LECTURE NOTES: By the end of this chapter, you should: Understand the key elements in the supply chain Explain what a distribution channel is and know what functions channels perform Discuss the types of wholesaling intermediaries found in distribution channels Describe the types of distribution channels and how place fits in with the other three Ps in the marketing mix List the steps to plan a distribution channel strategy Explain logistics and how it fits into the supply chain concept
The supply chain encompasses components external to the firm, including all activities that are necessary to convert raw materials into a product and put it in the hands of the customer. The last part of the chain--those firms that facilitate the movement of that product to the ultimate users of the product—is the channel of distribution . Logistics management deals with the process of actually moving goods through the supply chain.
LECTURE NOTES: Flows managed within the supply chain include not only the physical movement but also the sharing of information about goods. For example, the need to share information about the procurement process and the marketing campaigns that will be executed which could influence demand. One trend impacting global supply chain management is called insourcing . UPS is a great example of a firm that has benefited from this trend. UPS used to be considered “just” a package delivery service; today they specialize in insourcing, which means that many firms contract with UPS to run their essential operations. It may surprise you to know that insourcing services don’t stop at shipping. UPS employees fix laptops for their Toshiba clients and fills, bags, labels, and delivers orders for items bought from Nike.com Insourcing differs from outsourcing in that outsourced processes are typically nonessential tasks that firms delegate to outside subcontractors.
Insourcing is a practice in which a company contracts with a specialist firm to handle all or part of its supply chain operations. Using UPS for product shipping is a common type of insourcing.
LECTURE NOTES: The difference between a supply chain and a channel of distributions rests in the number of members the functions that each performs. Supply chains are broader and as Figure 15.1 on the next slide demonstrates, consist of firms who supply raw materials, component parts, and supplies necessary to product the good or service, in addition to channels of distribution.
The supply chain for Hewlett Packard is represented in the figure
Distribution channels and the various intermediaries used perform a number of distribution functions more efficiently and effectively than can any single organization. ’ Distribution channels provided time, place, and ownership utility, meaning that they make the products available when, where, and in the size/quantity that the customers desire. Logistical and physical distributions functions provided by intermediaries increase the efficiency of the flow of goods to the consumer, making it easier, more convenient, and saving time. Just imagine if vegetables could only be purchased from farm stands, meat from butcher shops, bread from bakeries, and milk and cheese from diaries. One would have to spend their entire day flitting from place to place shopping for items that today can all be purchased in grocery stores. Distribution channels provide a number of functions that increase the efficiency of the flow of goods from producer to customer. They give a number of utilities through the movement of products. They reduce the number of transactions necessary for goods to flow from many different manufacturers to large number of customers. This occurs in two ways: • Breaking bulk : wholesalers and retailers purchase large quantities of goods from manufacturers but sell only one or a few at a time to many different customers. • Creating assortments : providing a variety of products in one location so that customers can buy many different items from one seller at one time.
The transportation and storage of goods are other physical distribution functions . Channel intermediaries perform a number of facilitating functions that make the purchase process easier for customers and manufacturers. Some wholesalers and retailers assist the manufacturer by providing repair and maintenance service for products. An example would be Best Buy ’s Geek Squad. Intermediaries also perform a variety of communication and transaction functions, providing marketing information to the sales force and to customers with complaints or other inputs concerning the product.
Here is an example showing how the number of transactions is greatly reduced through the entry of a channel intermediary. LECTURE NOTES: Figure 15.2 demonstrates how distribution channels provide an assortment of products that customers can buy in the same location, thereby reducing the number of consumer transactions that are necessary and reducing the cost of obtaining a product.
