, which are zero-inventory situations resulting in lost sales and customer dissatisfaction, may be very negative. Ever go to the store based on an ad in the newspaper, only to find the store doesn't have the product on hand? Inventory control has a major impact on the overall costs of a firm's logistics initiatives. If supplies of products are too low to meet fluctuations in customer demand, a firm may have to make expensive emergency deliveries or else lose customers to competitors. If inventories are above demand, unnecessary storage expenses and the possibility of damage or deterioration occur. To balance these two opposing needs, manufacturers turn to just-in-time (JIT) inventory techniques with their suppliers. JIT sets up delivery of goods just as they are needed on the production floor. This minimizes the cost of holding inventory while ensuring the inventory will be there when customers need it. A supplier's ability to make on-time deliveries is the critical factor in the selection process for firms that adopt this kind of system. JIT systems reduce stock to very low levels (or even zero) and time deliveries very carefully to maintain just the right amount of inventory. The advantage of JIT systems is the reduced cost of warehousing. For both manufacturers and resellers that use JIT systems, the choice of supplier may come down to one whose location is nearest. To win a large customer, a supplier may even have to be willing to set up production facilities close to the customer to guarantee JIT delivery.24 A penultimate outcome of great logistics that we can all easily relate to is the trend toward online ordering and in-store pickup. BestBuy is a great example, as the firm has turned a former lemon into lemonade through its outstanding execution of this capability. In the past, BestBuy suffered mightily from browsers in their stores who would then go home after experiencing a product and purchase it for a lower price somewhere else online. But now BestBuy has turned the tables on competitors by creating several quick and convenient options under its Fast Store Pickup program. Today's customers "want it now," and logistics is a key tool to successfully fulfill that want and gain competitive advantage.25

