1. Chapter Eleven Deliver the Goods: Determine the Distribution Strategy
Marketing: Real People, Real Choices, 8e
Solomon, Marshall, and Stuart
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2. Copyright © 2016 Pearson Education, Inc.
Chapter Objectives
Explain what a distribution channel is, identify types of wholesaling intermediaries, and describe the different types of distribution channels
List and explain the steps to plan a distribution channel strategy
Discuss the concepts of logistics and supply chain
Lecture Notes:
Learning objectives for Chapter 11 (Distribution).
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3. Real People, Real Choices: Decision Time at First Tennessee
Which option should Dan pursue?
Option 1: Pursue minor refinements in many areas.
Option 2: Offer customers the option to pay their bills online – both to companies and to other individuals.
Option 3: Enable banking by smart phone.
DISCUSSION NOTE:
This slide is best introduced by playing the full-length video corresponding to the First Tennessee case.
Explain to students that you want them to think about each option, and that you will return to this question at the end of the chapter.
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4. Types of Distribution Channels and Wholesale Intermediaries
Physical distribution refers to activities that move finished goods from manufacturers to final customers.
A channel of distribution is a series of firms or individuals that facilitates the movement of a product to a final consumer
Direct channels
Indirect channels
LECTURE NOTES:
A channel of distribution consists of, at a minimum, a producer (or manufacturer/creator of a product or service), and a customer.
This is the simplest for of distribution, called a direct channel.
Indirect channels contain one or more channel intermediaries who facilitate the movement of goods between the producer and the consumer or end user. Agents, wholesalers, distributors, and retailers are all examples of channel intermediaries.
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5. Functions of Distribution Channels
Provide time, place, and ownership utility
Provide logistics and/or physical distribution
Create efficiencies by reducing the number of transactions
Lecture Notes:
Channels, consisting of two or more players, often can accomplish certain distribution functions more effectively and efficiently than can a single organization.
These benefits can be categorized in the following ways:
Channels make desired products available when (time utility), where (place utility), and in the sizes and quantities that customers desire (ownership utility).
Distribution channels provide a number of logistics or physical distribution functions that increase the efficiency of the flow of goods from producer to customer.
Similarly, distribution channels create efficiencies because they reduce the number of transactions necessary for goods to flow from many different manufacturers to large numbers of customers
Discussion Note:
Ask students to imagine a world in which there were no grocery stores. How would they acquire their dairy, bread, and produce products? They would have to have to get milk directly from a dairy, bread from a bakery, and tomatoes and corn from a local farmer.
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6. Roles of Distribution Channels
Distribution channel functions increase efficiency of the flow of goods from producer to customer:
Breaking bulk
Creating assortment
Transportation and storage
Facilitating functions
Risk taking functions
Communication and transaction functions
Lecture Notes:
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7. Distribution Channel Functions
Breaking bulk: Purchase large quantities of goods from producers but sell only one or a few at a time to many different customers
Creating assortment: Provide variety of products in one location, so customers can conveniently buy many different items from one seller
Transportation and storage: Occurs when retailers and other channel members move the goods from the production point to other locations where they can hold them until consumers want them.
Lecture Notes:
Distribution channels create efficiencies because they reduce the number of transactions necessary for goods to flow from many different manufacturers to large numbers of customers.
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8. Distribution Channel Functions
Facilitating functions: Make the purchase process easier for customers and manufacturers. (e.g., offering credit to buyers)
Risk taking: Chance retailers take on the loss of a product when they buy a product from a manufacturer because the product sits on the shelf because no customers want it
Communication and transaction: When channel members develop and execute both promotional and other types of communication among members of the channel.
Lecture Notes:
Distribution channels create efficiencies because they reduce the number of transactions necessary for goods to flow from many different manufacturers to large numbers of customers.
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9. Figure 11.1: Reduce Transactions via Intermediaries
LECTURE NOTES:
Figure 11.1 demonstrates how distribution channels provide an assortment of products that customers can buy in the same location, thereby reducing the number of consumer transactions that are necessary and reducing the cost of obtaining a product.
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10. Evolution of Distribution Functions
If intermediaries fail to provide unique value, they are at risk of disintermediation
New technology can render channel members obsolete
LECTURE NOTES:
The Internet has evened the playing field for small firms with limited resources by making it possible for them to reach a national, if not international audience. While this is great news for entrepreneurs, e-commerce has radically impacted distribution strategies for a variety of goods and services.