Some channel members, such as LidRock, assist with sampling, promotion, or even advertising efforts
LECTURE NOTES: The Internet has evened the playing field for small firms with limited resources by making it possible for them to reach a national, if not international audience. While this is great news for entrepreneurs, e-commerce has radically impacted distribution strategies for a variety of goods and services. Goods that are sold over the Internet allow manufacturers to reduce costs by eliminating many of the intermediaries traditionally found in offline channels of distribution, an outcome which has been called disintermediation. For example, airlines no longer need traditional travel agencies to book flights for consumers – consumers book their own flights either through online mega travel agencies such as Expedia, or directly from the airline ’s website, eliminating the commission fee paid to booking agents. Additional forms of cost reduction come from fewer employees, and less need for “brick and mortar” company owned stores (and all of the costs that go with them). Many companies use the Internet to make coordination among members of a supply chain more effective in ways that consumers never see. For example, the Internet allows firms to better implement knowledge management with respect to how they collect, organize, store, and retrieve information assets. Information assets can take many firms, including databases and the practical knowledge of employees within the organization. A firm can benefit from knowledge management practices when it allows for information assets to be shared with supply chain members to improve the speed of the flow of goods or address other problems. Of course many products can actually use the Internet as the distribution mechanism, including software, electronic books, music, video, and more. Online piracy is still a major hurdle for those who would distribute products over the Internet. Piracy includes both outright theft and unauthorized repurposing of intellectual property via the Internet. Music piracy is rampant, as is piracy of online textbooks. With the Internet , the need for intermediaries and much of what we assume about the needs and benefits of channels will change. Channel intermediaries that physically handle the product may become obsolete. Many traditional intermediaries are being eliminated as companies question the value added by layers in the distribution channel—a process called disintermediation (of the channel of distribution). This process also reduces costs. Companies using the Internet are also developing better ways to implement knowledge management, which refers to a comprehensive approach to collecting, organizing, storing, and retrieving a firm ’s information assets. The assets include databases, company documents, and the practical knowledge of employees whose past experience may be relevant to solving a new problem. As technology continues to evolve, some companies are capitalizing on the ability of the Internet to link partners in the supply chain quickly and easily.
LECTURE NOTES: Channels of distribution contain both wholesalers and retailers of course; however, the remainder of the chapter will focus on wholesaling. Retailing will be discussed in chapter 16. Wholesaling intermediaries are f irms that handle the flow of products from the manufacturer to the retailer/business user. Various forms exist: Independent intermediaries do business with many different manufacturers and many different customer firms and thus help the flow of goods throughout the marketplace. Merchant wholesalers are independent intermediaries that buy goods from manufacturers and sell to retailers and other B2B organizations. Because they take title to goods (meaning they take legal ownership of the items), they assume risk and can suffer financial losses if the products are damaged while in their possession, or if they become obsolete or just don ’t sell. There are several forms of merchant wholesalers as shown in Table 15.1.
Consumer Channels The simplest channel is a direct channel . A direct channel is used for a number of reasons. It may allow the producer to serve its customers better and at a lower price than is possible using a retailer. Using a direct channel gives control to the producer. Internet sales represent a typical type of channel. Indirect channels use intermediaries and have advantages such as customer familiarity with certain retailers. The producer-wholesaler-retailer-consumer channel is a common distribution channel, giving retailers a large selection of products. Business-to-Business Channels Facilitate the flow of goods from a producer to an organizational or business customer. They can be direct or indirect. Because business-to-business marketing often means selling high-dollar, high-profit items to a market made up of only a few customers, direct channels are common. A dual or multiple distribution system occurs when producers, dealers, wholesalers, retailers, and customers interact with more than one type of channel. This is common in the pharmaceutical industry. Instead of serving a target market with a single channel, companies have added new channels—direct sales, distributors, retail sales, and direct mail. As they add channels and communications methods, they create a hybrid marketing system .
LECTURE NOTES: Firms face a number of choices when the structure or restructure their distribution channels. Marketers first consider the different channel levels that are available. Channel levels refer to the number of distinct categories of intermediaries that populate a channel of distribution. Considerations of which members are available, the size of the market, and the frequency of consumer product purchases are just some of the factors considered at this point. Figure 15.4 summarizes the different structures that a channel of distribution can take. The first portion of this figure is illustrated on this slide. We ’ll discuss the remaining sections on subsequent slides. A direct channel is illustrated on the first line, in which a producer sells directly to the customer, be it a business or consumer. When this tactic is not feasible, retailers, wholesalers, or even multiple wholesalers may be added to the distribution channel. But as each intermediary is added to the channel structure, the final cost to the customer increases.
This figure shows various consumer channels that differ in the number of intermediaries. The top channel is a direct one. LECTURE NOTES: As previously explained, consumer channels of distributions can take a variety of forms, including direct from the producer to the consumer, or one which includes one or more wholesalers and retailers. Don ’t let the fact that specific retailers are mentioned on this slide fool you – Dillard’s is just one example of the TYPE of retailer that would carry the Liz Claiborne’s fashions. Macy’s and other higher end retailers would also be involved in the distribution process. Direct channels often allow producers to serve customers better and at a lower cost. Sometimes this is the only option because using intermediaries may inflate the final price to the consumer beyond what he or she is willing to pay. Direct channels also provide manufacturers with more control over the pricing, service, and delivery process. Working directly with consumers may also provide valuable insights into trends, needs, complaints, and the effectiveness of various marketing strategies. Producers are often forced to use indirect channels to reach consumers at the places they prefer to shop and expect to find merchandise of certain types. The producer-retailer-consumer channel creates utility and transaction efficiencies, channel members enhance the ability of producers to reach customers. The producer-wholesaler-retailer-consumer-channel is very common in consumer marketing such as ice cream, as well as fashion products.