Step 3: Choose a Distribution Strategy

Planning a distribution strategy means making several decisions. First, of course, distribution planning includes decisions about the number of levels in the distribution channel. We already discussed these options in the previous section on consumer and B2B channels, illustrated by Figure 11.3. Beyond the number of levels, distribution strategies also involve two additional decisions about channel relationships: (1) whether a conventional system or a highly integrated system will work best and (2) the proper distribution intensity, meaning the number of intermediaries at each level of the channel. The next sections provide insight into making these two distribution strategy decisions. Decision 1: Conventional, Vertical, or Horizontal Marketing System? Participants in any distribution channel form an interrelated system. In general, these marketing systems take one of three forms: conventional, vertical, or horizontal. A conventional marketing system is a multilevel distribution channel in which members work independently of one another. Their relationships are limited to simply buying and selling from one another. Each firm seeks to benefit, with little concern for other channel members. Even though channel members work independently, most conventional channels are highly successful. For one thing, all members of the channel work toward the same goals—to build demand, reduce costs, and improve customer satisfaction. And each channel member knows that it's in everyone's best interest to treat other channel members fairly. A vertical marketing system (VMS) is a channel in which there is formal cooperation among channel members at two or more different levels: manufacturing, wholesaling, and retailing. Firms develop VMSs as a way to meet customer needs better by reducing costs incurred in channel activities. Often, a VMS can provide a level of cooperation and efficiency not possible with a conventional channel, maximizing the effectiveness of the channel while also maximizing efficiency and keeping costs low. Members share information and provide services to other members; they recognize that such coordination makes everyone more successful when they want to reach a desired target market. There are three types of vertical marketing systems: administered, corporate, and contractual: In an administered VMS, channel members remain independent but voluntarily work together because of the power of a single channel member. Strong brands are able to manage an administered VMS because resellers are eager to work with the manufacturer so they will be allowed to carry the product. In a corporate VMS, a single firm owns manufacturing, wholesaling, and retailing operations. Thus, the firm has complete control over all channel operations. Retail giant Macy's, for example, owns a nationwide network of distribution centers and retail stores. In a contractual VMS, cooperation is enforced by contracts (legal agreements) that spell out each member's rights and responsibilities and how they will cooperate. This arrangement means that the channel members can have more impact as a group than they could alone. In a wholesaler-sponsored VMS, wholesalers get retailers to work together under their leadership in a voluntary chain. Retail members of the chain use a common name, cooperate in advertising and other promotions, and even develop their own private-label products. Examples of wholesaler-sponsored chains are Independent Grocers' Alliance (IGA) food stores and Ace Hardware stores. In other cases, retailers themselves organize a cooperative marketing channel system. A retailer cooperative is a group of retailers that establishes a wholesaling operation to help them compete more effectively with the large chains. Each retailer owns shares in the wholesaler operation and is obligated to purchase a certain percentage of its inventory from the cooperative operation. Associated Grocers and True Value hardware stores are examples of retailer cooperatives. Franchise organizations are a third type of contractual VMS. Franchise organizations include a franchiser (a manufacturer or a service provider) who allows an entrepreneur (the franchisee) to use the franchise name and marketing plan for a fee. In these organizations, contractual arrangements explicitly define and strictly enforce channel cooperation. In most franchise agreements, the franchiser provides a variety of services for the franchisee, such as helping to train employees, giving access to lower prices for needed materials, and selecting a good location. In return, the franchiser receives a percentage of revenue from the franchisee. Usually, the franchisees are obligated to follow the franchiser's business format very closely to maintain the franchise. From the manufacturer's perspective, franchising a business is a way to develop widespread product distribution with minimal financial risk while at the same time maintaining control over product quality. From the entrepreneur's perspective, franchises are a helpful way to get a start in business. In a horizontal marketing system, two or more firms at the same channel level agree to work together to get their product to the customer. Sometimes, unrelated businesses forge these agreements. Most airlines today are members of a horizontal alliance that allows them to cooperate when they provide passenger air service. For example, American Airlines is a member of the oneworld alliance, which also includes British Airways, Cathay Pacific, Finnair, Iberia, Japan Airlines, LATAM, Malaysia Airlines, Qantas, Qatar Airways, Royal Jordanian, S7 Airlines, and SriLankan Airlines. These alliances increase passenger volume for all airlines because travel agents who book passengers on one of the airline's flights will be more likely to book a connecting flight on the other airline. To increase customer benefits, they also share frequent-flyer programs and airport clubs.14 Decision 2: Intensive, Exclusive, or Selective Distribution? How many wholesalers and retailers should carry the product within a given market? This may seem like an easy decision: Distribute the product through as many intermediaries as possible. But guess again. If the product goes to too many outlets, there may be inefficiency and duplication of efforts. For example, if there are too