Chapter 5 Managing the Supply Chain

A Supply Chain The set of institutions that move goods from the point of production to the point of consumption. Synonymous with the term “channel” Must perform eight marketing functions: Note: None of these functions can be eliminated; they can only be shifted. Buying Selling Storing Transporting Sorting Financing Information gathering Risk taking

Supply Chain Participants A channel is made up of only two types of institutions… Primary marketing institutions Members that take possession of and title to the goods handled as they move through the marketing channel. Only primary institutions are formal members of a channel Facilitating marketing institutions Members that do not actually take title to the goods they handle, but assist in the marketing process by specializing in the performance of one or more of the eight marketing functions.

Development of the Supply Chain There are three general strategic decision areas that must addressed when designing a supply chain Length Width Level of Control All three will impact supply chain efficiency and the channel’s ability to meet its ultimate goal. Goal of every channel is to minimize suboptimization Achieved via specialization of labor in the 8 mkt. functions

Choices Concerning Length

Length: Direct vs. Indirect

Choices Concerning Width

Choices Concerning Control

Managing Retailer – Supplier Relations Power Ability of one channel member to influence the decisions and behavior of the other channel members. Pab = Dba Dependency Occurs when a retailer needs another supply chain member or vice versa to perform certain marketing functions. All channel members are interdependent upon one another. Interdependency is at the root of all major sources of conflict.

Bases of Power Bases of Power: Expertise power Referent power Legitimate power Reward power Coercive power

Use of Power within the Supply Chain* Note this information is not within your text and was supplied in class. (L.P. Bucklin’s “Theory of Channel Control,” JM 1973)

Theory of Channel Control Payoff Function The amount of benefits (or profits) that accrue as a result of giving up control Benefit (eg, $) Control Given Up

Theory of Channel Control Tolerance Function The amount of pain/burden felt as a result of giving up control to another. Benefit (eg, $) Control Given Up

Theory of Channel Control Zone of Indifference Corresponds to the indifference of keeping/ending the relationship due to the costs associated with “breaking-up” an arrangement Zone is the area below the Tolerance Function that is shaded in grey Benefit (eg, $) Control Given Up

Theory of Channel Control Area “A” The only area where the Payoff Function is above the Tolerance Function, and it’s increasing As one gives up more control initially, they experience greater benefit (e.g., why consultants exist) Benefit (eg, $) Control Given Up A

Theory of Channel Control Area “B” The only area where the Payoff Function is above the Tolerance Function, but it’s decreasing As one continues to give up control, the benefits begin to fall. Burden simultaneously begins to rise substantially as benefits continue to fall (i.e., steep rise in the Tolerance function). Benefit (eg, $) Control Given Up A B

Theory of Channel Control Area “C” The area where the Payoff Function is below the Tolerance Function, and still in the zone of indifference Here the amount of burden felt outstrips the benefit gained, but there’s a cost assoc. with breaking up Benefit (eg, $) Control Given Up A B C

Theory of Channel Control What bases of power should be used in “A”? And why should the others not? Benefit (eg, $) A B C Control Given Up

Theory of Channel Control What bases of power should be used in “B”? And why should the remaining not? Benefit (eg, $) A B C Control Given Up

Theory of Channel Control Why should the remaining bases of power be used in “C”? What do they do? Benefit (eg, $) A B C Control Given Up

Theory of Channel Control Why should the remaining bases of power be used in “C”? What do they do? Benefit (eg, $) A B C Control Given Up

Theory of Channel Control Why should the remaining bases of power be used in “C”? What do they do? Benefit (eg, $) A B C Control Given Up

Theory of Channel Control Why should the remaining bases of power be used in “C”? What do they do? Benefit (eg, $) A B C Control Given Up

Conflict Within the Supply Chain Exists when a member of the channel perceives that another member’s actions impede the attainment of his/her goals.* Sources of conflict: Perceptual incongruity Goal incompatibility Dual distribution Domain disagreements Diverting, Gray Marketing, Free Riding Role incongruities* Expectational differences*

Facilitating Channel Collaboration Compromise vs. Collaboration Win/Lose vs. Win/Win Requires: Mutual trust Faith that each (retailer & supplier) will be truthful and fair in their dealings with the other. Two-way communication When both communicate openly their ideas, concerns, & plans. Solidarity High value is placed on the relationship & results in flexible dealings where adaptations are made as circumstances change.

Category Management Process of managing all the SKUs within a product category. Involves the simultaneous management of… Price Shelf space Merchandising strategy Promotional efforts

Category Management Category Manager Category Advisor The individual who uses detailed knowledge of the consumer and consumer trends, detailed point-of-sale (POS) information, and specific analysis provided by each supplier to the category to create various store displays based on local market conditions. Works for the retailer Category Advisor In cases where the solidarity of the channel partners is high, a supplier may serve as the retailer’s category manager. Works for a supplier but manages all brands within the category.

What You Should Have Learned… Chapter’s Learning Objectives The retailer’s role as one of the institutions involved in the supply chain. How to discuss the types of supply chains by length, width, and level of control. The terms dependency, power, and conflict, as well as their impact on supply chain relationships. The importance of a collaborative supply-chain relationship.