This figure shows various B2B channels that differ in the number of intermediaries. The top channel is a direct one.
Internet advances have made mass customization more popular and practical than ever. Mass customization technologies allow consumers to become product co-designers. Although products can ’t be designed from scratch, consumers do have choices with respect to key product attributes. For example, at Vermont Teddy Bears.
Distribution decisions interact with the marketing mix in a number of ways: Place decisions often influence prices that will be charged to final customers. Distribution decisions can help develop a position a product in the market. For example, selling a fashion item in an elite retailer will enhance the product ’s image. The nature of the product in turn influences the choice of distribution channels, especially retailers.
Distribution planning involves a number of steps. The first step is to develop distribution objectives that support the firm ’s overall marketing goals. Step 2 entails the evaluation of internal and external environmental influences to develop best channel structure. Here the firm ’s resources are compared with those of available intermediaries. Competitors’ channel systems are also studied at this step. The first step requires that objectives be developed for the distribution plan that support the firm ’s overall marketing goals. This requires consideration of how distribution can work with the other marketing mix elements to increase profits, market share, or perhaps sales. More specific objectives may depend upon the nature of the product. If the product is heavy or bulky, the key goal may be to minimize shipping costs. On the other hand, if the product is marketed on the basis of status or prestige, the goal may be choose retailers who provide the level of store service and merchandise mix that is consistent with supporting the product’s desired image. In the second step, marketers consider both the internal and external environmental influences and how these factors can be used or minimized to develop the best channel structure. For example, is intensive, selective, or exclusive distribution most appropriate? Does the B2B product being sold require high levels of technical know-how and customer service? If so, a direct channel would likely be best. Is the item perishable? If so, a short channel would be better while inexpensive, standardized consumer goods requiring intensive distribution would likely benefit from a longer channel. The firm ’s ability to handle distribution functions, the channel intermediaries which are available, and how the competition distributes its products are also considered. Should the firm use the same retailers as its competitors? Some products are better sold in dedicated outlets that feature no competitive brands (e.g., Harley-Davidson dealers). In other instances, consumers expect competitive products to be side by side within the same retail store. Marketer’s also review competitive distribution strategies to learn from their success and failures.
The third stage is to develop channel strategies . 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. 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/or retailing. Often a VMS can provide a higher level of cooperation and coordination than a conventional channel. Horizontal marketing systems occur when two or more firms at the same channel level agree to work together to get their product to the customer.
In designing a distribution channel, the intensity of distribution is a key consideration. Intensity refers to the number of outlets through which the product will be sold. The three basic choices for deciding how many wholesalers and retailers to carry a product are intensive , exclusive , and selective distribution. As mentioned previously, the last decision to made in step three is to determine the level of distribution intensity: intensive, selective, or exclusive. Intensive distribution involves s elling through all suitable wholesalers or retailers. The aim is to maximize market coverage for frequently purchased products such as soft drinks, milk, and bread. This strategy works best with convenience goods. Exclusive distribution , by contrast, involves s elling only through a single outlet within a given geographic region. Exclusive distribution is most appropriate for high-priced items that have extensive service requirements and a limited number of buyers. Between these two extremes lies selective distribution , in which the producer chooses to use fewer outlets than under an intensive strategy, but more than when exclusive distribution is used. Selective distribution makes sense when demand is so large that exclusive distribution results in lost sales opportunities, but selling costs, service requirements, and other factors may intensive distributions a poor choice. Selective distribution is most commonly associated with shopping products such as household appliances, furniture, and the like. Table 15.2 shows the factors that favor intensive vs. exclusive distribution.
Intensive distribution aims at maximizing market coverage by selling a product through all wholesalers or retailers that will stock and sell the product. Availability is more important than any other consideration in customers ’ purchase decision. Products such as gum, milk, and soft drinks are intensively distributed.
