Kotler, Brown, Burton, Deans, Armstrong Marketing 8e Chapter 13: Marketing channels and logistics networks

Chapter Objectives 1.Marketing logistics networks. 2.Goals of marketing logistics networks and the main decision areas. 3.Marketing channels and why intermediaries used. 4.Marketing channel behaviour and organisation. 5.Channel design decisions and channel objectives and constraints. 6.Major channel alternatives. 7.Selection, motivation and evaluation of channel members.

The nature of marketing logistics network management Marketing logistics network refers to the system of efficiently and effectively making and getting goods and services to end-users. It is the end-users, or consumers, who pull products through the network. At the upstream or input end of such networks are the many suppliers of raw materials and components. In between, lie the conversion operations of the manufacturer, the service provider and the experiential provider.

Manufactured goods marketing logistics network

Flows in marketing logistics networks Marketing logistics networks involve bi- directional flows of information, materials or service content, title, payment and/or credit. Information systems play a critical role in managing marketing logistics networks. Marketing logistics networks decisions, including those related to marketing channels, are among the most important in management today.

Marketing logistics network management Marketing logistics network management involves several activities—including sales forecasting, production, inventory, distribution, and customers. Marketing logistics management: Managing the network of players providing customer fulfilment ranging from providers of inputs (raw materials, components and capital equipment) and extending to conversion operations, and including marketing channel intermediaries and those involved in physical movement of product.

Marketing logistics objectives Many organisations state their marketing logistics objective as ‘getting the right goods to the right places at the right time for the least cost.’ This objective does not provide practical guidance, as no market-oriented logistics system can simultaneously maximise customer service and minimise logistics costs.

Marketing logistics objectives Cross-functional teams – Logistics coordination takes a number of forms and may require different methods to ensure that an integrated system is in place. Building channel partnerships – The members of a marketing logistics network are inexorably linked. One member’s distribution network is another’s supply network and channel partnerships may take many forms. Third-party – Most marketing organisations perform their own logistics functions whilst some outsource this role to other companies such as Fedex or DHL.

Marketing logistics network trade-offs and marketing mix elements Trade-offs

Marketing logistics decisions (1) Management seeks an optimal result in terms of achieving a customer service level acceptable to the customer at a cost that gives an optimal profit and cash flow result to the company. Several decisions are involved: – Cycle-time reduction—computer-aided design, computer-aided manufacturing and just-in-time techniques have helped in reducing manufacturing time, inventory levels, re-work levels and other costs. – Conversion operations location decisions—placing the operation close to raw materials makes economic sense.

Marketing logistics decisions (2) – Manufacturing and operations process decisions: The choice of manufacturing process may not be an option for many firms. Most operations are a mixture of process types. – Order-processing decisions: Conversion operations and/or distribution of finished goods begin with a customer order by people on a retail floor or order department which can be placed in a variety of ways – , mail, telephone, fax, internet or EDI. – Warehousing decisions: All companies must store their goods while they wait to be sold. A storage function is needed because production and consumption cycles rarely match.

Marketing logistics decisions (3) – Inventory decisions: Inventory usually refers to finished goods stored as a buffer or warehoused between production and intermediaries such as wholesalers and retailers. The reduction of inventory saves costs. – Transport decisions: Marketers are involved in transport decisions as the choice of carriers affects the pricing of products, delivery performance and condition of goods when they arrive.

The nature of marketing channels A marketing channel is a set of interdependent organisations involved in the process of making a product or service available to users. Why are marketing intermediaries used? – A major part of any marketing logistics network is the intermediaries used to bring the goods and services to the marketplace. These intermediaries are connected so as to form a marketing channel. – There can be cost benefits to using intermediaries, especially when producers lack resources.