Goods that are sold over the Internet allow manufacturers to reduce costs by eliminating many of the intermediaries traditionally found in offline channels of distribution, an outcome which has been called disintermediation. For example, airlines no longer need traditional travel agencies to book flights for consumers – consumers book their own flights either through online mega travel agencies such as Expedia, or directly from the airline’s website, eliminating the commission fee paid to booking agents. Additional forms of cost reduction come from fewer employees, and less need for “brick and mortar” company owned stores (and all of the costs that go with them).
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Online Distribution
The Internet has changed how channel members coordinate supply chains
Knowledge management
Use of Internet as a distribution channel not without challenges
Online distribution piracy
Lecture Notes:
The Internet is radically changing how companies coordinate among members of a supply chain to make it more effective in ways that consumers never see.
These firms develop better ways to implement knowledge management, which refers to a comprehensive approach that collects, organizes, stores, and retrieves a firm’s information assets. Those assets include databases and company documents as well as the practical knowledge of employees whose past experience may be relevant to solve a new problem.
In the world of B2B, this process probably occurs via an intranet (Ch. 6), which is an internal corporate communication network that uses Internet technology to link company departments, employees, and databases. But it can also be used to facilitate sharing of knowledge among channel partners since it is a secure and password-protected platform.
However, the Internet as a distribution channel is not without potential problems. pleasure. One of the more vexing issues with Internet distribution is the potential for online distribution piracy, which is the theft and unauthorized repurposing of intellectual property via the Internet. For instance, unauthorized downloads of music continue to pose a major challenge to the “recording” industry—to the point where the whole nature of the industry has turned topsy-turvy in search of a new business model that works.
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12. Figure 11.2: Key Types of Intermediaries
LECTURE NOTES:
Channels of distribution contain both wholesalers and retailers of course; however, the remainder of the chapter will focus on wholesaling. Retailing will be discussed in chapter 12.
Wholesaling intermediaries are firms that handle the flow of products from the manufacturer to the retailer/business user.
Various forms exist:
Independent intermediaries do business with many different manufacturers and many different customer firms and thus help the flow of goods throughout the marketplace.
Merchant wholesalers are independent intermediaries that buy goods from manufacturers and sell to retailers and other B2B organizations. Because they take title to goods (meaning they take legal ownership of the items), they assume risk and can suffer financial losses if the products are damaged while in their possession, or if they become obsolete or just don’t sell. There are several forms of merchant wholesalers as shown in the next slide.
Merchandise Agents or Brokers are independent intermediaries that provide service in exchange for commissions but never take title to the product. Sometimes they don’t even take physical possession of the product. Agents normally represent buyers or sellers on an ongoing basis whereas brokers are normally employed by clients for only a short period of time.
Manufacturer-Owned Intermediaries are separate business units that perform all the functions of independent intermediaries while still maintaining complete control over the channel.
Next sequence of slides covers each of these intermediary types in greater detail.
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Merchant Wholesalers
Full service merchant wholesalers
Limited service merchant wholesalers
Cash-and-carry wholesalers
Truck jobbers
Drop shippers
Mail-order wholesalers
Rack jobbers
LECTURE NOTES:
Full service merchant wholesalers provide delivery, credit, repairs, advertising market research and more to their customers, and often field their own sales force. General merchandise wholesalers (such as a food wholesaler) carry a wide variety of different items, whereas specialty wholesalers (such as a candy wholesaler) carry a deep assortment of items within a specific product line.
By contrast, limited service merchant wholesalers provide fewer services to their customers, and include the cash-and-carry wholesaler, truck jobbers, drop shippers, mail-order wholesalers, and rack jobbers, each of which is described below.
Cash-and-carry wholesalers provide products for small-business customers and are used to distribute low-cost merchandise for small retailers and other business customers.
Truck jobbers deliver perishable food and tobacco items to retailers. (Ex: Those that deliver bread to stores)
Drop shippers take orders from retailers and bill retailers for bulky items that are drop shipped from the manufacturer
Mail-order wholesalers sell through the phone, via mail order, or catalogs and thus provide reasonably priced items to smaller organizational customers (Ex: Granger, Harbor Tools)
Rack jobbers provide display units to retailers, check inventories, and stock shelves.
