Chapter 15: Marketing Channels & Supply Chain Management
Physical Distribution in Supply Chain Management
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Channel Conflict: Reestablishing Partnerships
1: role of each member must be specified. Need to expect unambiguous, agreed on performance levels from one another. 2: Members of channel partnerships must institute measures of channel coordination which requires leadership and benevolent exercise of control. Both must be accomplished
Channel Conflict
All channel members work toward the same general goal-distributing products profitably and efficiently. But members may disagree in the best methods to attain these goals Frustration and conflict occurs (for the whole channel) when self-interest creates misunderstanding about role expectations Communication difficulties are a potential form of conflict Increased use of multiple channels of distribution (new tech allows this) increases potential likelihood of conflict between intermediaries and manufacturers Ex. HP sells via website and stores like Best Buy Conflicts occurs also when retailers overemphasize competing products or diversify into lines traditionally handled by other intermediaries Conflict also occurs when producers strive for efficiency by circumventing intermediaries Conflict also can occur when a producer has traditionally used certain dealers but broadens its retailer base (ex. Goodyear tires)
Physical Distribution
Also known as logistics. Activities used to move products from producers to consumer and other end users Physical distribution activities may be performed by a producer, a wholesaler, or a retailer, or they may be outsourced
Industrial Distributor
An independent business organization that takes title to industrial products and carries inventory Usually sell standardized items such as supplies, tools etc. Many carry several product line ex. W.W. Grainger
Selecting Marketing Channels: Environmental Forces
Anything in the environment that changes how the marketer should react Adverse economic conditions: use a cheaper marketing channel at the expense of customer service etc. New technology, changing government regulations, etc. can all affect this
Transportation Modes: Rail
Carry heavy, bulky freight that must be shipped long distances over land minerals, lumber, chemicals, farm products, and low value manufactured goods and autos Many companies locate factories or warehouses near rail lines for convenient loading and unloading
The Significance of Marketing Channels
Channel decisions are critical because they determine a product's market presence and buyer's accessibility to the product Have strategic significance bc they normally entail a long term commitment among firms It is normally easier to change prices etc. than to change marketing channels Also important bc it serves many functions. Most of these functions are accomplished through both independent and joint efforts of channel members
Corporate VMS
Combines all stages of the marketing channel, from producers to consumers, under a single owner ex. Supermarket chains that own food processing plants
Electronic Data Interchange (EDI)
Computerized means of integrating order processing with production, inventory, accounting, and transportation Reduces paperwork and shares information on invoices, order, payments, inquiries, and scheduling
Outsourcing
Contracting out of physical distribution tasks to third parties when this is done, the third party normally has special expertise in areas such as warehousing, transportation, inventory management, and IT ex. Perot Systems When choosing companies through which to outsource, marketers must be cautious and use efficient firms that help the outsourcing co. provide excellent customer service Efficient physical distribution systems are crucial in marketing strategy bc it can decrease costs and increase customer satisfaction Suppliers must be able to respond quickly to inventory needs Tech is playing a larger role in logistics. Has facilitated JIT delivery, precise inventory visibility, and instant shipment tracking costs Total cost approach is needed with physical distribution bc it allows it to be seen as a system instead as a collection of unrelated activities (shifts focus to reducing overall distribution costs)
Competitive Priorities in Marketing Channels
Effective supply chains can provide a competitive advantage for marketers Supply chain decisions cut across all functional areas of the business, so its a competitive priority Ex. Amazon, Dell, Walmart owe their success to outmaneuvering rivals with their unique supply chains Supply chains needs to be integrated; the reward is efficiency and effectiveness as well as a holistic view of the supply chain *Goal driven supply chains focus on the competitive priorities of speed, quality, cost or flexibility as the performance objective*
Selecting Marketing Channels
Important and it varies across orgs Significantly affected by one or more of: customer characteristics, product attributes, type of organization, competition, marketing environmental forces, and characteristics of intermediaries
Physical Distribution Activities: Inventory Management
