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12-1 Visit UMT online at © 2005 UMT MGT100 Version: INTRODUCTION TO BUSINESS University of Management and Technology 1901 N. Fort Myer Drive Arlington, VA USA Phone: (703) Fax: (703) Website:
12-2 Visit UMT online at © 2005 UMT MGT100 Version: Chapter 12: Distributing Products Griffin, R. W. & Ebert, R. J. Business (7 th ed.) © 2004 Prentice Hall.
12-3 Visit UMT online at © 2005 UMT MGT100 XP Version: Learning Objectives Upon successful completion, the student will be able to: Explain the distribution mix, the different channels of distribution, and distribution strategies. Compare and contrast merchant wholesalers and agents/brokers. Identify the major types of retailing and retail stores. Define physical distribution and warehousing operations. Describe the five basic forms of transportation. Explain how distribution can be used as a marketing strategy.
12-4 Visit UMT online at © 2005 UMT MGT100 XP Version: Distribution Mix Getting products from producer to consumer is the next element of the marketing mix, known as distribution. In the 4Ps it is known as place. An organized network of firms used to move goods and services from producers to customers is called a distribution channel or marketing channel. A company’s decisions about which channels to use, the distribution mix, plays a major role in the firm’s success.
12-5 Visit UMT online at © 2005 UMT MGT100 XP Version: Intermediaries and Distribution Channels For most of your purchases, you rely on market intermediaries. Also known as middlemen. Intermediaries channel goods and services from producer to end-users. Wholesaler Purchase products in large lots and breaks these into smaller lots for sale to retailers. Retailer Sells products directly to the end-users (consumers).
12-6 Visit UMT online at © 2005 UMT MGT100 XP Version: Intermediaries and Distribution Channels A distribution channel is the path that a product follows from producer to end user. A firm may use an independent intermediary or set up its own distribution network and sales force. Deciding on distribution requires management to analyze: The company's target markets The nature of its products The costs of maintaining distribution and sales networks If management will set up its own distribution network and sales force if that is the most cost-effective approach.
12-7 Visit UMT online at © 2005 UMT MGT100 XP Version: Distribution of Consumer Products There are important differences among the channels of distribution for consumer products and business products. Consumer goods are more complex. Typical consumer products channels include: Channel 1: Direct Distribution to the Consumer Channel 2: Distribution to Retailers Channel 3: Distribution to Wholesalers Channel 4: Distribution through Sales Agents or Brokers Wholesalers and retailers come to brokers with specific needs. Producers come to brokers with specific products. Brokers play “matchmaker” to connect the two. Unlike wholesalers and retailers, who purchase goods, brokers only facilitate the exchange and take a commission on the total dollar value of the deals.
12-8 Visit UMT online at © 2005 UMT MGT100 XP Version: Distribution of Consumer Products
12-9 Visit UMT online at © 2005 UMT MGT100 XP Version: Pros and Cons of Nondirect Distribution Each link in the distribution chain makes a profit by charging a markup or commission. Nondirect distribution therefore means higher prices: The more members in the channel, the higher the final price. Each member applies a markup to the price. Markups range from a few percent to more than 100%, depending on the goods and their prices. In general, markup levels depend on competitive conditions and practices in a particular industry.
12-10 Visit UMT online at © 2005 UMT MGT100 XP Version: The Value-Adding Intermediary Some intermediaries add value. For example, a supermarket makes it possible to buy a variety of products without having to go to multiple stores.
12-11 Visit UMT online at © 2005 UMT MGT100 XP Version: Distribution of Business Products Industrial channels are important because every company is also a customer that buys other companies’ products. The Kellogg Co. (www.kelloggs.com) buys grain to make breakfast cerealswww.kelloggs.com Humana Inc. (www.humana.com) buys medicines and other medical supplies to provide hospital services.www.humana.com Industrial (business) distribution is the network of channel members involved in the flow of manufactured goods to business customers. Most business goods are sold directly by the manufacturer to the industrial buyer. Wholesalers function in only a few industrial channels. Brokers and agents are rare.
12-12 Visit UMT online at © 2005 UMT MGT100 XP Version: Distribution Strategies A distribution strategy is a company’s overall plan for moving products to buyers and it plays a major role in the company’s success. One part of that strategy, choosing the appropriate market coverage, depends primarily on the type of product Convenience goods require different strategies from business supplies. Three general strategies are: Intensive Exclusive Selective
12-13 Visit UMT online at © 2005 UMT MGT100 XP Version: Distribution Strategies Intensive distribution. Normally used for low-cost consumer goods with widespread appeal such as candy and magazines. Exclusive distribution Limits the number of outlets for the item in a particular geographic area. Used most often used for expensive specialty or technical products. Selective distribution Limits distribution only to wholesalers and retailers that will give the product special attention and sales effort. Used most often for furniture, appliances, and fashions.