Limited service wholesalers also take title to the merchandise, but are less likely to offer delivery, credit, or marketing assistance.
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14. Merchandise Agents and Brokers
Agents and brokers provide paid services but never take title to the product
Manufacturer’s agents
Selling agents
Commission agents
Merchandise brokers
LECTURE NOTES:
Merchandise agents or brokers are channel intermediaries that provide service in exchange for commissions but never take title to the product. Sometimes they don’t even take physical possession of the product. Agents normally represent buyers or sellers on an ongoing basis whereas brokers are normally employed by clients for only a short period of time.
The various forms of merchandise agents and brokers are listed and explained below.
Manufacturers’ agents use independent salespeople to promote several lines of noncompeting products.
Selling agents, particularly import/export agents market a whole product line or one manufacturer’s entire output. Their value rests in the fact that they are capable of providing all marketing functions for small manufacturers.
Commission merchants, as the name suggests, sell products on a commission basis and are best used in agricultural markets.
Merchandise brokers do not take physical possession of the good, but rather identify buyers and sellers and get them together, creating efficiencies in marketers in which many small buyers and sellers exist. (Ex: Wineries and wine distributors)
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15. Manufacturer-Owned Intermediaries
Producers may set up their own channel intermediaries
Perform functions of independent intermediaries while maintaining control:
Sales branches
Sales offices
Manufacturer’s showrooms
Lecture Notes:
Sales branches are manufacturer-owned facilities that, like independent wholesalers, carry inventory and provide sales and service to customers in a specific geographic area.
Sales offices are manufacturer-owned facilities that, like agents, do not carry inventory but provide selling functions for the manufacturer in a specific geographic area. Allow members of the sales force to locate close to customers, reducing selling costs and offering better customer service.
Manufacturers’ showrooms are manufacturer-owned or leased facilities in which products are permanently displayed for customers to visit. Retailers can visit either during a trade show or all year long to see the manufacturer’s merchandise and make B2B purchases.
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16. Figure 11.3: Major Types of Channels of Distribution
Channels differ by the number of members who participate
Choice influenced by market size, purchase frequency and intermediary availability.
LECTURE NOTES:
Firms face a number of choices when the structure or restructure their distribution channels.
Marketers first consider the different channel levels that are available.
Channel levels refer to the number of distinct categories of intermediaries that populate a channel of distribution. Considerations of which members are available, the size of the market, and the frequency of consumer product purchases are just some of the factors considered at this point. The figure summarizes the different structures that a channel of distribution can take.
A direct channel is illustrated on the first line, in which a producer sells directly to the customer, be it a business or consumer.
When this tactic is not feasible, retailers, wholesalers, or even multiple wholesalers may be added to the distribution channel. But as each intermediary is added to the channel structure, the final cost to the customer increases, so it is critical that each channel member provide additional value.
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17. Figure 11.3: Typical Consumer Channels
LECTURE NOTES:
As previously explained, consumer channels of distributions can take a variety of forms, including direct from the producer to the consumer, or one which includes one or more wholesalers and retailers. Don’t let the fact that specific retailers are mentioned on this slide fool you – Dillard’s is just one example of the TYPE of retailer that would carry the Liz Claiborne’s fashions. Macy’s and other higher end retailers would also be involved in the distribution process.
Direct channels often allow producers to serve customers better and at a lower cost. Sometimes this is the only option because using intermediaries may inflate the final price to the consumer beyond what he or she is willing to pay. Direct channels also provide manufacturers with more control over the pricing, service, and delivery process. Working directly with consumers may also provide valuable insights into trends, needs, complaints, and the effectiveness of various marketing strategies.
Producers are often forced to use indirect channels to reach consumers at the places they prefer to shop and expect to find merchandise of certain types. The producer-retailer-consumer channel creates utility and transaction efficiencies, channel members enhance the ability of producers to reach customers.
The producer-wholesaler-retailer-consumer channel is very common in consumer marketing of products such as ice cream as well as fashion products.
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18. Figure 11.3: Typical B2B Channels
LECTURE NOTES:
Business-to-business channels operate in a similar manner. Some manufacturers sell directly to the end business users. Others use dealers as intermediaries. Longer channels may involve sales agents and wholesalers, or wholesalers and distributors. In the B2B context, the merchant wholesaler is typically referred to as an industrial distributor.
