Managing the Supply Chain Chapter 5 Managing the Supply Chain

Learning Objectives Discuss the retailer’s role as one of the institutions involved in the supply chain Describe the types of supply chains by length, width, and control Explain the terms dependency, power, and conflict and their impact on supply-chain relations Understand the importance of a collaborative supply-chain relationship

The Supply Chain Set of institutions that move goods from the point of production to that of consumption Channel: Term used for supply chain Broadened view incorporates: The materials that go into manufacturing the good The process consumers use to dispose of or recycle the product LO 1

Zara Corporate owned vertical marketing channel Run each step below full capacity Limited runs of each style Zday the days the new stuff comes (feeding frenzy)

The Supply Chain Is affected by five external forces: Consumer behavior Competitor behavior (big retailers going straight to manufacturers) Socioeconomic environment (dirt to dirt) Technological environment Legal and ethical environment LO 1

The Supply Chain Must perform eight marketing functions: Buying Selling Storing Transporting Sorting Financing (car dealerships) Information gathering Risk taking LO 1

The Supply Chain Sorting - Breaking down heterogeneous products into homogenous groups Logistics network The entities that are involved in moving physical inventory from the source to the retail store Logistics inventory Total business cost: All direct and indirect costs of manufacturing, distributing, and marketing a product LO 1

The Supply Chain Institutions involved in performing the eight marketing functions Primary marketing institutions Channel members that take title to the goods as they move through the marketing channel (drop shippers) Facilitating marketing institutions: Channel members that: Do not actually take title Assist in the marketing process by specializing in the performance of certain marketing functions LO 1

Exhibit 5.2- Institutions Participating in the Supply Chain LO 1

Facilitating Marketing Institutions Public warehouse: Stores goods for safekeeping for any owner in return for a fee Third-party logistics provider Provides service to retailers of outsourced logistics services for their: Storage, transporting, sorting, information and risk management functions Other facilitating institutions Provide information through out the supply chain Aid in financing LO 1

Types of Supply Chains Strategic decisions for efficient and competitive supply chain require deciding: Supply-chain length Supply-chain width Control of the supply chain LO 2

Exhibit 5.3 - Strategic Decisions in Supply-Chain Design LO 2

Exhibit 5.4 - Direct and Indirect Supply Chains LO 2

Supply-Chain Length Direct supply chain: Manufacturer sells its goods directly to the final consumer Desired length is determined by: The size of the customer base Geographical dispersion Behavior patterns like purchase frequency LO 2

Supply-Chain Length Average purchase size The particular needs of customers The nature of the product Size of the manufacturer, its financial capacity, and its desire for control LO 2

Supply-Chain Width Intensive distribution: All possible retailers are used in a trade area Selective distribution: Moderate number of retailers are used in a trade area Exclusive distribution: Only one retailer is used to cover a trading area LO 2

Exhibit 5.5 - Width of Supply-Chain Structure LO 2

Exhibit 5.6 - Marketing Channel Patterns LO 2

Control of the Supply Chain Conventional marketing channel: Each channel member is: Loosely aligned with the others and takes a short term orientation Vertical marketing channels Capital-intensive networks of several levels Professionally managed and centrally programmed to: Realize the technological, managerial, and promotional economies of long-term relationships LO 2

Control of the Supply Chain Quick response (QR) systems/ efficient consumer response (ECR) systems Integrated information, production, and logistical systems that: Obtain real-time information on consumer actions by capturing sales data at point-of-purchase terminals Transmit customer information back through the entire channel Enable efficient production and distribution scheduling LO 2

Control of the Supply Chain Corporate vertical marketing channels One channel institution owns multiple levels of distribution Consists of either a manufacturer that has integrated vertically forward to reach the consumer or: A retailer who has integrated vertically backward to create a self supply network LO 2