12-14 Visit UMT online at © 2005 UMT MGT100 XP Version: Channel Conflict and Channel Leadership Channel conflict occurs when a channel member places its own success above the success of the entire channel, or when the members of a distribution channel disagree. Channel Leadership occurs when a channel member emerges that has sufficient power to determine the roles and rewards of other members. The leader is called the Channel Captain. The power usually come from large sales volume generated by the captain. Wal-Mart is an example of a retailer who often is the channel captain for products it is willing to sell. Producers of specialty goods and services usually are better able to control of their distribution than commodity producers.
12-15 Visit UMT online at © 2005 UMT MGT100 XP Version: Channel Conflict and Channel Leadership Common sources of channel conflict are: Bypassing channels. Friction is created if a producer bypasses existing channels in hopes of increasing business. Oversaturating markets. Conflicts occur when franchisers sell too many operations too close to one another. Providing inadequate support. If support is needed (e.g., advertising, training, or managerial assistance) and is not provided, intermediaries will not be effective. Some channel conflict leads to more dynamic adaptation to a changing environment, such as the Internet. The management challenge is not to eliminate conflict but to manage it effectively, avoiding dysfunctional outcomes.
12-16 Visit UMT online at © 2005 UMT MGT100 XP Version: Wholesaling Wholesalers sell to retailers, other wholesalers, and industrial or institutional users. Wholesalers provide a variety of services to customers who are buying products for resale or business use. Selling & Promoting – Help introduce a new product or producer. Bulk-breaking – Buy in large quantities, and sell in smaller quantities. Warehousing - Hold inventory thereby reducing the inventory holding costs and risks of suppliers and retailers. Transporting – Offer regular routes and delivery schedules. Financing – May offer credit terms to customers. Risk-bearing – The wholesaler takes title, so any "shrinkage" is at the wholesaler’s expense. Gathering market information – Wholesalers provide an important link between customers and manufacturers.
12-17 Visit UMT online at © 2005 UMT MGT100 XP Version: Merchant Wholesalers Full-Service Merchant Wholesaler. Provides credit, marketing, and merchandising services in addition to traditional buying and selling services. Approximately 80 percent of all merchant wholesalers are full-service. Limited-Service Merchant Wholesaler. Provides only a limited range of services, sometimes only storage. Drop Shipper. Limited-function wholesaler who takes orders, negotiates with producers, receives goods, and arranges shipment to customers. Rack jobbers. Limited-function wholesaler who sets up displays in retail outlets, stocks inventory, and mark prices on merchandise displayed.
12-18 Visit UMT online at © 2005 UMT MGT100 XP Version: Agents and Brokers Agents and brokers, including Internet e-agents, serve as independent sales representatives for many companies’ products. They work on commission, usually about four to five percent of net sales. Unlike merchant wholesalers, brokers do not take title (ownership). Rather, they serve as sales and merchandising arms for producers who do not have their own sales forces. The value of agents and brokers lies in their knowledge of markets, their merchandising expertise, and their ability to put together deals.
12-19 Visit UMT online at © 2005 UMT MGT100 XP Version: The Advent of the E-Intermediary E-commerce brings together millions of widely dispersed consumers and businesses. E-intermediaries are Internet-based channel members who perform one or two functions: They collect information about sellers and present it to consumers. They help deliver Internet products to buyers. Three types of e-intermediaries: Syndicated sellers Shopping agents Business-to-business brokers
12-20 Visit UMT online at © 2005 UMT MGT100 XP Version: Types of E-Intermediaries Syndicated Selling is an e-commerce practice whereby a Web site offers other Web sites commissions for referring customers. Here’s how it works. With 9.2 million users each month, Expedia.com is a heavily visited travel-services Web site. Expedia has given Dollar Rent A Car a special banner on its web page.www.dollarcar.com When Expedia customers click on the banner for a car rental, they are transferred from the Expedia site to the Dollar site. Dollar pays Expedia a fee for each booking that comes through this channel.
12-21 Visit UMT online at © 2005 UMT MGT100 XP Version: Types of E-Intermediaries Shopping Agent (E-Agent) are e-intermediaries (middlemen) that assist buyers in finding products and prices, but who does not take possession of products. PriceScan is a well-known shopping agent for computer products.www.pricescan.com For CDs and tapes, searches for vendors and does price comparisons.www.evenbetter.com BizRate, searches product catalogs from many vendors to help find lowest prices.www.bizrate.com Business-to-Business Broker—e-commerce intermediary serving the business customer.