Exclusive distribution means limiting distribution to a single outlet in a particular region. Some cars, pianos, and products with high price tags are sold this way.
Selective distribution 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. Selective distribution is suitable for shopping products such as household appliances and electronic equipment.
The channel leader, sometimes called a channel captain , is the dominant firm that controls the channel. The captain has power relative to other channel members. The power comes from a variety of sources: • A firm has economic power when 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 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.
Logistics : process of designing, managing, and improving the movement of products through the supply chain Involves physical distribution (the activities used to move finished goods from manufacturers to final customers). Logistics: The process of designing, managing, and improving the movement of products through the supply chain Inbound and outbound logistics are important Reverse logistics is increasingly important Marketing success rests strongly on implementation. That ’s why marketers place a great deal of emphasis on logistics. Inbound logistics take place with respect to the raw materials, parts, components, and supplies that are needed for the manufacturing process, while outbound logistics stem from the firm and move the finished goods or works-in-process out through the distribution channel. Recycling, material reuse, product returns, and waste disposal – called reverse logistics – are becoming increasingly important as firms consider sustainability as a competitive advantage and continue to devote resources to encourage sustainable practices.
Logistics Functions 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. Many firms have automated this process through 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 is entered once and then shared and linked throughout the organization. Warehousing means storing goods in anticipation of a sale or transfer to another member of the channel of distribution. Warehousing enables marketers to provide time utility to consumers by holding on to products until consumers need them. Developing logistics means deciding how many warehouses a firm needs and where they should be. Materials handling is the moving of products into, within, and out of warehouses. Once in the facility, 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. Transportation is a critical part of logistics. Here decisions are made concerning mode of transport and choice of carrier. Inventory contro l means developing and implementing a process to ensure that the firm always has sufficient quantities of goods available to meet customer ’s demands.
Modes of transportation differ in their • Dependability: ability to deliver goods safely and on time • Speed of delivery including loading and unloading • Accessibility: number of different locations carrier serves • Capability to handle different products such as large and small, fragile or bulky • Traceability: ability to locate goods in shipment
Modes of transportation and usage Railroads : heavy, bulky items over long distances Water : large, bulky goods (especially internationally) Trucks : consumer goods in short haul; allow flexibility in locations Air : high value-items; fastest and most expensive mode Pipelines : petroleum/chemical products Internet : services such as banking, news, and entertainment
The last function of logistics is inventory control . Firms store goods for many reasons, such as enabling production to meet seasonal demand and creating economies in ordering. Some companies are phasing in a sophisticated technology known as radio-frequency identification (RFID), which lets them tag products with tiny chips containing information about the item ’s content, origin, and destination. LECTURE NOTES: Inventory control is the final function of logistics. Firms work hard to track their merchandise so they know where goods are and can easily get them where needed when low-inventory situations occur. Some firms use radio frequency ID technology to tag clothes or virtually any product that can contain tiny chips of this nature. RFID tags contain information about the item ’s content, origin, destination, etc. Some consumer groups are creating a backlash against RFID in blogs or via other sources, labeling them “spy chips”. In extreme cases, boycotts and other anti-company initiatives have been instigated. Firms store goods for many reasons. With seasonal items, for example, it is often more economical to produce goods year round, inventory excess product, and then ship it when needed. Retailers may also find that money can be saved by ordering larger quantities and reducing the number of deliveries. Of course the downside is that stockouts can occur when demand exceeds estimations and inadequate product is on hand to be sold. While often a mere inconvenience for consumers, other forms of stockouts – such as an inadequate supply of anti-venom – could be life threatening to patients in need. Total costs are heavily influenced by logistics. Poor planning could lead to expensive emergency deliveries or lost customers. On the other hand, too much inventory leads to excessive carrying costs and the possibility of lost product due to perishability or damage. Just in time delivery systems are used to set up the delivery of goods just as they are needed on the production floor, minimizing inventory costs while ensuring that inventory will be there when needed. A supplier ’s ability to make on-time deliveries is the single most critical factors in the selection factor, even more important than price. Often suppliers agree to set-up production facilities close to large customers to guarantee JIT delivery.
Chapter 15 Module 1
Make Marketing Value Decisions (Part 1) Create the Value Proposition (Part 3) Communicate the Value Proposition (Part 4) Deliver the Value Proposition (Part 5) Understand Customers’ Value Needs (Part 2)
Deliver Value Through Supply Chain Management, Channels of Distribution, and Logistics Chapter Fifteen