It’s not uncommon for a producer to participate in more than one type of channel, regardless of whether consumers or businesses are ultimately targeted. Using multiple channels is called dual distribution or a multiple distribution system.
For example, drug companies sell to at least three types of channels – direct to hospitals and clinics, and indirect to consumers via drug stores and retailers. Alternately, a drug provider may sell some OTC medicines to wholesalers, who in turn sell to retailers, who then make the product available to the final consumer.
Often companies combine channels, direct sales, distributors, retail sales, and direct mail to reach a target market. This combination of different channels and communication methods is called a hybrid marketing system.
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19. Dual (Hybrid) Distribution Channels
Channel members may participate in more than one type of channel – a concept known as dual or hybrid distribution channels
Pharmaceutical companies
Some companies combine channels—direct sales, distributors, retail sales, and direct mail—to create a hybrid marketing system
Xerox
Lecture Notes:
Instead of serving a target market with a single channel, some companies combine channels—direct sales, distributors, retail sales, and direct mail—to create a hybrid marketing system.
Discussion Note:
Pharmaceutical companies distribute their products in at least three types of channels:
Hospitals and large clinics
Drugstore chains
Large insurance companies, HMOs, and PPOs
At one time, you could buy a Xerox copier only directly through a Xerox salesperson. Today, unless you are a very large business customer, you likely will purchase a Xerox machine from a local Xerox authorized dealer or possibly through the Xerox “Online Store.”
Xerox turned to an enhanced dealer network for distribution because such hybrid marketing systems offer companies certain competitive advantages, including increased coverage of the market, lower marketing costs, and a greater potential for customization of service for local markets.
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20. Distribution Channels and the Marketing Mix
Channel decisions impact other elements of the marketing mix
Pricing objectives and strategies will vary based on channel member selection
Physical features and complexity of product have channel implications
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21. Ethics in the Distribution Channel
Channel decisions can create ethical dilemmas
Slotting allowances are fees paid by producers to large retailers for access to premium shelf space
Selection of large intermediaries like Wal- Mart can have detrimental effects on smaller retailers
Lecture Notes:
Companies’ decisions about how to make their products available to consumers through distribution channels can create ethical dilemmas.
For example, because their size gives them great bargaining power when they negotiate with manufacturers, many large retail chains force manufacturers to pay a slotting allowance—a fee in exchange for agreeing to place a manufacturer’s products on a retailer’s valuable shelf space. Although retailers claim that such fees help pay the cost of adding products to their inventory, many manufacturers feel that slotting fees are more like highway robbery.
In addition, the practice prevents many smaller manufacturers that cannot afford the slotting allowances from getting their products into the hands of consumers
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22. Channels of Distribution
Channels facilitate movement of goods and services from producer to end consumer
May be direct or indirect channels
Channel intermediaries vary in terms of ownership, functions performed, and whether or not they take title to products
What do you think about the practice of slotting fees? Is this practice unethical? Unfair?
Lecture Notes:
Summary slide for Chapter 11, learning objective 1.
Discussion Note:
Instructor should revisit discussion of slotting fees from the earlier slide, making sure everyone understands how they work
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23. Figure 11.4: Steps in Distribution Planning
LECTURE NOTES:
Planning a channel strategy works best when marketers follow a four step process:
Develop distribution objectives
Consider both internal and external environmental influences
Develop a distribution strategy.
Select distribution tactics.
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24. Step 1: Develop Distribution Objectives
Objectives must support overall marketing goals
How does distribution work with the other marketing mix elements to increase sales, profits, or market share?
Specific objectives may depend on nature of the product (e.g., if product is heavy, a key goal may be to minimize shipping cost)
Lecture Notes:
The first step requires that objectives be developed for the distribution plan that support the firm’s overall marketing goals.
This requires consideration of how distribution can work with the other marketing mix elements to increase profits, market share, or perhaps sales.
More specific objectives may depend upon the nature of the product. If the product is heavy or bulky, the key goal may be to minimize shipping costs. On the other hand, if the product is marketed on the basis of status or prestige, the goal may be choose retailers who provide the level of store service and merchandise mix that is consistent with supporting the product’s desired image.
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25. Step 2: Evaluate Internal and External Environmental Influences
What are relevant internal and external environmental influences?
How can these factors be used or minimized in developing the best channel structure?
Lecture Notes:
In the second step, marketers consider both the internal and external environmental influences and how these factors can be used or minimized to develop the best channel structure.
