1. 0 Managing the Supply Chain Chapter 5 Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved.

2. 1 Learning Objectives Discuss the retailer’s role as one of the institutions involved in the larger 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 having collaborative supply chain relationships.

3. 2 The Supply Chain Supply Chains Is a set of institutions that moves goods from the point of production to the point of consumption. Channel Used interchangebly with chain. LO 1

4. 3 The Supply Chain The supply chain, or channel, is affected by five external forces: Consumer behavior Competitor behavior Socioeconomic environment Technological environment Legal and ethical environment LO 1

5. 4 The Supply Chain A supply chain or channel must perform eight marketing functions: Buying Selling Storing Transporting Sorting Financing Information gathering Risk taking LO 1

6. 5 The Supply Chain A marketing function does not have to be shifted in its entirety to another institution or to the consumer but can be divided among several entities. LO 1

7. 6 The Supply Chain Marketing System Is the set of institutions performing marketing functions (activities), the relationships between these institutions, and the functions that are necessary to create exchange transactions with target populations or consumers. LO 1

8. 7 The Supply Chain Primary Marketing Institutions Are those channel members that take title to the goods as they move through the marketing channel. They include manufacturers, wholesalers, and retailers. LO 1

9. 8 Primary Marketing Institutions Costco is a primary marketing institution that acts as both a wholesaler (selling to small businesses) and a retailer (selling to households). LO 1

10. 9 The Supply Chain Facilitating Marketing Institutions Are those that do not actually take title but assist in the marketing process by specializing in the performance of certain marketing functions. LO 1

11. 10 The Supply Chain: Institutions Participating in LO 1: Exhibit 5.1 Primary (Take Title) Facilitating (Do Not Take Title) Manufacturers Wholesalers Retailers Agents/Brokers Financial Institutions Market Researchers Transporters Advertising Agencies Warehouses Insurers The Supply Chain

12. 11 The Supply Chain Public Warehouse Is a facility that stores goods for safekeeping for any owner in return for a fee, usually based on space occupied. LO 1

13. 12 Facilitating Institutions Freelance broker Manufacturer’s agent Sales agent Purchasing agents LO 1

14. 13 The Supply Chain: Sorting Process LO 1 SOURCE: Virginia Newell Lusch, used with permission.

15. 14 The Supply Chain: Sorting Process LO 1 SOURCE: Virginia Newell Lusch, used with permission.

16. 15 The Supply Chain: Sorting Process LO 1 SOURCE: Virginia Newell Lusch, used with permission. ASSORTMENT

17. 16 A Grocery Product’s Final Ten Movements Truck carrying 10 cases of Macaroni & Cheese arrives @ Retailer’s loading dock Retailer’s employee moves shipment to storage area until stocker can put cans on the shelf. Stocker puts boxes on the shelf. Customer picks up box of Macaroni and Cheese and puts it in a shopping cart. Customer takes shopping cart to checkout line. Box of Macaroni and Cheese is taken from shopping cart and placed on scanner belt. Cashier scans the box. Bagger bags the box. Bag is carried to customer’s car. Customer drives home. Customer carries bag of groceries into the home and unloads it. LO 1

18. 17 Deductions Taken by a Retailer 010 Price Difference as Documented 011 Price difference PO/Invoice 012 Invoice Incorrectly Extended 013 Substitution Over/charge 020 Concealed Damage 021 Concealed Shortage 022 Merchandise Billed Not Shipped 023 Carton Shortage SL&C 024 Carton Shortage Frt Bill signed Short 025 P.O.D./No Merchandise Received for Invoice 026 Carton Shortage-Misrouting Changed FOB 027 Carton Damage-SL&C 028 Carton Damage-Frt Bill Signed Damaged 029 Carton Damage-Misrouting Changed FOB LO 1

19. 18 Deductions Taken by a Retailer 030 Duplicate Billing 031 P.O. Number Not on Invoice 032 Multiple P.O. Number on Invoice 033 P.O. Number Incorrect on Invoice 034 Pallet Charge 035 Sales Tax - State 036 Sales Tax - City 037 Insurance 038 Stop-Off charge Incorrectly Added to Invoice 039 Freight Cost on Backorder LO 1