many Honda dealerships in town, there will be a lot of unsold Hondas sitting on dealer lots, and no single dealer will be successful. But if there are not enough wholesalers or retailers to carry a product, the manufacturer will fail to maximize total sales of its products (and its profits). If customers have to drive hundreds of miles to find a Honda dealer, they may instead opt for a Toyota just because of convenience. Thus, a distribution objective may be to either increase or decrease the level of distribution in the market. The three basic choices are intensive, exclusive, and selective distribution. Table 11.2 summarizes five decision factors—company, customers, channels, constraints, and competition—and how they help marketers determine the best fit between distribution system and marketing goals. Read on, and you will find that these categories connect with the concept of convenience products, shopping products, and specialty products you learned about in Chapter 8. Table 11.2Characteristics That Favor Intensive versus Exclusive Distribution Decision Factor Intensive Distribution Exclusive Distribution Company Oriented toward mass markets Oriented toward specialized markets Customers High customer density Low customer density Price and convenience are priorities Service and cooperation are priorities Channels Overlapping market coverage Nonoverlapping market coverage Constraints Cost of serving individual customers is low Cost of serving individual customers is high Competition Based on a strong market presence, often through advertising and promotion Based on individualized attention to customers, often through relationship marketing Intensive distribution aims to maximize market coverage by selling a product through all wholesalers or retailers that will stock and sell the product. Marketers use intensive distribution for convenience products, such as chewing gum, soft drinks, milk, and bread that consumers quickly consume and must replace frequently. Intensive distribution is necessary for these products because availability is more important than any other consideration in customers' purchase decisions. In contrast to intensive distribution, exclusive distribution means to limit distribution to a single outlet in a particular region. Marketers often sell pianos, cars, executive training programs, TV programs, and many other specialty products with high price tags through exclusive distribution arrangements. They typically use these strategies with products that are high priced and have considerable service requirements and when a limited number of buyers exist in any single geographic area. Exclusive distribution enables wholesalers and retailers to better recoup the costs associated with long selling processes for each customer and, in some cases, extensive after-sale service. For luxury products, employing an exclusive distribution strategy can support the associations the marketer wants consumers to have with the product (such as exclusivity, quality, or mystique) and ensure that the product is offered by retailers who are well-suited and matched to the task. For example, the ultra-high-end watchmaker Patek Phillippe only sells its products through a small group of authorized retailers, and in many cases, each retailer only receives one unit of a new model each year. Authorized dealers are heavily vetted and ultimately are selected based on their fit and ability to sell and service the watches, which can range from 10,000 euros to more than 1 million euros in price. The company does not sell its watches online and does not expect its retailers to do so either.15 That said, if you search for a Patek Philippe watch online you will undoubtedly find some e-commerce sites selling the company's products they were able to acquire through the gray market. Gray markets often emerge around high-end luxury goods sold through exclusive distribution. Related to the concept of product diversion introduced previously in the chapter, the gray market represents those channels of distribution that are not formally defined and authorized by the manufacturer for sale of the product. Exchanges that occur in the gray market are not technically illegal (unlike the concept of an illegal "black market"); hence, the use of the intermediate color gray makes sense. But the original manufacturer of the product does not view gray markets as appropriate or beneficial. Of course, not every situation neatly fits a category in Table 11.2. (You didn't really think it would be that simple, did you?) For example, consider professional sports. Customers might not shop for games in the same way they shop for pianos. They might go to a game on impulse, and they don't require much individualized service. Nevertheless, professional sports use exclusive distribution. A team's cost of serving customers is high because of those million-dollar player salaries and multi-million-dollar stadiums. The alert reader (and/or sports fan) may note that there are some exceptions to the exclusive distribution of sports teams. New York has two football teams and two baseball teams, Chicago fields two baseball teams, and so on. We call market coverage that is less than intensive distribution but more than exclusive distribution selective distribution (yes, this type falls between the two). This model fits when demand is so large that exclusive distribution is inadequate but selling costs, service requirements, or other factors make intensive distribution a poor fit. Although a White Sox baseball fan may not believe that the Cubs franchise is necessary (and vice versa), Major League Baseball and even some baseball fans think the Chicago market is large enough to support both teams. Selective distribution strategies are suitable for most shopping products, such as household appliances and electronic equipment, for which consumers are willing to spend time visiting different retail outlets to compare alternatives. For producers, selective distribution means freedom to choose only those wholesalers and retailers that have a good credit rating, provide good market coverage, serve customers well, and cooperate effectively. Wholesalers and retailers like selective distribution because it results in higher profits than are possible with intensive distribution, in which sellers often have to compete on price.

