MMIT session 6

Distribution Channels 1. What are supply networks and channels of distribution? 2. How should marketers design supply networks and channels of distribution? 3. How can marketers select channel members? 4. What are the challenges of managing distribution channels?

Who are the top supply chain companies worldwide? Nokia Apple Procter & Gamble IBM Toyota Motor Wal-Mart Anheuser-Busch Tesco Best Buy Samsung Electronics Cisco Systems Motorola The Coca-Cola Company Johnson & Johnson

What is a supply chain? A supply chain is a set of three or more entities (organisations or individuals) directly involved in the upstream or downstream flows of product, service, finances and/or information from a source to a customer.

What are distribution channels? Distribution channels are sets of intermediaries that are usually independent organisations involved in the process of making a product or service available for use or consumption.

Intermediaries in distribution channels Title HoldersNon-Title Holders Wholesalers Retailers Distributors Transport companies Brokers Manufacturers’ reps Agents Export management

What is supply chain management? Supply chain management (SCM) encompasses the planning and management of all activities in buying, making, providing and distributing. It also includes coordination and collaboration with channel partners.

20th century demand-driven supply networks Figure 17.8 Demand-driven supply networks

21st century demand-driven supply networks Figure 17.8 Demand-driven supply networks (continued)

Key processes of supply chain management Customer relationship management Customer service management Demand management Order fulfillment Manufacturing or service process flow management Intermediary relationship management Product development/ commercialisation Returns

Consumer marketing channels Figure Consumer and industrial marketing channels

Industrial marketing channels Figure Consumer and industrial marketing channels (continued)

3 types of distribution strategy Intensive – stocked in all outlets Selective – few intermediaries, specialists Exclusive – only one brand by reseller

Customer needs Quantity of purchase Waiting/delivery time Convenience Product variety Service backup

Identifying channel alternatives Types of intermediaries Number of intermediaries Terms and responsibilities

Figure The value adds versus the costs of different channels

Terms and responsibilities of channel members Price policy Condition of sale Distributors’ territorial rights Mutual services and responsibilities

Channel-management decisions Training channel members Motivating channel members Evaluating channel members Modifying channel members

Zara – mini-case Inditex = Zara, Pull & Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterqüe Zara operates in 82 countries with a network of stores Based in La Coruna/Arteixo, Spain 70% of sales are in Europe, 25% in Spain New rules for marketing 20

Zara’s challenge to marketing wisdom Rule one: country-of-origin carries value (Zara is from a small town in Spain, pop. 25,000) Rule two: avoid stock-outs (shortages contribute to the urge to buy now, new goods arrive twice a week, Zara makes 20,000 items a year (3x what gap makes), London shoppers visit Zara 17x annually compared to 4x for average store) Rule three: advertise (Gap and H&M spend 3-4% of sales on ads, Zara 0.3%, focus on location) 21

Zara (continued) Rule four: outsource (Gap and H&M don’t own any facilities, Zara manufactures 51% of its products in Spain, Portugal, Morocco. Only basic items are outsourced to Asia (34%) and Turkey (14%). This reduces errors in prediction so that Zara’s average discount is 15% vs. 40% for other retailers) Rule five: efficiency through large batches (Zara uses quick reaction, fixed supply chain schedule: stores order twice a week, truck and cargo flights on fixed schedule, good arrive in at stores in Europe in 24 hrs, US 48 hrs, and Asia 72 hrs) 22

Zara’s challenges Expensive in China Competitors can copy model Standardized marketing problems C&A failure – standardization and centraliztion ◦ Sizes, Ads showing body hair, Colors, Dress cuts 23

EU does better in Operations than People management

Marketing Mix for International Firms ProductPlacePromotionPricing Marketing Mix

Key Decision-Making Factors Standardization versus customization Legal forces Economic factors Changing exchange rates Target customers Cultural influences Competition

Standardization versus Customization 3 Options: ETHNOCENTRIC (standardized– home) GEOCENTRIC (standardized-global) POLYCENTRIC (customized)

International Marketing Advantages STANDARDIZED Approach + Reduces marketing costs + Facilitates centralized control of marketing + Promotes efficiency in R&D + Results in economies of scale in production + Reflects the trend toward a single global marketplace CUSTOMIZED Approach + Reflects different conditions of product use + Acknowledges local legal differences + Accounts for differences in buyer behavior patterns + Promotes local marketing initiatives + Accounts for other differences in individual markets

Figure 17.1 The International Operations Management Process Strategic Context Differentiation Cost leadership Focus Standardized vs. Customized Production Acquisition of Resources Supply Chain Management Vertical Integration Make-or-buy decision Location Decisions Country-related issues Product-related issues Government policies Organizational issues Logistics and Materials Management Flow of materials Transportation options Inventory levels Packaging

Production Management 1. Acquisition of Resources 2. Location Decisions 3. Logistics and Materials Management

1. Acquisition of Resources Managers must decide where and how to obtain the resources the firm needs to produce its products Supply chain management: set of processes and steps a firm uses to acquire the various resources it needs to create its products Vertical integration: extent to which a firm either provides its own resources or obtains them from other sources

Figure 17.2 Basic Make-or-Buy Options

Necessary Trade-offs in Make-or-Buy Decision MakeBuy Cost + Profit potential - Expensive initial + no start up costs - more exp. unit costs Control + quality, delivery schedule, design changes, cost - contract enforcement Risk + control+ reduces financial, operating, and political Investment ( in facilities, tech, people) + become assets, competitive or strategic advantage + lowers investment, frees up capital, reduces training costs and expertise needs Flexibility - Difficult to change direction + can change suppliers, products, easily

2. Location Decisions Managers must decide where to build administrative facilities, sales offices, etc. Factors to consider: Country-Related Issues Product-Related Issues Government Policies Organizational Issues

Country-Related Issues Resource availability Cost Infrastructure Country-of-origin effects

Product-Related Issues Value-to-weight ratio Technology Importance of customer feedback

Government Policies Stability of political process National trade policies Economic development incentives Existence of foreign trade zones (FTZ)

Organizational Issues Business strategy ◦ Cost leadership ◦ Differentiation Organizational structure Inventory management policies ◦ Just-in-time (JIT) inventory management system

3. Logistics and Materials Management Managers must decide on modes of transportation and methods of inventory control Three key flows: ◦ flow of materials, parts, supplies, and other resource from suppliers to the firm ◦ flow of materials, parts, supplies, and other resources within and between units of the firm itself ◦ flow of finished products, services, goods from the firm to customers

Differences in Domestic and International Materials Management Distance involved in shipping Number of transport modes Complexity of regulatory context Key Factors ◦ Time ◦ Predictability ◦ Cost

Advantages and Disadvantages of Different Modes of Transportation for Exports ModeAdvantagesDisadvantagesSample Products TrainSafe, reliable, inexpensive Limited to rail routes, slow Automobiles, grains AirplaneSafe, reliable, fast Expensive, limited access Jewelry, medicine TruckVersatile, inexpensive Small sizeConsumer goods ShipInexpensive, good for larger products Slow, indirectAutomobiles, furniture Electronic Media FastUnusable for many products Information