For example, is intensive, selective, or exclusive distribution most appropriate?
Does the B2B product being sold require high levels of technical know-how and customer service? If so, a direct channel would likely be best.
Is the item perishable? If so, a short channel would be better while inexpensive, standardized consumer goods requiring intensive distribution would likely benefit from a longer channel.
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26. Step 3: Choose a Distribution Strategy
Choice of distribution strategy involves several decisions:
Number of levels
Conventional system vs. highly integrated system
Distribution intensity
Lecture Notes:
Planning a distribution strategy means making several decisions.
First, distribution planning includes decisions about the number of levels in the distribution channel.
Beyond the number of levels, distribution strategies also involve two additional decisions about channel relationships: (1) whether a conventional system or a highly integrated system will work best and (2) the proper distribution intensity, meaning the number of intermediaries at each level of the channel.
The next sections provide insight into making these two distribution strategy decisions
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27. Conventional Marketing System
Multilevel distribution channel in which members work independently
Relationships limited to buying and selling from each other
While members work independently, each recognizes self-interest is best served by fair dealing
Lecture Notes:
A conventional marketing system is a multilevel distribution channel in which members work independently of one another.
Their relationships are limited to simply buying and selling from one another. Each firm seeks to benefit, with little concern for other channel members.
Even though channel members work independently, most conventional channels are highly successful. For one thing, all members of the channel work toward the same goals—to build demand, reduce costs, and improve customer satisfaction. And each channel member knows that it’s in everyone’s best interest to treat other channel members fairly.
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28. Vertical Marketing Systems (VMS)
Channel in which there is formal cooperation among members at two or more levels
Three types of vertical marketing systems
Administered VMS: Independent channel members work together due to power of a dominant channel member
Corporate VMS: A single firm owns manufacturing, wholesaling, and retailing operations.
Contractual VMS: Channel member cooperation enforced by contracts that spell out rights and responsibilities of each member.
Lecture Notes:
In an administered VMS, channel members remain independent but voluntarily work together because of the power of a single channel member. Strong brands are able to manage an administered VMS because resellers are eager to work with the manufacturer so they will be allowed to carry the product.
In a corporate VMS, a single firm owns manufacturing, wholesaling, and retailing operations. Thus, the firm has complete control over all channel operations. Retail giant Macy’s, for example, owns a nationwide network of distribution centers and retail stores.
In a contractual VMS, cooperation is enforced by contracts (legal agreements) that spell out each member’s rights and responsibilities and how they will cooperate. Three types of contractual VMS are most common:
In a wholesaler-sponsored VMS, wholesalers get retailers to work together under their leadership in a voluntary chain. Retail members of the chain use a common name, cooperate in advertising and other promotion, and even develop their own private-label products. Examples of wholesaler-sponsored chains are IGA (Independent Grocers’ Alliance) food stores and Ace Hardware stores.
A retailer cooperative is a group of retailers that establishes a wholesaling operation to help them compete more effectively with the large chains. Each retailer owns shares in the wholesaler operation and is obligated to purchase a certain percentage of its inventory from the cooperative operation. Associated Grocers and True Value Hardware stores are examples of retailer cooperatives.
Franchise organizations are a third type of contractual VMS. Franchise organizations include a franchiser (a manufacturer or a service provider) who allows an entrepreneur (the franchisee) to use the franchise name and marketing plan for a fee. In these organizations, contractual arrangements explicitly define and strictly enforce channel cooperation. Usually, the franchisees are obligated to follow the franchiser’s business format very closely in order to maintain the franchise.
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29. Horizontal Marketing System
Two or more firms at the same channel level agree to work together to get their product to the customer.
e.g., airline code sharing agreements
Lecture Notes:
In a horizontal marketing system, two or more firms at the same channel level agree to work together to get their product to the customer. Sometimes, unrelated businesses forge these agreements.
Most airlines today are members of a horizontal alliance that allows them to cooperate when they provide passenger air service. For example, American Airlines is a member of the OneWorld alliance, which also includes Air Berlin, British Airways, Cathay Pacific, Finnair, Iberia, Japan Airlines, LAN, Malaysia Airlines, Qantas, Qatar Airways, Royal Jordanian, S7 Airlines, SriLankan Airlines, TAM Airlines and, recently added, US Airways.