Involves developing and maintaining adequate assortments of products to meet customer's needs Stockouts (shortages): when there are too few products on hand If too many products are held though, costs are increased, risk of damage, obsolescence, and pilferage increase Two major issues regarding trying to minimize inventory costs while maintaining an adequate supply of goods to satisfy customers
Just-in-time
JIT approach in which supplies arrive just as they are needed for production or for resale Low inventory levels are maintained and purchase products/materials in small quantities when needed. Requires a high level of coordination between suppliers and producers
Distribution Centers
Large facilities used for receiving, warehousing, and redistributing products to stores or customers Specially designed for rapid flow of products
Choosing Transportation Modes
Logistics managers select a transportation mode based on the combination of cost, speed, dependability, load flexibility, accessibility, and frequency that is most appropriate for their products and generates the desired level of customer service
Legal Issues in Channel Management: Restricted Sales Territories
Manufacturer may try to prohibit intermediaries from selling products outside designated sales territories. Intermediaries often like this bc it gives them exclusive selling rights in certain areas This must be evaluated on an individual basis bc it may sometimes promote competition and other times not so
Channel Leadership: Channel Captain
Many channel decisions are determined by give and take among partners with the idea that the channel will ultimately benefit Channel Captain: Channel leader; may be a producer, wholesaler, or retailer. They are the dominant leader of a marketing channel or a supply chain. May establish policies and coordinate development of marketing mix
Marketing Intermediary Activities
Marketing Information: analyze sales data Marketing Management: establish strategic and tactical plans for developing customer relationships and organizational productivity Facilitating Exchanges: choose product assortments that match the needs of customers. Cooperate with channel members to develop partnerships Promotion: Set promotional objectives. Coordinate advertising, personal selling etc Price establish pricing policies Physical Distribution: manage transportation, warehousing, materials handling, inventory control and communication
The Significance of Marketing Channels: Marketing Channels Create Utility
Marketing channels create four types of utility: time, place, possession and form
Transportation Modes: Trucks
Most flexible schedules and routes of all major transportation modes in the US bc they can go anywhere Are more expensive and somewhat more vulnerable to bad weather
Legal Issues in Channel Management
Most of the laws concerning this are based on the idea that the public is best served by protecting competition and free trade Sherman Antitrust Act and FTC Act gives the authority to the court
Variety of Physical Distribution Activities
Order Processing, Inventory Management, Materials Handling, Warehousing, & Transportation
Transportation Modes: Freight Forwarders
Organizations that consolidate shipments from several firms into efficient lot sizes Combine shipments from several orgs (tend to be many small shipments, the forwarders buy carrier space, and arrange for them to be delivered to buyers)
Reorder Point
Part of inventory management It's the inventory level that signals the need to place a new order Reorder Point=(order lead time X usage rate) + safety stock Lead time: average time lapse between placement of an order and receiving it Usage rate: rate at which product's inventory is used or sold Safety Stock: amount of extra inventory a firm keeps to guard against stockouts from above average usage rates and/or longer than expected lead time
Advantages of Industrial Distributors
Perform needed selling activities at low cost Reduce producer's financial burden by providing credit services to customers Can pass market information on to producer bc they're closer to customers Hold inventory and can reduce producer's capital requirements
Physical Distribution Activities: Materials Handling
Physical handling of tangible goods, supplies, and resources RFID, radio frequency ID is being used more often to track materials in every phase of handling Product characteristics often determine handling. Ex. liquids and gases characteristics determine how they can be moved and stored
Transportation Modes
Railroads, trucks, waterways, airways, pipelines Many companies adopt a combination of two or more modes Many companies locate factories or warehouses near rail lines for convenient loading and unloading
Physical Distribution Activities: Order Processing
Receipt and transmission of sales order information Efficient order processing facilitates product flow Order processing has three main tasks: order entry, order handling, and order delivery Order entry: customer or salespeople purchase via telephone, mail, email etc. Order handling: Order is transmitted to a warehouse, product availability is checked, credit rating, prices and terms are checked by the credit dept. Credit dept. approves the purchase, then personnel (and equip) pick and assemble the order. Order Delivery: Depends on what the customer has paid for rush order etc.