Control of the Supply Chain Contractual vertical marketing channels A contract governs the working relationship between channel members and includes: Wholesaler-sponsored voluntary groups Wholesaler brings together a group of independently owned retailers and offers them a coordinated merchandising and buying LO 2

Control of the Supply Chain Retailer-owned cooperatives Wholesale institutions, organized and owned by member retailers Offer scale economies and services to member retailers Retailers make greater transaction-specific investments or investments in assets Franchise Form of licensing The owner of a product, service, or business methods obtains distribution through affiliated dealers LO 2

Exhibit 5.6 - Advantages and Disadvantages of Franchising LO 2

Control of the Supply Chain Administered vertical marketing channels – Channel members takes the initiative to lead the channel by: Applying the principles of effective interorganizational management LO 2

Managing Retailer-Supplier Relations Dependency In channel arrangement: Each member firm, whether primary or facilitating, depends on the others to perform a job Interdependency is: At the root of the collaboration found in today’s supply The major cause of conflict found in supply Power: Ability of one channel member to influence the decisions of the other channel members LO 3

Managing Retailer-Supplier Relations Types of power Reward power Based on B’s perception that A has the ability to provide rewards for B Expertise power Based on B’s perception that A has some special knowledge Referent power Based on the identification of B with A Coercive power Based on B’s belief that A has the capability to punish or harm B if B doesn’t do what A wants Legitimate power Based on A’s right to influence B, or B’s belief that B should accept A’s influence LO 3

Managing Retailer-Supplier Relations Types of power Reward, expertise, referent, and informational power foster a healthy working relationship Use of coercive and legitimate power tends to elicit conflict and harm cooperation

Managing Retailer-Supplier Relations Conflict Major sources of conflict between retailers and their suppliers: Perceptual incongruity regarding the: Quality of the supplier’s merchandise Potential demand for the supplier’s merchandise Consumer appeal of the supplier’s advertising Best shelf position for the supplier’s merchandise LO 3

Managing Retailer-Supplier Relations Goal incompatibility Dual distribution Domain disagreements Diverter Gray marketing Free riding

Managing Retailer-Supplier Relations Perceptual incongruity The retailer and supplier have different perceptions of reality. Goal incompatibility Achieving the goals of either the supplier or the retailer would hamper the performance of the other. Dual distribution Manufacturer sells to independent retailers and also through its own retail outlets. Domain disagreements Disagreement about which member of the marketing channel should make decisions. Diverter Unauthorized member of a channel who buys and sells excess merchandise to and from authorized channel members. LO 3

Managing Retailer-Supplier Relations Gray marketing Branded merchandise flows through unauthorized channels. Free-riding Consumer seeks product information, usage instructions, and sometimes even warranty work from a full-service store but then, armed with the brand’s model number, purchases the product from a limited service discounter or over the Internet. LO 3

Exhibit 5.8 - Supply Chain Management Best Practices LO 4

Facilitating Channel Collaboration Mutual trust Both the retailer and its supplier have faith that each will be truthful and fair in their dealings with the other; allows the channel to grow and prosper Two-way communication Both retailer and supplier communicate openly their ideas, concerns, and plans Solidarity High value is placed on the relationship between a supplier and retailer; results in flexible dealings where adaptations are made as circumstances change LO 4

Category Management Category management (CM) Process of managing all the SKUs within a product category Involves the simultaneous management of: Price, shelf space, merchandising strategy, promotional efforts, and other elements of the retail Based on the firm’s goals, changing environment, and consumer behavior LO 4

Category Management Advantages Increase in sales for both parties Decrease in markdowns Better in-stock percentages on key items for the retailer Increase in turnover rates Decrease in average inventory for both retailers and wholesalers Increase in both members’ ROI and profit LO 4

Category Management Category manager Creates various store displays based on local market conditions and knowledge of: Consumer trends Point-of-sale information Analysis provided by each supplier Ensures that the retailer has the best assortment for each store A supplier may serve as the retailer’s category advisor LO 4