20. 19 Deductions Taken by a Retailer 040 Routing Violation 041 Collect - Should have been Prepared 042 Backhaul/Pickup Allowance 043 Mds. S/B Combined for Lower Frt cost 044 Freight on Returned Merchandise 045 Prepaid Freight Incorrectly Added to Invoice 046 Freight Allowance 047 Excessive Freight charge on Invoice 048 Frt Should Be Prepaid to Consolidator 049 Frt Cost to Forward Misrouted Shipment LO 1

21. 20 Deductions Taken by a Retailer 050 Advertising Allowance 051 Promotional/Display/Fixture Allowance 052 Volume Allowance 053 Truckload Allowance 054 Warehouse Allowance 055 New Location Allowance 056 Early Buy allowance 057 Quantity Discount 058 Other Allowance 059 Defective Merchandise Allowance LO 1

22. 21 Deductions Taken by a Retailer 060 Handling Charge as Documented 061 Incorrect Color/Size Assortment 062 Labor and Handling-Packaging/Repackaging 063 D/L Addressed to Wrong Location 064 Early Shipment 065 Late Shipment 066 P.O. Number Not on Carton 067 Incorrect P.O. Number on Carton 068 P.O. Number Not on Bill of Lading 069 Incorrect P.O. Number on Bill of Lading LO 1

23. 22 Deductions Taken by a Retailer 070 No Item Number on Cartons 071 Incorrect Item Number on Cartons 072 Labor and Handling-Ticketing/Reticketing 073 Duplicate Payment 074 Previous Account - Debit Balance 075 Transfer of Debit Balance 076 Buyers Reserve 077 Overpayment of Invoice Amount 078 Storage Charges 079 Sample Charges LO 1

24. 23 Deductions Taken by a Retailer 080 Cash Discount 081 Anticipation - Vendor Request 082 Anticipation - Early Payment of Invoice 083 Discount Not Taken at Time of Payment 085 Interest on Overpayment 086 Excise Tax 087 Other LO 1

25. 24 Deductions Taken by a Retailer 090 Unauthorized Charge - System Deduction 091 Merchandise Destroyed - Damaged/Defective 092 Merchandise Returned - Overstock/Recall 093 Merchandise Returned - Damaged Merchandise 094 Merchandise Returned - Defective Merchandise 095 Merchandise Return - Wrong Item 096 Mdse. For Repair/Assembly - Not Returned 097 Returned Merchandise Handling Charge 150 Softgoods Defective Allowance 151 Purchase Rebate Allowance LO 1

26. 25 Types of Supply Chains Length Width Control LO 2

27. 26 Supply Chain Length Direct Supply Chain Is the channel that results when a manufacturer sells its goods directly to the final consumer or end user. Indirect Supply Chain Is the channel that results once independent channel members are added between the manufacturer and the consumer. LO 2

28. 27 Supply Chain Length: Strategic Decisions in LO 2: Exhibit 5.2 Supply Chain Length Supply Chain Length Direct Indirect Supply Chain Width (Intensive, Selective, and Exclusive) Supply Chain Width (Intensive, Selective, and Exclusive) Controlling the Supply Chain Controlling the Supply Chain Supply Chain Design

29. 28 Supply Chain Length: Direct and Indirect LO 2: Exhibit 5.3 Manufacturer Consumer Manufacturer Retailer Manufacturer Consumer Wholesaler Retailer Consumer Direct Supply ChainIndirect Supply Chains Supply Chains

30. 29 Supply Chain Width Intensive distribution Means that all possible retailers are used in a trade area. Selective distribution Means that a moderate number of retailers are used in a trade area. Exclusive distribution Means only one retailer is used to cover a trading area. LO 2

31. 30 Width of Marketing Supply Chain: LO 2: Exhibit 5.4 Manufacturer Retailer Only one retailer in trading area sells the product(s) Exclusive Distribution

32. 31 Width of Marketing Supply Chain: LO 2: Exhibit 5.4 Manufacturer Retailer Moderate number of retailers in each trading area sell the product(s) Retailer Selective Distribution

33. 32 Width of Marketing Supply Chain: LO 2: Exhibit 5.4 Manufacturer Retailer All possible retailers in the trading area sell the product(s) Retailer Intensive Distribution

34. 33 Control of the Supply Chain Conventional Marketing Channel Is one in which each channel member is loosely aligned with the others and takes a short-term orientation. Vertical Marketing Channels Are capital-intensive networks of several levels that are professionally managed and centrally programmed to realize the technological, managerial, and promotional economies of a long- term relationship orientation. LO 2