Legal Issues in Channel Management: Exclusive Dealing
Situation in which a manufacturer forbids an intermediary to carry products of competing manufacturers Legality found through applying 3 tests if the dealing blocks competitors from as much as 15% of the market, the sales volume is large, and the producer is considerably larger than the retailer, then it is considered anticompetitive Allowed if it strengthens a weak competitor or dealers/customers have access to similar products
Selecting Marketing Channels: Competition
Success or failure of a competitor's marketing channel may encourage or dissuade an organization from considering a similar approach Firm may be forced to adopt a similar strategy to remain competitive
Physical Distribution Activities: Warehousing
The design and operation of facilities for storing and moving goods is another important physical distribution function Warehouses are places to store materials when mass production creates a greater stock of goods than can be sold immediately Warehouses falls into two general categories: private and public
Intensity of Market Coverage
The number and kind of outlets in which a product will be sold Depends on the characteristics of the product and target market Distribution should correspond with the behavior patterns of the buyers Replacement rate, product adjustment, duration of consumption, time required to find products and similar factors are what customer take into account Intensive, selective and exclusive are the three major levels of market coverage
Operations Management
Total set of managerial activities used by an organization to transform resource inputs into products
Selecting Marketing Channels: Type of Organization
Type of organization is important ex. Sheer size. Larger firms may be able to negotiate better deals with vendors or other channel members May have more distribution centers Larger product mix Smaller companies can be more flexible and serve customer better
Two Common Methods Used in Materials Handling
Unit Loading: one or more boxes are placed on a pallet or skid and are then loaded efficiently by mechanical means Containerization: consolidation of many items into a single large container that is sealed at its point of origin and opened at its destination (individual items aren't handled in transit, so this greatly increases efficiency and security in transit)
Coordinating Transportation: Intermodal Transportation
Use of two or more transportation modes in combination This integrated approach has been facilitated by new developments in transportation industry Several kinds of intermodal shipping are available Piggyback: shipping that uses both truck trailers and railway flatcars Fishyback: truck trailers and water carriers Birdyback: truck trailers and air carriers As transportation costs have increased, intermodal transportation has increased
Channel Cooperation
Vital if each member is to gain something from other members Enables retailers, wholesalers, suppliers, and logistics providers to speed up inventory replenishment, improve customer service, and cut the costs of bringing the products to the consumer Without cooperation, individual or overall channel goals can't be achieved Need to realize that one firm's success depends in part on the other firms Needs to be unified so members are less likely to take actions that create disadvantages for other members Should agree to direct efforts toward common objectives so as to structure efforts for max effectiveness
Where do supply chains start?
With the customer and require the cooperation of channel members to satisfy customer requirements
Strategic Channel Alliance
agreement whereby the products of one organization are distributed through the marketing channels of another. Good for products with similar target markets but are not direct competitors ex. bottled water might be distributed through soft drinks marketing channel
Supply Chain
all the activities associated with the flow and transformation of products from raw materials through to the end customer Total distribution system that involves upstream (suppliers) and downstream (wholesaler, retailers)
Marketing Channel
also called distribution channel or channel of distribution Group of individuals and organization that direct the flow of product from producers to customers within the supply chain Goal is to make products available at the right time, place and in right quantity Providing customer satisfaction should be the driving force behind marketing channel decisions
Place Utility
created by making products available in locations where customers wish to purchase them
Possession Utility
customer has access to the product to use or to store for future use ex. rental agreement
Distribution
decisions and activities that make products available to customer when and where they want to purchase them
Supply chain relationships
each supply chain member requires information from other channel members. ex. Suppliers need order and forecast information from the manufacturer
Field Public Warehouses (subcat of Public Warehouses)
established by public warehouses at the owner's inventory location Warehouser becomes custodian of the products and issues a receipt that can be used as collateral Bonded Storage: arrangement in which imported/taxable goods are not released until product owner pay the US customs duties etc
Transportation Modes: Megacarriers
freight transportation firms that provide several modes of shipment ex. CSX has trains, barges, container ships, trucks, and pipelines, thus offering a multitude of transportation services
Time Utility:
having products available when the customer wants them
Form Utility
is sometimes created by assembling, preparing, or otherwise refining the product to suit individual customer needs
Vertical Marketing Systems (VMS's)
method of institutionalizing market channels in which a single channel member coordinates or manages channel activities to achieve efficient, low cost distribution aimed at satisfying target market customers Brings most or all stages of the marketing channel under common control/ownership There are three types of VMS's: Corporate, Administered, & Contractual
Marketing Intermediaries
middlemen that link producers to other intermediaries or ultimate consumers through contractual arrangements or through the purchase and resale of products
Logistics Management
planning, implementing, and controlling the efficient and effective flow and storage of products and information from the point of origin to consumption to meet customers needs and wants
Supply Management
refers to the processes that enable the progress of value from raw material to final customer and back to redesign and final disposition purchasing, procurement, sourcing etc.