12-22 Visit UMT online at © 2005 UMT MGT100 XP Version: Retailing Retailers sell to individuals who buy products for ultimate consumption. Retailers are perhaps the most visible element in the distribution chain. Retailers represent the end of the distribution channel that began with the producer. Retail stores include department stores, discount stores, warehouse clubs, hypermarkets, factory outlets, category killers, supermarkets, convenience stores, and catalog stores. Retailers save consumers time and money by bringing together products that otherwise would require shopping at multiple stores.
12-23 Visit UMT online at © 2005 UMT MGT100 XP Version: Product Line Retailers Department Store—large product line retailer characterized by organization into specialized departments. Supermarket—large product line retailer offering a variety of food and food-related items in specialized departments. Hypermarket—very large product line retailer carrying a wide variety of unrelated products. Specialty Stores—carry only a particular type of good, but an extensive selection of brands, styles, sizes, models, and prices within each line stocked such as children’s clothing or sporting goods. Category killers are superstores such as Toys R Us or Office Depot that dominate a market by stocking every conceivable variety of a particular line of merchandise. Scrambled merchandising—retail practice of carrying any product that is expected to sell well regardless of a store's original product offering. Ex: Supermarkets selling DVDs.
12-24 Visit UMT online at © 2005 UMT MGT100 XP Version: Bargain Retailers Discount Houses—large sales volume stores that offer goods at substantial price reductions. Ex. K-Mart & Wal-mart Off-Price Stores—buy excess inventories from high-quality manufacturers and sell at discounted prices. Ex. Marshall's. Catalog Showrooms—customers order items from a catalog an then pick them up at an on-premises warehouse or loading dock. Ex. Service Merchandise Factory Outlet—retail outlet owned by a manufacturer. Ex. Land’s Inlet Stores; Nordstrom Rack; Filene’s Basement. Warehouse Club or Wholesale Club—offers discounts on brand- name products; customers pay annual membership fees. Ex. Costco. Convenience Store—retail store offering easy access, extended hours, and fast service for a limited number of products. Ex. 7-Eleven & Circle K.
12-25 Visit UMT online at © 2005 UMT MGT100 XP Version: Retail Challenges Retailers face many challenges today. The average life cycle of a retail establishment is considerably shorter than it used to be. New concepts now become old in as little as 5 years. Retailers have opened too many stores, glutting the market. Increasingly, consumers consider shopping a chore when once it was consider a pastime. Consumers spend less time shopping than ever. The growth of the e-commerce has been at the expense of store sales. Most of the U.S. shopping malls are 20 years old or older. Competition is more intense than ever, across the board.
12-26 Visit UMT online at © 2005 UMT MGT100 XP Version: Nonstore and Electronic Retailing Direct-response retailing involves the retailer is in direct interaction with customers, informing them about products and receiving sales orders Mail order (or catalog marketing) involves the customer placing orders for catalog merchandise received through the mail or e- mail. Telemarketing is the use of the telephone to sell directly Direct selling is selling door-to-door or through home-selling parties. Personal selling is very expensive in general. With direct selling, the costs and risks are transferred to the sales person, who often is an independent dealer and receives only a small commission for compensation.
12-27 Visit UMT online at © 2005 UMT MGT100 XP Version: What Is Electronic Retailing? Electronic retailing is nonstore retailing in which information about the seller's products and services is transmitted via computers. Consumers receive information and purchase the products online, from their homes or offices. The Internet has created a borderless shopping environment that has great potential for some products.
12-28 Visit UMT online at © 2005 UMT MGT100 XP Version: Forms of Electronic Retailing Electronic-Catalogs use the Internet to display products and services for both retail shoppers and business customers. Internet-Based Stores use of the Internet as their virtual store, displaying goods and taking orders online. Electronic Storefronts are Web sites in which consumers collect information about products and buying opportunities. Cybermalls are Web-based retail complex that houses dozens of electronic storefronts or Internet-based stores.
12-29 Visit UMT online at © 2005 UMT MGT100 XP Version: Forms of Electronic Retailing The figures tel the story of the growth in electronic retailing.
12-30 Visit UMT online at © 2005 UMT MGT100 XP Version: What Is Physical Distribution? Physical distribution encompasses all activities required to move finished products from a producer to the consumer. It is a complex strategic activity with many trade-offs that affect the organization and profits. Technology used in physical distribution today includes Satellite navigation and communication, Robots and machine vision, Voice input computers, On-board computer logbooks, and Planning software that uses artificial intelligence.