35. 34 Marketing Channel Patterns LO 2: Exhibit 5.5 Marketing Channels Conventional Marketing Channels Vertical Marketing Channel System Corporate Systems Contractual Systems Administered Systems Wholesaler- Sponsored Groups Retailer- Owned Cooperatives Franchised Retail Programs

36. 35 Vertical Marketing Channels Quick Response (QR) Systems Also known as Efficient Consumer Response (ECR) Systems, are integrated information, production, and logistical systems that obtain real-time information on customer actions by capturing sale data at point-of-purchase terminals and then transmitting this information back through the entire channel to enable efficient production and distribution scheduling. LO 2

37. 36 Vertical Marketing Channels Stock-Keeping Units Are the lowest level of identification of merchandise. LO 2

38. 37 Vertical Marketing Channels Corporate Vertical Marketing Systems Exist where one channel institution owns multiple levels of distribution and typically consists of either a manufacturer that has integrated vertically forward to reach the consumer or retailer that has integrated vertically backward to create a self-supply network. LO 2

39. 38 Vertical Marketing Channels Contractual Vertical Marketing Systems Use a contract to govern the working relationship between channel members and include wholesaler- sponsored voluntary groups, retailer-owned cooperatives, and franchised retail programs. LO 2

40. 39 Vertical Marketing Channels Wholesaler-Sponsored Voluntary Groups Involve a wholesaler that brings together a group of independently owned retailers and offers them a coordinated merchandising and buying program that will provide them with economies like those their chain store rivals are able to obtain. LO 2

41. 40 Wholesale Sponsored Voluntary Group Wholesale sponsored voluntary groups, such as NAPA, have been a major force in marketing channels since the mid- 1960s. These marketing institutions offer members coordinated merchandising and buying programs that help lower costs. LO 2

42. 41 Vertical Marketing Channels Retailer-Owned Cooperatives Are wholesale institutions, organized and owned by member retailers, that offer scale economies and services to member retailers, which allows them to compete with larger chain-buying organizations. LO 2

43. 42 Vertical Marketing Channels Franchise Is a form of licensing by which the owner of a product, service, or business method (the franchisor) obtains distribution through affiliated dealers (franchisees). LO 2

44. 43 Advantages to Franchise Ownership Advantages to Franchisee Franchisor provides managerial skills that are taught to franchisee. Franchisee can begin a business with a relatively small capital investment. Franchisee can acquire a relatively well known or established line of business. Franchisee can acquire rights to a well-defined geographical area. The standardized marketing programs and operating procedures enable the franchisee to be competitive immediately. Because they own a piece of the action, franchisees tend to be more motivated and bottom-line oriented than managers of corporate chain stores. LO 2: Exhibit 5.6

45. 44 Disadvantages to Franchise Ownership Disadvantages to Franchisee Too many franchises can be located in a geographical area. Too many franchisors make promises they cannot keep (e.g., overstating the income potential of a franchise). Franchisors can include a buyback agreement whereby the franchisee must sell back the franchise at a given point in time or the franchise agreement is for a short duration. Under most franchise agreements, payments to the franchisor are a percentage of a franchisee’s profitability. Franchise systems may be too inflexible in terms of operating procedures (hours, product selection, etc.) for the franchisee. In short, the franchisee must surrender to freedom to make many decisions. LO 2: Exhibit 5.6

46. 45 Yum! Brands Inc. Yum! Brands Inc. (YUM), the parent of Pizza Hut, has nearly 33,000 restaurants in 100 countries and territories. These restaurants are operated by the company or, under the terms of franchise or license agreements, by franchisees or licensees that are independent third parties or by affiliates in which the company owns a noncontrolling equity interest. LO 2

47. 46 Vertical Marketing Channels Administered Vertical Marketing Channels Exist when one of the channel members takes the initiative to lead the channel by applying the principles of effective interorganizational management. LO 2

48. 47 Managing Retailer-Supplier Relations Dependency Power Conflict Managing Cooperative Relations LO 3

49. 48 Managing Retailer-Supplier Relations Dependency Every supply chain needs to perform eight marketing functions, which can be performed by any combination of the members. None of the respective institutions and isolate itself; each depends on the others to do an effective job. LO 3