These alliances increase passenger volume for all airlines because travel agents who book passengers on one of the airline’s flights will be more likely to book a connecting flight on the other airline. To increase customer benefits, they also share frequent-flyer programs and airport clubs.
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30. Intensive, Selective, and Exclusive Distribution
How many wholesalers and retailers should carry the product within a given market?
Intensive distribution: Maximize coverage by selling through as many outlets as possible.
Exclusive distribution: Limit distribution to a single outlet in a particular region
Selective distribution: Seeks to strike a balance between intensive and exclusive distribution
Lecture Notes:
Intensive distribution involves selling through all suitable wholesalers or retailers. The aim is to maximize market coverage for frequently purchased products such as soft drinks, milk, and bread. This strategy works best with convenience goods.
Exclusive distribution, by contrast, involves selling only through a single outlet within a given geographic region. Exclusive distribution is most appropriate for high-priced items that have extensive service requirements and a limited number of buyers.
Between these two extremes lies selective distribution, in which the producer chooses to use fewer outlets than under an intensive strategy, but more than when exclusive distribution is used. Selective distribution makes sense when demand is so large that exclusive distribution results in lost sales opportunities, but selling costs, service requirements, and other factors may intensive distributions a poor choice. Selective distribution is most commonly associated with shopping products such as household appliances, furniture, and the like.
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Table 11.2: Characteristics That Favor Intensive versus Exclusive Distribution
LECTURE NOTES:
As mentioned previously, the last decision to made in step three is to determine the level of distribution intensity: intensive, selective, or exclusive.
Table 11.2 shows the factors that favor intensive vs. exclusive distribution.
DISCUSSION NOTE:
Ask students to come up with examples of products or services that fit the criteria for intensive and exclusive distribution. For example, high-end luxury cars such as Rolls Royce would be excellent choices for exclusive distribution.
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32. Step 4: Develop Distribution Tactics
Distribution tactics relate to two aspects of strategy implementation:
Selecting channel partners
Firms consider economic, competitive, relationship, and sustainability factors
How to manage the channel
Lecture Notes:
The final step in distribution planning is to develop the tactics for distribution necessary to implement the distribution strategy.
Distribution tactics relate to two aspects of the implementation of these strategies: (1) how to select individual channel members, (2) how to manage the channel.
In evaluating intermediaries, manufacturers try to answer questions such as the following:
Will the channel member contribute substantially to our profitability?
Does the channel member have the ability to provide the services customers want?
What impact will a potential intermediary have on channel control?
Channel management tactics are discussed on the next slide.
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33. Copyright © 2016 Pearson Education, Inc.
Channel Management
The channel captain is the dominant firm that controls the channel
Channel power derives from different potential sources:
Economic power
Legitimate power
Coercive power
Cooperation and conflict within the channel
Channel power is the ability of one channel member to influence, control, and lead the entire channel based on one or more sources of power.
This power comes from different potential sources, among which are the following:
Once a manufacturer develops a channel strategy and aligns channel members, the day-to-day job of managing the channel begins. The channel leader or channel captain is the dominant firm that controls the channel. A firm becomes the channel captain because it has more channel power relative to other channel members. Channel power is the ability of one channel member to influence, control, and lead the entire channel based on one or more sources of power. This power comes from different potential sources, among which are the following:
• A firm has economic power if it has the ability to control resources.
• A firm such as a franchiser has legitimate power if it has legal authority to call the shots.
• A producer firm has reward or coercive power if it engages in exclusive distribution and has the ability to give profitable products and to take them away from the channel intermediaries.
Because producers, wholesalers, and retailers depend on one another for success, channel cooperation helps everyone. Channel cooperation is stimulated when the channel leader takes actions that make its partners more successful. Examples of this, such as high intermediary profit margins, training programs, cooperative advertising, and expert marketing advice, are invisible to end customers but are motivating factors in the eyes of wholesalers and retailers.
Of course, relations among members in a channel are not always full of sweetness and light. Because each firm has its own objectives, channel conflict may threaten a manufacturer’s distribution strategy. Such conflict most often occurs between firms at different levels of the same distribution channel. Incompatible goals, poor communication, and disagreement over roles, responsibilities, and functions cause conflict
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34. Channel Strategy and Tactics
Channel strategy planning involves decisions about:
Number of channel levels
Degree of integration
Distribution intensity
Channel tactics involve channel partner selection and channel management
Lecture Notes:
Summary slide for Chapter 11, learning objective 2.