12-31 Visit UMT online at © 2005 UMT MGT100 XP Version: What Is Physical Distribution? The overriding objective of all physical distribution systems should be to minimize the total cost of distribution, while achieving the desired level of service. Each step in the process must be analyzed to find cost savings or improved efficiencies. Components of physical distribution include: Warehousing and Transportation
12-32 Visit UMT online at © 2005 UMT MGT100 XP Version: Types of Warehouses Warehousing Operations—Warehouses are holding facilities for inventory, whereas distribution centers serve as command posts for moving goods to customers. Types of Warehouses: Private Warehouse—warehouses owned by and providing storage for a single company. Public Warehouse—independently owned and operated warehouses that stores goods for many firms. Storage Warehouse—warehouses providing storage for extended periods of time. Distribution Center—warehouses providing short-term storage of goods for which demand is both constant and high.
12-33 Visit UMT online at © 2005 UMT MGT100 XP Version: Warehousing Costs Warehousing costs include rental or mortgage payments, insurance, and wages. Other costs include: Inventory Control—warehouse operation that tracks inventory on hand and ensures that an adequate supply is in stock at all times. Material Handling—warehouse operation involving the transportation, arrangement, and orderly retrieval of goods in inventory.
12-34 Visit UMT online at © 2005 UMT MGT100 XP Version: Transportation Operations The cost of physically moving a product through the channel is one of the highest costs faced by many manufacturers. With heavier goods, transportation costs often limit the geographical region a company tries to serve. Minimizing transportation costs is an overall good strategy. But firms must also consider other factors: The nature of the product The distance it must travel The speed with which it much be received Customer wants and needs
12-35 Visit UMT online at © 2005 UMT MGT100 XP Version: Transportation Modes Trucks are the most frequently used. Offer door-to-door delivery over public highways. Cannot carry all types of cargo. Railroads are able to carry heavier and more diversified cargo than trucks, but are unable to deliver directly to the customer. Water carriers are the cheapest form of transport, especially for bulk items, but service is slow and infrequent, and delivery is restricted to ports. Air transport is the fastest means of moving goods, but it can carry only certain types of cargo, is expensive, and can only deliver to airports. Pipelines are expensive to build, but once in place they are extremely reliable as well as being economical to operate and maintain.
12-36 Visit UMT online at © 2005 UMT MGT100 XP Version: Changes in Transportation Operations Intermodal Transportation is the combined use of several different modes of transportation. Containerization is the use of standardized heavy-duty containers in which many items are sealed at points of shipment and opened only at final destination. Physical Distribution and E-Customer Satisfaction E-commerce companies have focused attention on after-sale distribution to improve customer satisfaction. Order fulfillment begins when the sale is made: It ends with getting the product, in good condition and on time, to the customer for each sales transaction.
12-37 Visit UMT online at © 2005 UMT MGT100 XP Version: Distribution as a Marketing Strategy Distribution can be an important way of competing for sales. Some firms consider distribution a cornerstone of their business. They devote significant time and attention to assessing and improving the entire stream of activities involved in getting products to customers.
12-38 Visit UMT online at © 2005 UMT MGT100 XP Version: Summary In selecting a distribution mix, a firm may use a variety of distribution channels. Intermediaries may include wholesalers, retailers, and brokers. Unlike wholesalers, agents and brokers never take legal possession of products. Rather they function as sales and merchandising arms of manufacturers who do not have their own sales forces. They may also provide such services as advertising and display merchandising. In e-commerce, e-agents assist Internet users in finding products and best prices.
12-39 Visit UMT online at © 2005 UMT MGT100 XP Version: Summary Retailers fall into two classifications: Product line retailers include department stores, supermarkets, hypermarkets, and specialty stores. Bargain retailers include discount houses, off-price stores, catalog showrooms, factory outlets, warehouse clubs, and convenience stores. Nonstore retailing may use direct mail catalogs, vending machines, video marketing, telemarketing, electronic retailing, and direct selling. Internet retail shopping includes electronic storefronts, virtual stores, and cybermalls.
12-40 Visit UMT online at © 2005 UMT MGT100 XP Version: Summary Physical distribution includes all of the activities needed to move products from manufacturers to consumers, including customer service, warehousing, and transportation of products. The costs of warehousing goods also includes inventory control and material handling. Trucks, railroads, planes, water carriers (boats and barges), and pipelines are the major transportation modes used in the distribution process. They differ in cost, availability, reliability, speed, and number of points served. Air is the fastest but most expensive mode. Water carriers are the slowest but least expensive.
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