Ch. 14: Channel Relationships and Supply Chains

Rationale for Channel Design Channels Can Create Efficiency Direct: V x C transactions Via Reseller: V + C transactions V1 V2 V3 V4 C1 C2 C3 C4 V1 V2 V3 V4 C1 C2 C3 C4 RS V = Vendors; C=Customers; RS=Reseller

Marketing Channels & Economic Utility Form Time Place Possession

Marketing Channels & Economic Utility: Form The usable quantity or mode of the product most preferred by the customer

Marketing Channels & Economic Utility: Time The availability of the product when the customer needs it

Marketing Channels & Economic Utility: Place “Locational Convenience,” the availability of the product where the customer needs it

Marketing Channels & Economic Utility: Possession Methodology by which the customer obtains ownership or the right to use of the product or service

Marketing Channel Flows Supplier to Customer Exhibit 14-2a Manufacturers/Suppliers Sales and Marketing Flows Product & Ownership Flows Ancillary Members of the Channel (Facilitating Agencies) Missionary Sellers/Field Marketing Install, Train, & Service Flows Transportation Direct Sellers Financing Specialized Installation & Service Providers Distributors Promotion Manufacturers’ Representatives Value-added Resellers Insurance Real estate/ Storage End Users This Exhibit is not intended to imply that all channels contain all flows shown or that all possible flows are shown here.

Marketing Channel Flows Customer to Supplier Manufacturers/Suppliers Exhibit 14-2b Manufacturers/Suppliers Missionary Sellers/Field Marketing Specialized Installation & Service Providers Financial Institutions Direct Sellers Distributors Manufacturers’ Representatives Value-added Resellers Payment Flows Customer and Market Information Flows End Users This Exhibit is not intended to imply that all channels contain all flows shown or that all possible flows are shown here.

“Backward” Vertical Integration Henry Ford developed his own iron ore mining operation, steel mills, glass factories, tire manufacturing, and so on

“Forward” Vertical Integration Apple owns its own retail channels

Vertical Integration Advantages Economies of Scale Complete Control Reliability and Availability Disadvantages Lack of Flexibility Significant Investment Slow to Innovate (Myopia)

Functional Spin-Off Alternative to Vertical Integration Ancillary services are provided most efficiently by experts in each service a basic application of the principle of division of labor

MARKETING/ DISTRIBUTION A Value Network Exhibit 14-5 MARKETING/ DISTRIBUTION CHANNEL CUSTOMER SUPPLIER OFFERING SUPPLY CHAIN SUPPLIER PARTNERS

Value Networks “Fast Vertical Integration” create a lot of the advantages without the disadvantages Greater flexibility Lower initial investment Fast response to market

Distributors Serve Buyers and Sellers Exhibit 14-4 Buyer Benefits Seller Benefits Buy and hold inventory. Provide fast delivery. Combine supplier outputs (reduce discrepancy of assortment). Provide market segment-based product assortment. Share credit risk. Provide local credit. Share selling risk. Provide product information. Forecast market needs. Assist in buying decisions. Provide market information. Anticipate needs.

Business Logistics The management of movement, sorting, and storage of goods  an important tactical function

Supply Chain Management Creation of value for customers through effective and efficient flow of materials, components, finished goods, and services Extends from raw materials through to end use customers

Physical Distribution Concept System design aimed at minimizing costs while maintaining a given level of customer service through the simultaneous management of three elements Inventory Transportation Warehousing

Physical Distribution Concept: Inventory Management Often largest cost associated with logistics system Inventory implies carrying and finance charges and costs of storage and creating assortment Tools to manage include, JIT inventory and manufacturing methods and facility location, and so on Lower inventory quantities lead to lower costs but can result in more costly transportation needs and/or stockouts

Physical Distribution Concept: Transportation Tradeoff of speed versus cost Slower transportation implies larger safety stocks If transportation costs are minimized with out regard necessary inventory levels, carrying costs increase

Physical Distribution Concept: Warehousing Two primary functions of warehousing Product flow/movement (associated with the creation of assortment) (Distribution Centers) Product storage (Warehouses)

Logistics of a Competitive Edge As technology and product advantages become more fleeting, efficient supply chains have become a competitive advantage Best designs match “the way a customer buys” in that the marketing channel is differentially invisible to the customer

Differentially Invisible Customer should not be required to adapt to the vendor The process should be invisible

Channel Design – Dual Distribution Different market segments require different channel design Example: Goodyear Tires Manufacturer Multi-brand Distributor Logistics Provider Large Customer – Direct Channel Integrated Retailers Independent Retailers Goodyear may or may not use the same distributor/logistics provider as the independent stores. Auto Manufacturers – GM, Ford, Honda, etc. Goodyear Sponsored/ Franchised Dealers Sears, Wheel Works, etc.