Supply Chain Management
set of approaches used to integrate the functions of operations management, logistics management, supply management and marketing channel management so products are produced and distributed at right amount, right locale, and right time
Look over Characteristics of Transportation Chart
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Channel Leadership, Cooperation, and Conflict
Each channel member accepts a different role in the distribution system and agrees to accept certain rights, responsibilities, rewards, and sanctions for nonconformity There are also some expectations that each member holds of another ex. Retailers expect wholesalers to maintain adequate inventories and deliver goods on time Wholesalers expect retailers to honor payment agreements and keep them informed of inventory needs Partnerships can eliminate redundancies and reassign tasks for max efficiency ex. Walmart and P&G cooperation
Types of Marketing Channels
Marketing channels that are appropriate for one product may not be so for another and may require different distribution paths The various marketing channels can be classified into channels for consumer products or channels for business products
Public Warehouses
Storage space and related physical distribution facilities that can be leased by companies. Some provide distribution services such as receiving,, unloading, inspecting, reshipping etc. Especially useful to firms that have seasonal production or low volume storage needs, are testing a new market, or need inventories in many locations. Also may be used simply when additional space is required Offer variable (and often lower) costs bc users rent space and purchase warehousing services only as needed May provide security for products used as collateral for laons
Channel Leadership: Channel Power
Ability of one channel member to influence another member's goal achievement The member who is the channel captain accept the responsibilities and exercises the power that this role affords Ex. Manufacturer large scale production means it may exercise power by giving channel members financing, business advice etc. (like auto maker and dealer relationships) Retailers can also be channel captains. Ex. Walmart has a tremendous amount of power (national chain stores) Wholesalers can be channel leaders too. They were more powerful several decades ago though when manufacturers and retailers were smaller and more scattered IGA (Independent Grocers' Alliance) wholesale leader Form voluntary chains with several retailer and manage bulk buying etc. In return they get the majority of the retailer's business (purchasing)
Legal Issues in Channel Management:Tying Agreements
Agreement in which a supplier furnishes a product to a channel member with the stipulation that the channel member must purchase other products as well May be used to move weaker products along as well as popular items Full Line Forcing is related: requires channel members to buy the supplier's entire line to obtain any of the supplier's products Courts accept it when the supplier alone can provide products of a certain quality, when the intermediary is free to carry competing products, and when a company has just entered the market. Otherwise, illegal
Selecting Marketing Channels: Product Attributes
Attributes have a strong influence Marketers of complex and expensive products (cars) will have short channels. So will makers of perishable goods (dairy) Longer channels will be used by makers of less expensive, standardized goods Sturdiness affects it too; fragile-> short. Sturdy->longer channels Exclusive image->limited number of outlets
Administered VMS
Channel members are independent but a high level of inter-organizational management is achieved through informal coordination ex. Members of this may adopt uniform accounting and ordering procedures Individual members remain independent but one member dominates it (such as a large producer/retailer) ex. Intel has strong influence over distributors and manufacturers
Channel Integration
Channel members can combine and control most activities or pass them on to another channel member Channel functions can be transferred but they cannot be eliminated and they must pay for the labor and resources to have them done (unless buyers do it)
Selecting Marketing Channels: Customer Characteristics
Channels appropriate for some consumers are different then those necessary for businesses Business consumers prefer to deal directly with producers Consumers generally buy limited quantities, purchase from retailers, and often don't mind limited customer service When customers are concentrated in a small area, a direct channel may be perfect, but if customers are spread out then use of multiple intermediaries may be the best choice
Transportation Modes: Waterways
Cheapest method of shipping heavy, low value, nonperishable goods such as ore, coals, grain, and petro products 95% of international cargo is done via water transport
Channel Integration: Vertical Channel Integration