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35. The Lowdown on Logistics
Marketing success depends on more than just plans – implementation is crucial!
Logistics plays a crucial role in firm efforts to deliver on their brand’s promise
Logistics is the process of designing, managing, and improving the movement of products through a supply chain
Supply chain is all activities needed to turn raw materials into a product delivered to a customer
Lecture Notes:
Introductory slide for Chapter 11, learning objective 2.
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36. Figure 11.5: The Five Functions of Logistics
LECTURE NOTES:
Developing logistic strategies requires marketers to make decisions related to the five functions of decisions displayed in Figure 11.5.
Each of the function are discussed in detail on the following slides.
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Order Processing
Order processing includes activities that occur between time an order comes in and the product goes out
Many firms automate this process using enterprise resource planning (ERP) software
Order processing includes the series of activities that occurs between the time an order comes into the organization and the time the product goes out the door.
After a firm receives an order, it typically sends it electronically to an office for record keeping and then on to the warehouse to fill it. When the order reaches
the warehouse, personnel there check to see if the item is in stock. If it is not, they put the order on back-order status. That information goes to the office and then to the customer. If the item is available, the company locates it in the warehouse, packages it for shipment, and schedules it for pickup by either in-house or external shippers.
Many firms automate this process with enterprise resource planning systems, which are software systems that integrate information from across the entire company, including finance, order fulfillment, manufacturing, and transportation and then facilitates sharing of the data throughout the firm.
For example, and ERP system ties information on product inventories to sales information so that a sales representative can tell a customer whether or not a product is in stock.
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Warehousing
Storage of good in anticipation of sale or transfer of goods to another member of distribution channel
Logistics planning determines:
How many warehouse will be needed
Where will warehouses be located
What type of warehouses
Lecture Notes:
Warehousing involves the storage of goods in anticipation of the sale or transfer to of goods to another member of the channel of distribution.
It’s the warehousing function of logistics that allows marketers to provide time utility to consumers by holding products until the consumer is ready to buy. Logistics planning requires determining how many warehouses will be needed, where they should be located, and what type they should be. Higher desired customer service levels may require more warehouses to minimize shipping times. Location is also chosen on the basis of proximity to railroads, seaports, or major highways. Private warehouses are owned by the firm and require a large initial investment, though they lose less product due to damage.
Public warehouses allow a firm to rent a portion of a warehouse, thereby minimizing costs.
Distribution centers may store goods for a short time, but then serve other functions such as breaking bulk.
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Materials Handling
Materials handling relates to the movement of products into, within, and out of warehouses
Procedures that limit the number of times a product must be handled:
Decrease the likelihood of damage
Reduce the cost of materials handling
Lecture Notes:
Materials handling is the moving products into, within, and out of warehouses.
When goods come into the warehouse, they must be physically identified, checked for damage, sorted, and labeled. Next, they are taken to a location for storage. Finally, they are recovered from the storage area for packaging and shipment. All in all, the goods may be handled over a dozen separate times.
Procedures that limit the number of times a product must be handled decrease the likelihood of damage and reduce the cost of materials handling.
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Transportation
Transportation modes differ along multiple dimensions, including:
Dependability
Cost
Speed of delivery
Accessibility
Capability
Traceability
LECTURE NOTES:
Logistics decisions must take into account options for transportation.
Dependability refers to the ability of the carrier to deliver goods safely and on time.
Cost refers to the total transportation costs to move a product from one location to another, including any charges for loading, unloading, and in-transit storage.
Speed of delivery means the total time to move a product from one location to another, including loading and unloading
Accessibility relates to the number of different locations the carrier serves.
Capability refers to a carriers ability to handle a variety of different products such as large or small, fragile, or bulky.
Traceability relates to the ability of the carrier to locate goods in a shipment.
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41. Table 11.3: A Comparison of Transportation Modes
LECTURE NOTES:
Each mode of transportation has strengths and weaknesses that make it a good choice for different transportation needs; Table 15.3 summarizes the pros and cons of each.
DISCUSSION NOTES:
Ask students to identify some of the product characteristics that influence a manufacturer to select one shipping method over another.