Channel Design – Multi-Distribution Customers within a segment with similar needs will expect locational convenience Example: Honda Automobiles Manufacturer Dealer/Retailer Dealer/Retailer Dealer/Retailer Dealer/Retailer Number of dealers with same channel design relates to the desired intensity of distribution.

Channel Design Reduce the Discrepancy of Assortment Channels convert manufacturers’ product lines to product assortments desired by particular market segments

When to Use Distributors Favoring Product requires local stock. Product line is small, unable to support direct sales. Product is somewhat generic. Product has low unit value. Product is near end of PLC. Customers are widely dispersed. Local repackaging, sizing, or fabrication is required. Market has many small-volume buyers. Product requires extensive sales effort directed at buying professionals. Start-up venture or established company is entering a new market. Competition Uses distributors. Customers prefer distributors. Not Favoring Product is highly customized. Product is new or innovative. Product is technically sophisticated. Significant missionary selling is required. Manufacturer requires control over product application. Large buyers are geographically concentrated. Exhibit 14-6

Selecting and Caring for Distributors Determine right distributor for your marketing plan Ask customers who they recommend Train and support them well, at both your facilities and theirs Make calls on them Make calls with them

Bases of Power in Marketing Channels “Soft” Bases of Power Expertise Information Identification “Hard” Bases of Power Reward Coercion Legitimate

Control and Cooperation in Vertical Marketing Systems Exhibit 14-7 Increasing centralized control Contractual systems Corporate vertical marketing systems(CVMS) Administered systems Conventional Systems Horizontal Sprawl Value Networks Value Networks are almost totally dependent on relationships that create cooperation and win-win scenarios. The assembled team creates a solution to a particular customer need. The team will be unified in the approach at that customer, but there is not necessarily any agreement to participate together beyond the immediate collaboration. Today’s may be part of a competing network tomorrow. Conventional systems, not a vertical channel patterns, are similar to administered channels but without agreement on goals. Intermediaries are independent businesses with concerns only for their own operations. CVMS were likely developed when there were no other channel alternatives. In a CVMS all functions and flows are performed by (or contracted by) the integrator. CVMS have the greatest degree of centralized control but less flexibility. Many Goodyear tire dealers are forms of a forward integrated CVMS; Sears is a backward integrated CVMS. Contractual systems include wholesaler and retailer sponsored voluntary chains, and franchise Systems. Ace and Tru-Value Hardware and IGA are voluntary chains. New car dealers and fast food restaurants (e.g., McDonalds, Burger King) are franchises. By most traditional views, administered marketing systems are the closest to conventional systems. Independent intermediaries agree on goals related to a particular administrative leader’s market segment while maintaining disparate goals associated with their own operations. Horizontal Sprawl is a term applied to the Japanese keiretsu channel pattern. A keiretsu is a group of loosely associated companies that may have many ties at the ownership and management level. A keiretsu is often a complete supply chain with many buyers, sellers, and ancillary service providers. There is significant sharing of goals, risks, and benefits among members of the chain. Mutual Goals Increasing Voluntary Cooperation Directed Goals

Control and Cooperation in Vertical Marketing Systems Exhibit 14-7 Increasing centralized control Contractual systems Corporate Vertical Marketing Systems Conventional Systems Value Networks Administered Systems Horizontal Sprawl / Keiretsu Mutual Goals Directed Goals Increasing Voluntary Cooperation

Web Opportunities for B2B Marketers Better and faster channel flows  market data more readily available Faster communications provides rapid ordering and order tracking Reduced transaction costs through online processing and tracking Product information available at the customers’ convenience

New Channel Types Affiliates - link on a web site that refers to a product or service supplier’s site Hubs – Intermediate that brings buyers and sellers together in a market