Combines two or more stages of the channel under one management May occur when one member of a marketing channel purchases the operations of another or simply performs the functions of another member eliminating need for the intermediary ex. PepsiCo buys Pepsi Bottling Group Unlike conventional channel systems, participants in vertical integration coordinate efforts to reach a desired market CHannel members regard other members as extensions of their own operations Vertically integrated channels are often more effective bc of increased bargaining power and sharing of info and responsibilities ex. manufacturer provides advertising and training, and retailer may buy products in large amounts and actively promote them
Horizontal Channel Integration
Combining organizations at the same level of operation under one management ex. one dry cleaner buys another one out. May enable a firm to generate sufficient sales revenue to integrate vertically too permits some efficiency and economies of scale in advertising, research, purchasing etc, it isn't the best method of improving distribution
Private Warehouses
Company operated facilities for storing and shipping products This is normally done when a company's warehousing needs in a given geographic market are stable and substantial enough to warrant a long term commitment to a fixed facility Also good for firms that sell goods requiring special handling or storage Face fixed costs such as insurance, taxes, maintenance, and debt expense and limited flexibility when wishing to move inventories to strategic locations
Supply Chain
Considers all the entities that facilitate product distribution and benefit from cooperative efforts
Legal Issues in Channel Management: Refusal to Deal
Courts have held that producers have the right to choose channel members with which they will do business (and right to reject others) Supplier may not legally refuse to deal with wholesalers or dealer simply bc they resist policies that are anticompetitive or in restraint of trade Suppliers cant organize channel members in refusal to deal actions against other members that choose not to comply with illegal policies
Disadvantages of Industrial Distributors
Difficult to control bc they are independent firms Often stock competing brands so producer's can't be sure that their brand will be sold aggressively Maintain inventories so they are less likely to handle bulky or slow selling items or items that require a lot of selling effort May lack technical knowledge to sell and service some products
Types of Marketing Channels: Channels for Business Products
E: Producer-> Organizational Buyers Direct channel for business products. Directly contrasted with consumer goods, more than half of all business services are sold through this manner. This is especially true of expensive, complex equipment where a customer wants the technical assistance that only a producer can provide F: Producer-> Industrial Distributors-> Organizational Buyers Increasing % of products are being sold in this manner. Effective when products has broad market appeal, easily stocked and serviced, and is sold in small quantities, and is needed on demand to avoid high losses G:Producer-> Agents-> Organizational Buyers Uses a manufacturer's agent to sell the products H: Producer->Agents->Industrial Distributors-> Organizational Buyers Uses both industrial distributor and agents. Appropriate when producer wants to cover a large area but doesn't have a sales force due to seasonal demand or bc it can't afford a sales force Also good for expanding into a market, without expanding existing workforce
Transportation Modes: Air Transportation
Fastest but most expensive form of shipping Used most often for perishable goods; high value, low bulk items and for products that require quick delivery such as emergency shipments less than 1% of total ton miles occurs via air but its importance is growing and many businesses depend on the overnight, fast shipping UPS, DHL etc
Types of Marketing Channels: Channels for Consumer Products
Four Different Channels Possible A: Producer-> Consumer This is direct movement of products from producer to consumer. Ex. legal advice from an attorney moves like this. Need to evaluate cost and benefits of going direct vs. transaction costs in using intermediaries B: Producer-> Retailers->Consumers Goods move from producer to retailer and then to customers Often used by big retailers such as Kmart bc it allows them to buy in quantity (car dealers) C: Producer-> Wholesalers-> Retailers-> Consumers Long standing distribution method, especially for consumer products Very practical option for producers that sell to hundreds of thousands of customers through thousands of retailers. ex. Wrigley's gum D: Producer->Agents or Brokers-> Wholesalers-> Retailers-> Consumers Frequently used for products intended for mass distribution, such as processed foods. Ex. a food processor may hire a broker to sell the food to wholesalers and so on and so forth
The Significance of Marketing Channels: Marketing Channels Facilitate Exchange Efficiencies
