© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 12 Small Business Marketing: Product

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 2 Learning Objectives Discuss the different forms a product can take, and identify the five levels of product satisfaction Explain the importance of purchasing and describe its procedures Calculate how much inventory you need and when Describe seven methods of inventory control

12| 3 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO Discuss the different forms a product can take, and identify the five levels of product satisfaction

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 4 Marketing Mix Factors that a business can change or control in selling products or services to customers in its target market Marketing mix Product - Goods and services Place - Distribution channels, location, and layout Price - Enables to make profit Promotion - Marketing communications Four Ps (Factors of marketing mix)

12| 5 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Marketing Mix Target Market Product PlacePrice Promotion

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 6 Product: The Heart of the Marketing Mix Tangible goods, intangible services, or a combination of these Bundle of satisfaction that consumers receive in exchange for their money Product Core benefit - Fundamental reason why the product is purchased Generic product - Basic product attributes Expected product - Assumed product characteristics Augmented product - Differentiating characteristics Potential product - Anticipated future characteristics Levels of product satisfaction

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 7 Figure Spectrum of Goods and Services

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 8 Figure Levels of Products

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 9 Categories of New Products New-to-the-world products New product lines Additions to existing product lines Improvements in, revisions of, or new uses of existing products Repositioning of existing products Lower-cost versions of existing products

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 10 Startup - Create and operate a business based on new product Licensing agreement: Owner of intellectual property grants another person permission to produce that product Private label manufacturing: Producing products under another company’s name Original-equipment manufacturer (OEM) Company that makes component parts or accessories for larger items Options for marketing a new product Inventor’s Paradox

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 11 Obsolescence factors for existing products New technologies Increasing numbers of substitute products Quickly changing consumer tastes and preferences Shifting consumption patterns Importance of Product Competitive Advantage

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 12 Importance of Product Competitive Advantage Core competencies create sustainable competitive advantage Criteria to be satisfied to be classified as a core competency Should be applicable across a range of products Should be difficult for competitors to duplicate Should provide a fundamental and valuable benefit to customers

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 13 Leverage existing capabilities Enter growth markets Target niche markets Diversify Add new capabilities Best Practices of Successful Companies

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 14 Establish strong top management leadership Have a good workforce Maintain high employee productivity Have low overhead Best Practices of Successful Companies

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 15 Catch customers’ attention Add value to the product Make handling or storage more convenient Reduce spoilage or damage Make the product more identifiable and easier for customers to find Marketing functions of packaging Packaging

12| 16 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO Explain the importance of purchasing and describe its procedures

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 17 Purchasing for Small Business Are you using the proper sources of supply? Are you taking advantage of all purchase discounts? How do you determine minimum inventories and reorder points? Have you run out of raw materials or finished goods? What is the record of your current suppliers for quality, service, and price? Purchasing guidelines

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 18 Purchasing for Small Business Are you using minimum quantities or economic ordering quantities? What are your inventory holding costs? Do you know your optimum average inventory? Does it guide your purchasing policy? Could you improve your purchasing to increase profits? What is your inventory turnover ratio? How does it compare with the industry average? Purchasing guidelines

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 19 Purchasing Basics Steps in the purchasing process Recognize, describe, and transmit the need Investigate and select suppliers and prepare a purchase order Follow up on the order Receive and inspect the order Complete the order (pay the invoice)

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 20 Selecting Suppliers Supplier selection should be based on systematic analysis Vendors are a significant component of business operation

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 21 Make-or-Buy Decision Choice of whether to purchase parts and components or to produce them Based on the availability and quality of suppliers Specialized needs are required to manufacture own parts Standardized parts and components can be purchased

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 22 Investigating Potential Suppliers Product quality, location, services provided, and credit terms Develop a checklist to evaluate vendors Mutual dependence benefits both companies Less paperwork in dealing with one business Single source advantages Decreased prices and improves services due to competition between vendors Multiple-source advantage

12| 23 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO Calculate how much inventory you need and when

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 24 Managing Inventory Goods a business owns for the completion of future sales Act of counting the goods held in stock Inventory Monetary value of goods owned by a business at a given time Number of units on hand at a given time Process of measuring or counting goods Detailed list of goods Contextual definitions of inventory

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 25 Managing Inventory How much inventory do you need? Retail business Time required to get fresh inventory Cost of reordering Service industry Supplies to perform services and meet needs of customers Manufacturing business Production rate considering lead time to get new stock Optimum economic quantity of order Inventory techniques Just-in-time (JIT) inventory control Materials requirement planning (MRP)

12| 26 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Costs of Carrying Inventory ShrinkageOrdering costsObsolescence Holding costs Inventory carrying costs

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 27 Costs of Carrying Inventory Loss of goods held in inventory due to theft or spoilage Shrinkage Occurs when products become outdated or fall out of fashion Obsolescence Expenses related to keeping inventory on hand Holding costs Expenses related to procuring inventory Ordering costs

12| 28 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO Describe seven methods of inventory control

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 29 Controlling Inventory Process of establishing and maintaining the supply of goods to keep on hand Inventory control Reorder point and quantity Visual control Economic order quantity (EOQ) ABC classification Electronic data interchange (EDI) Just-in-time (JIT) Materials requirements planning (MRP) Techniques

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 30 Controlling Inventory Reorder point and quantity Determining when to restock inventory and how much to reorder Inventory cycle Period of time from the point when inventory is at its highest until it is replenished Lead time Period of time from order placement until the goods are received

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 31 Figure Inventory Cycles

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 32 Controlling Inventory Looking at the goods on hand and reordering when it appears to be running low on items Visual control Minimizes total inventory costs by balancing annual ordering costs with annual holding costs for an item Economic order quantity (EOQ) No volume discounts Accurate prediction of annual demand Average inventory level is equal to the maximum level minus the minimum level divided by two EOQ assumptions

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 33 Figure Economic Order Quantity

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 34 EOQ Formula Where D = Annual demand for the product (in units) O = Average ordering cost for the product (in dollars per year) C = Average holding cost for one of the products (in dollars per year)

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 35 Controlling Inventory ABC classification Classifies items based on the total dollar volume of sales each generates Calculating ABC items Calculate the total dollar volume for an item by multiplying the cost of an item by the number of units sold annually Pay more attention to the item which generates high weighted dollar volume

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 36 Table ABC Inventory Investment Classification

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 37 Controlling Inventory Computerized application-to-application exchange to track inventory in a standard data format Utilizes UPC (Universal Product Code) bar codes to track sales, determine orders, and transmit data to suppliers Electronic data interchange (EDI) Indicates how many units of an item are on hand at any given time Perpetual inventory system Radio-frequency identification tags can detect the selected items and deduct the costs from the credit card RFID

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 38 Controlling Inventory Just-in-Time (JIT) Japanese approach to inventory management Reduces order sizes and time orders so that goods arrive when they are needed as possible Minimizes a business’s dependence on inventory and cuts the costs of moving and storing goods Used more by producers than retailers Requires that everyone involved must be able to do what they say they can, when they say they can do it

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 39 Table JIT and Traditional Inventory Comparison

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12| 40 Controlling Inventory Materials requirements planning (MRP) Depends on computers to coordinate product orders, raw materials, and the sequence of production Useful when demand for some materials depends on the demand for others Manufacturing resource planning II (MRPII) Advanced control system that coordinates inventory management with all other functions of a business Used mainly in large businesses