distribution channels and the marketing mix

Recall that the elements of the marketing mix include product, promotion, place (meaning channel of distribution), and price. So how do decisions regarding place relate to the other three Ps? For one, place decisions affect pricing. Marketers that distribute products through low-priced retailers such as Walmart, T.J. Maxx, and Marshalls will have different pricing objectives and strategies than will those that sell to specialty stores like Tiffany or high-end department stores like Nordstrom. And, of course, the nature of the product itself influences the retailers and intermediaries that are used for distribution. Manufacturers select mass merchandisers to sell mid-price-range products while they distribute top-of-the-line products, such as expensive jewelry, through high-end department and specialty stores. Distribution decisions can sometimes give a product a distinct position in its market. For example, Ultradent Products, Inc., sells its teeth-whitening product Opalescence® exclusively through licensed dental professionals. Many other companies' teeth-whitening products are typically sold through traditional retail channels, making them much more easily available. However, Ultradent's approach allows the company to position Opalescence® as a higher-end product endorsed by professional experts. They rely on the dentist and staff to pitch the benefits of the product in a way that carries far more credibility with a patient than an ad by a retailer or manufacturer.9 In addition, the distribution channel itself—a cool new way you get the product—may help to position a product in a unique way vis-à-vis the competition. That is, the way you obtain a product can be one of the attributes that makes it appealing. A great example is the hot trend of subscription boxes, a business model that generates more than $5 billion in revenue per year. Many people love to get surprises in the mail (as long as they're not bills or a jury summons). Today, numerous upstart companies supply these surprises by sending out a box each month filled with items you never knew you wanted but you just have to have. Birchbox is one of the pioneers in this area, sending different boxes to women and men each month with samples of trendy new cosmetics, personal care products, and even socks and underwear. Many other competitors have entered the market to offer beauty boxes, such as Allure, Vegan Cuts Beauty Box (guess what kind of beauty products are in there), and even Target. Overall, McKinsey reports that the subscription e-commerce market has grown by more than 100 percent a year over the past five years and that 15 percent of online shoppers have signed up for one or more subscriptions to receive products on a recurring basis, frequently through monthly boxes.10 The subscription model includes other distribution channels as well, including gourmet food (Taste Club, Graze, BoCandy), fitness and weight-loss products (Bulu Box, Jacked Pack), razors and blades (Dollar Shaving Club), clothing (StitchFix, Trunk Club), and phone cases (Phone Case of the Month). More than 11 million Americans participated in subscription box services in 2017—the industry has seen triple-digit growth every year since 2011!11 What are you waiting for? Run, don't walk, to your mailbox!

risk-taking functions

The chance retailers take when they buy a product from a manufacturer, as the product might just sit on the shelf if no customers want it.

independent intermediaries

channel intermediaries that are not controlled by any manufacturer but instead do business with many different manufacturers and many different customers

merchandise agents or brokers

channel intermediaries that provide services in exchange for commissions but never take title to the product

selective distribution

distribution using fewer outlets than intensive distribution but more than exclusive distribution

breaking bulk

dividing larger quantities of goods into smaller lots in order to meet the needs of buyers

wholesaling intermediaries

firms that handle the flow of products from the manufacturer to the retailer or business user

facilitating functions

functions of channel intermediaries that make the purchase process easier for customers and manufacturers

communication and transaction functions

happens when channel members develop and execute both promotional and other types of communication among members of the channel

reverse logistics

includes product returns, recycling and material reuse, and waste disposal

channel conflict

incompatible goals, poor communication, and disagreement over roles, responsibilities, and functions among firms at different levels of the same distribution channel that may threaten a manufacturer's distribution strategy

merchant wholesalers

intermediaries that buy goods from manufacturers (take title to them) and sell to retailers and other B2B customers

just-in-time

inventory management and purchasing processes that manufacturers and resellers use to reduce inventory to very low levels and ensure that deliveries from suppliers arrive only when needed

channel cooperation

occurs when producers, wholesalers, and retailers depend on one another for success

transportation and storage

occurs when retailers and other channel members move the goods from the production point to other locations where they can hold them until consumers want them

Radio Frequency Identification (RFID)

product tags with tiny chips containing information about the item's content, origin, and destination

warehousing

storing goods in anticipation of sale or transfer to another member of the channel of distribution

channel power

the ability of one channel member to influence, control, and lead the entire channel based on one or more sources of power

physical distribution

the activities that move finished goods from manufacturers to final customers, including order processing, warehousing, materials handling, transportation, and inventory control

product diversion

the distribution of a product through one or more channels not authorized for use by the manufacturer of the product

distribution planning

the process of developing distribution objectives, evaluating internal and external environmental influences on distribution, and choosing a distribution strategy

order processing

the series of activities that occurs between the time an order comes into the organization and the time a product goes out the door