Marketing intermediaries reduce the costs of exchanges by performing certain services or functions efficiently An intermediary reduces the number of transactions that have to take place and make things more efficient Intermediaries are specialists in facilitating exchanges Often critiqued and many want to cut out the middlemen You can cut them out, however their functions must still be performed. If a producer tries to do these services it may end up being very expensive and won't necessarily reduce the cost of the product For wholesalers to survive (intermediaries) they must be more efficient and more customer focused than other marketing institutions
Long Marketing Channel
May be the most efficient distribution channels for some consumer goods bc it allows several intermediaries to provide specialized functions and could lower costs. Costs could be lower than when only one channel member tries to do it all
Selecting Marketing Channels: Characteristics of Intermediaries
May consider other channel choices if an intermediary is not promoting the product adequately or if it doesn't offer the right mix of services
Transportation Modes: Pipelines
Most automated transportation mode, usually belong to the shipper and carry the shipper's products Most carry petro products or chemicals Slurry pipelines carry pulverized coal, grain, or wood chips suspended in water Pipelines are great for moving product slowly but continuously and at a relatively low cost Are susceptible to 1% shirnkage mostly due to evaporation
Contractual VMS
Most popular type of vertical marketing system Channel members are linked by legal agreements spelling out each member's rights and obligations ex. Franchise organizations like KFC ex. Wholesaler sponsored groups (IGA) ex. Retailer sponsored cooperatives (own and operate their wholesalers)
Physical Distribution Activities: Transportation
Movement of products from where they are made to intermediaries and end users This the most expensive physical distribution function. About 10% of a company's total expenses are freight charges
Multiple Marketing Channels and Channel Alliances
Multiple product channels may be used when the same product is directed to both consumer and business customers ex. Ketchup needs to go to consumers and to businesses
Costs in the Physical Distribution
Need to be sensitive to trade offs. Higher costs in one area may facilitate lower costs in another Cycle time should also be considered; the time needed to complete a process Reducing cylce time while maintain or reducing cost and maintaining or increase customer service is a winning combo
Intensity of Market Coverage: Intensive Distribution
Uses all available outlets for distributing a product Appropriate for convenience products such as gum or bread High replacement rate, require almost no service and are often bought on price cues Sales may be directly related to availability and convenience. Ex. milk and bread sell at gas stations well
Intensity of Market Coverage: Exclusive Distribution
Uses only one outlet in a relatively large geographic area Suitable for products purchased infrequently, consumed over a long period of time or require service/info to fit to consumer's needs ex. BMW, Patek Phillipe watches Often used as an incentive when only a limited market is available for some products Possible problem occurs when an unauthorized dealer gets a hold of them and sells them
Intensity of Market Coverage: Selective Distribution
Uses only some available outlets in an area to distribute a product Durable goods such as tvs, computers etc (shopping products) More expensive and require a little bit more time researching them This is a good distribution when customers find customer service or special support very important for the product Requires differentiation at the point of purchase Often sold on a selective basis to maintain control over a product.
Legal Issues in Channel Management: Dual Distribution
Using two or more marketing channels to distribute the same products to the same target market Ex. HP comps through internet and Best Buy; not illegal-> promotes competition Courts don't like it when manufacturers open their own retail outlet and use it to dominate or drive out of business retailer that handle its products
Manufacturer's Agent
an independent salesperson who sells complementary products of several producers in assigned territories and is compensated through commissions Unlike an industrial distributor they don't acquire title to the product and normally don't take possession Good for products with highly seasonal demand (don't have to support staff year round) Good if you can't afford a full time sales staff There are problems though; producer has little control over the agent Agents prefer to go after their larger accounts bc their on commission Reluctant to spend time following up sales or doing things for smaller buyers Have limited ability to provider customers with spare parts or repair services
Dual Distribution
use of two or more marketing channels to distribute the same products to the same target market ex. Kellogg sells cereals to large grocery chains (B) and to wholesalers to sell it to retailers (C) ex. firm that sells its products through retail outlets and its own mail order or website such as P&G Can cause dissatisfaction among wholesalers and smaller retailers when they must compete with larger grocery chains