One factor to be considered is the degree to which the product is perishable. Perishable goods are less likely to be shipped by rail, due to poor traceability and moderate delivery speeds. The composition of the product is also important. For example, pipelines are devised to transport liquid goods.
Another point to be made is that very often a combination of methods might be used. Products may leave a manufacturing facility by truck and be taken to an airport, flown over a long distance, then trucked to their final destination. Barges may move coal or other non-perishable items up or down river to a docking facility from which they are trucked to their final location.
A summary of the most suitable products for each transportation mode is provided in the final column of the table:
Railroads: heavy, bulky items over long distances
Water: large, bulky goods (especially internationally)
Trucks: consumer goods in short haul; allow flexibility in locations
Air: high value-items; fastest and most expensive mode
Pipelines: petroleum/chemical products
Internet: services such as banking, news, and entertainment
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42. Copyright © 2016 Pearson Education, Inc.
Inventory Control
Firms store goods (i.e., create an inventory) for many reasons
Must balance extra costs of holding excess inventory with risk of stock-outs
Inventory control: Activities to ensure goods are available to meet customers’ demands
Just in Time (JIT) delivery systems help ensure deliveries arrive when they are actually needed
New technologies like RFID also reduce costs
LECTURE NOTES:
Inventory control is the final function of logistics. Firms work hard to track their merchandise so they know where goods are and can easily get them where needed when low-inventory situations occur.
Some firms use radio frequency ID technology to tag clothes or virtually any product that can contain tiny chips of this nature. RFID tags contain information about the item’s content, origin, destination, etc. Some consumer groups are creating a backlash against RFID in blogs or via other sources, labeling them “spy chips”. In extreme cases, boycotts and other anti-company initiatives have been instigated.
Firms store goods for many reasons. With seasonal items, for example, it is often more economical to produce goods year round, inventory excess product, and then ship it when needed. Retailers may also find that money can be saved by ordering larger quantities and reducing the number of deliveries. Of course the downside is that stockouts can occur when demand exceeds estimations and inadequate product is on hand to be sold. While often a mere inconvenience for consumers, other forms of stockouts – such as an inadequate supply of anti-venom – could be life threatening to patients in need.
Total costs are heavily influenced by logistics. Poor planning could lead to expensive emergency deliveries or lost customers. On the other hand, too much inventory leads to excessive carrying costs and the possibility of lost product due to perishability or damage.
Just in time delivery systems are used to set up the delivery of goods just as they are needed on the production floor, minimizing inventory costs while ensuring that inventory will be there when needed.
A supplier’s ability to make on-time deliveries is the single most critical factors in the selection factor, even more important than price. Often suppliers agree to set-up production facilities close to large customers to guarantee JIT delivery.
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43. Ethical/Sustainable Decisions in the Real World
Lyfe Kitchens is a small fast food chain in California with a big vision:
Create a sustainable brand of healthy fast food.
Lyfe sources all of its meat, vegetables and dairy from sustainable suppliers.
Do you think restaurants should be required to purchase their ingredients from sustainable suppliers?
Discussion Notes:
Instructor should begin by asking students whether this restaurant concept appeals to them. If so, how much more what they would be willing to pay for lunch?
Students should also be asked consider the many challenges associated with requiring restaurants to source even a percentage of their supplier from sustainable suppliers.
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44. Logistics and the Supply Chain
Logistics manages the movement of products through a supply chain
Order Processing
Warehousing
Materials management
Transportation
Inventory Control
Lecture Notes:
Summary slide for Chapter 11, learning objective 3.
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45. Real People, Real Choices: Decision Made at First Tennessee
Dan chose option 3
Implementation: Dan and his team decided to concentrate on mobile banking. They reasoned that the ability to conduct transactions via smart phone provided a way to establish leadership with a relatively modest investment.
Measuring Success: The team created a launch dashboard that tracked number of users. It conducted post-launch analysis to understand impact of app use on retention, purchase of other products, and cost savings.
Discussion Notes:
To keep tabs on the app’s progress, the team created a launch dashboard that tracked
the number of users who adopted mobile banking and its penetration into the existing
customer base. At the three-, six-, and 12-month marks postlaunch, the First Tennessee
Customer Insight team conducted an analysis to understand the impact on retention
rates, probability of purchasing other products, and the cost-saving potential of moving
inquiries from the call center or deposits from the teller line onto the mobile platform.
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46. Copyright © 2016 Pearson Education, Inc.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America
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