Reducing channel transactions

Marketing channel functions Information—gathering and distributing info Promotion—develop and communicate offer Contact—finding & communicating with prospects Matching—shaping the offer to match the buyer’s needs Negotiation—agree on price and other offer terms Physical distribution— transporting & storage Financing—acquiring & using funds to do channel tasks Risk taking—carrying out channel tasks You can eliminate a channel member (or level) but you cannot eliminate the functions—someone has to do the task

Channel alternatives

Consumer marketing channel levels Channel 1 is a direct marketing channel. Channel 2 contains one intermediary level, typically a retailer. Channel 3 contains two intermediary levels, typically a wholesaler and a retailer. Channel 4 three intermediary levels—jobber handles very small retailers For B2B markets three alternatives generally apply More levels = less control for the producer

Channels in the service sector Channels are not limited to just physical goods. Utilities, such as electricity, involve the use of middlemen (the electricity company) to sell the product to you, the consumer. Other examples include government organisations, such as education and health delivery systems.

Channel behaviour and organisation A marketing channel consists of dissimilar organisations that have combined together for their common good. Due to the very nature of a channel, conflict is likely to arise between members. There can be vertical conflict, which is conflict between different levels of the same channel or horizontal conflict, between firms at the same level of the channel.

Channel organisation Historically marketing channels were a loose collection of independent firms—little concern for overall channel performance, lacked strong leadership, conflict and poor performance Vertical marketing network (VMN): – A distribution channel structure in which producers, wholesalers and retailers act as a unified network—either one channel member owns the others, has contracts with them, or wields so much power that they all cooperate.

Conventional channel vs VMN

Major types of vertical marketing networks Single ownership Contracts between independent firms Power lies with one firm

Channel design decisions In designing a channel, manufacturers struggle between what will work and what is ideal and what is practical. Designing a channel network calls for analysing consumer service needs, setting the channel objectives and constraints, identifying the major channel alternatives and evaluating them.

Analysing consumer service needs Like most things in marketing, designing a channel begins with the customer. Marketing channels can be thought of as customer value delivery networks in which each channel member adds value for the customer. Designing marketing channels starts with finding out what values consumers in various target segments want from the channel.

Setting channel objectives and constraints Channel objectives should be stated in terms of the desired service level of target consumers. The company should decide which segments to serve and the best channels to use in each case. Company channel objectives are also influenced by the nature of its products, company policies, intermediaries, competitors and environment. Competitors’ channels need to be considered. Environmental factors such as economic decisions, etc. affect channel design decisions.

Identifying the major alternatives A firm needs to identify the types of intermediaries available—these might include the following: – Company sales force – Manufacturer’s agency – Industrial distributors

Number of marketing intermediaries Intensive distribution – Product in as many outlets as possible—fast moving consumer goods (FMCG) Exclusive distribution – Limited number of outlets have exclusive rights—luxury items—producer hopes for stronger selling support and greater control Selective distribution – A middle position—TVs, furniture, cameras

Evaluating the major alternatives Economic criteria—sales figures and costs. Control criteria—the agent may concentrate on the customers who buy the largest volume of goods from its entire mix of companies rather than those most interested in a particular company’s goods. Adaptive criteria—each channel involves some long term commitment and loss of flexibility – A long term commitment should be superior to alternatives on economic or control grounds.

Designing international marketing channels Each country has its own unique distribution network. Channel systems can vary greatly from country to country. The distribution system may be complex and difficult to penetrate, such as in Japan. Distribution systems in developing countries may be scattered and inefficient. Countries with large populations may have very small actual markets.

Channel management decisions Selecting channel members— business experience, lines carried, growth & profit record, reputation Motivating channel members—continuous effort, higher margins, special deals, cooperative advertising, sales contests Evaluating channel members—sales, inventory levels, customer service, cooperation in training & promotional programs— provide rewards Efficient customer response—‘automatic’ supply of goods

Summary Marketing organisations are paying attention to marketing logistics network management. This involves coordinating the activities of the entire chain to achieve cost savings and deliver added value to customers. The major functions include effective and efficient conversion operations, order processing, warehousing, inventory management and transportation.