50. 49 Managing Retailer-Supplier Relations Power Is the ability of one channel member to influence the decisions of the other channel members. LO 3

51. 50 Managing Retailer-Supplier Relations: Reward Power is based on B’s perception that A has the ability to provide rewards for B. Expertise Power is based on B’s perception that A has some special knowledge. Referent Power is based on the identification of B with A. LO 3 Types of Power

52. 51 Managing Retailer-Supplier Relations: Coercive Power is 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 is based on A’s right to influence B, or B’s belief that B should accept A’s influence. Informational Power is based on A’s ability to provide B with factual data. LO 3 Types of Power

53. 52 Managing Retailer-Supplier Relations Conflict Conflict is inevitable in every channel relationship because retailers and suppliers are interdependent; that is, every channel member is dependent on every other channel member to perform some specific task. LO 3

54. 53 Managing Retailer-Supplier Relations: Perceptual Incongruity occurs when the retailer and supplier have different perceptions of reality. Goal Incompatibility occurs when achieving the goals of either the supplier or the retailer would hamper the performance of the other. Dual Distribution occurs when a manufacturer sells to independent retailers and also through its own retail outlets. LO 3 Conflict

55. 54 Managing Retailer-Supplier Relations: Domain Disagreements occur when there is disagreement about which member of the marketing channel should make decisions. Diverter is an unauthorized member of a channel who buys and sells excess merchandise to and from authorized channel members. Gray Marketing is when branded merchandise flows through unauthorized channels. LO 3 Conflict

56. 55 Managing Retailer-Supplier Relations: Free Riding is when a 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 Conflict

57. 56 Conflict Process Role of Channel Interdependency LO 3 Conflict Resolution Dependency of Retailer on Supplier Dependency of Supplier on Retailer Felt Manifest Perceived Power of Supplier Over Retailer Conflict Potential Power of Retailer Over Supplier Conflict Felt Manifest Perceived Conflict Potential Supplier’s Power Sources Retailer’s Power Sources Interdependency FEEDBACK

58. 57 Collaboration in the Channel Facilitating Channel Collaboration Category Management LO 4

59. 58 Facilitating Channel Collaboration Mutual trust occurs when both the retailer and its suppliers have faith that each will be truthful and fair in their dealings with the other. LO 4

60. 59 Facilitating Channel Collaboration: Supply Chain Best Management Practices All supply chain members must remember that satisfying the retail consumer is the only way anyone can be successful. Successful partners work together in good times and bad. Never abandon a supply chain partner at the first sign of trouble. Never abuse power in negotiations. Rather, understand your partner’s needs prior to negotiations and work to satisfy those needs. LO 4: Exhibit 5.7

61. 60 Facilitating Channel Collaboration: Supply Chain Best Management Practices Share profits fairly among partners. Limit the number of partners for each merchandise line. By doing so you can signal greater commitment and trust to your partners, thus building stronger relationships. Set high ethical standards in your business transactions. Successful partners plan together to help the supply chain operate efficiently and effectively. Treat your partner as you wish to be treated. LO 4: Exhibit 5.7

62. 61 Facilitating Channel Collaboration Two-Way Communication occurs when both retailer and supplier communicates openly their ideas. Concerns, and plans. Solidarity exists when a high value is placed on the relationship between a supplier and retailer. LO 4

63. 62 Category Management Category Management (CM) Is the process of managing all the SKUs within a product category and involves the simultaneous management of price, shelf space, merchandising strategy, promotional efforts, and other elements of the retail mix within the category based on the firm’s goals, the changing environment, and consumer behavior. LO 4

64. 63 Question to Ponder How can a manufacturer employ an e-tailing strategy while maintaining a strong partnership with its retailers?

65. 64 Additional Slides

66. 65 The Marketing Functions LO 1 Marketing Functions Selling Buying Storing Transporting Sorting Financing Info. Gathering Risk Taking

67. 66 Facilitating Marketing Institutions LO 1 Facilitating Institutions Manufacturer’s Agent Freelance Broker Sales Agent Purchasing Agents

68. 67 Managing Retailer-Supplier Relations LO 3 Power Dependency Conflict Managing Cooperative Behavior

69. 68 Collaboration in the Channel LO 4 Facilitating Behaviors and Attitudes Mutual Trust Solidarity Two-Way Communication