Distribution Channels and Logistics Management PRINCIPLES OF MARKETING Eighth Edition Philip Kotler and Gary Armstong Chapter 12 Distribution Channels and Logistics Management

What is a Distribution Channel? A set of interdependent organizations (intermediaries) involved in the process of making a product or service available for use or consumption by the consumer or business user. Channel decisions are among the most important decisions that management faces and will directly affect every other marketing decision.

Why are Marketing Intermediaries Used? Greater efficiency in making goods available to target markets. Offer the firm more than it can achieve on it’s own through the intermediaries: Contacts Experience Specialization Scale of operation Match supply and demand.

Distribution Channel Functions This CTR relates to the material on pp. 354-355. Distribution Channel Functions All Use Up Scarce Resources All May Often Be Performed Better Through Specialization All Can Often Be Shifted Among Channel Members Risk Taking Information Financing Promotion Distribution Channel Functions Information. This function involves gathering and distributing marketing research and intelligence about the environment for planning purposes. Discussion Note: The use of scanner technology has dramatically changed this function in the last few years. Promotion. This involves developing and spreading persuasive communications about an offer. Contact. Contact involves finding and communicating with prospective buyers. Matching. This function consists of shaping and fitting the offer to the buyer’s needs by manufacturing, grading, assembling, and packaging. Negotiation. This involves reaching an agreement on price and other terms. Physical Distribution. This function consists of the transporting and storing of goods. Financing. This function addresses the acquiring and using of funds to cover the costs of channel work. Risk Taking. This function assumes the risk of carrying out the channel work. Discussion Note: Students often assume business is risk-free. You might expand upon the link between risk and value-added services as the justification for profits. Contact Physical Distribution Negotiation Matching

Consumer Marketing Channels & Levels Channel Levels and Channel Conflict This CTR corresponds to Figure 12-2 (A) on p. 355 and relates to the material on pp. 355-356. Consumer Marketing Channels & Levels Channel Level - A Layer of Intermediaries that Perform Some Work in Bringing the Product and it’s Ownership Closer to the Buyer. Direct Indirect Channel 1 Channel Levels Distribution channels can be described by the number of channel levels involved. A channel level is defined as each of the marketing intermediaries that perform some work in bringing the product and its ownership closer to the final buyer. Distribution channels can be categorized broadly as: Direct Marketing Channel. This is a marketing channel that has no intermediary levels. The company sells directly to final consumers. Discussion Note: The company may not be the actual producer. Land’s End only makes a small fraction of its clothes but coordinates the sale and ships from its warehouses. Dell Computer assembles its computers on site but from component parts made elsewhere. Indirect Marketing Channels. These contain one or more intermediary levels. M W J R C  Channel 2 Channel 3 Channel 4

Channel Behavior & Conflict The channel will be most effective when: each member is assigned tasks it can do best. all members cooperate to attain overall channel goals and satisfy the target market. When this doesn’t happen, conflict occurs: Horizontal Conflict occurs among firms at the same level of the channel. Vertical Conflict occurs between different levels of the same channel. For the channel to perform well, conflict must be managed.

Types of Vertical Marketing Systems Corporate Common Ownership at Different Levels of the Channel Types of Vertical Marketing Systems Types of Vertical Marketing Systems This CTR relates to the discussion on pp. 358-362. Greater Contractual Contractual Agreement Among Channel Members Channel Organization As traditional channel organization lacks a specified controlling authority, new approaches have been developed: Vertical Marketing Systems. A vertical marketing system consist of producers, wholesalers, and retailer acting in as a unified system. Three main types of VMS are: Corporate VMS. The corporate combines successive stages of production and distribution under a single ownership. Contractual VMS. The contractual VMS consists of independent firms at different levels of production and distribution to obtain more economies and sales than members could achieve alone. Three types of contractual VMS are wholesaler-sponsored chain, retailer cooperative, franchise organization. Administered VMS. This coordinates distribution by the power exerted by of one of its members in the marketplace, not by contract or ownership. Degree of Direct Control Administered Leadership is Assumed by One or a Few Dominant Members Lesser

Vertical Marketing Systems Systems (VMS) Administered VMS Corporate VMS Contractual VMS Wholesaler Sponsored Voluntary Chain Retailer Cooperatives Franchise Organizations Manufacturer- Sponsored Retailer Franchise System Manufacturer- Sponsored Wholesaler Franchise System Service-Firm- Sponsored Franchise System

Innovations in Marketing Systems Horizontal Marketing System Hybrid Marketing System Two or More Companies at One Channel Level Join Together to Follow a New Marketing Opportunity. Example: Banks in Grocery Stores A Single Firm Sets Up Two or More Marketing Channels to Reach One or More Customer Segments. Example: Retailers, Catalogs, and Sales Force

Channel Design Decisions Analyzing Consumer Service Needs Setting Channel Objectives & Constraints Channel Design Decisions This CTR relates to the material on pp. 364-368. Channel Design Decisions Identifying Major Alternatives Identifying Major Alternatives Number of Channel Members Intensive Distribution. This approach utilizes as many outlets as possible and is especially appropriate for convenience goods and common raw materials. Exclusive Distribution. This approach consists of a very limited number of outlets hold all the rights to distribute a product line. This strategy is appropriate for many high prestige goods. Distributor selling effort is usually very strong. Selective Distribution. This approach uses more than one outlet per market but less than all available outlets. This strategy gains good market coverage and gains better than average selling effort. Teaching Tip: Ask students to name their favorite store for: gifts, computer supplies, sporting goods, hobbies. Many will name selective distribution outlets. Evaluating the Major Alternatives Intensive Distribution Selective Distribution Exclusive Distribution

Channel Management Decisions Selecting Channel Management Decisions This CTR relates to the material on pp. 369-370. Channel Management Decisions Motivating Channel Management Decisions Selecting Channel Members. Choosing middlemen will vary in difficulty be product and producer. Very large and well known companies often have more qualified middlemen seeking to carry their products than the company can effectively use. Some new products will be resisted by existing channels and may require adopting new channel members to carry the line. Motivating Channel Members. Channel members must be motivated to perform. Positive motivators come from high margins, special deals, premiums, cooperative advertising allowances, display allowances, and sales contests. Negative motivators may include threatening margins, delaying delivery, or ending the relationship. Long term cooperation is enhanced by distribution programming which involves building a planned, professionally managed, VMS that meets al channel member needs. Evaluating Channel Members. Assessing channel members requires regular measurement of performance against established criteria such as sales quotas, inventory levels, customer delivery time, training, and overall customer service for each channel member. Effective channel management rewards superior performance and seeks to improve substandard performance in a cooperative professional partnership. Channel member replacement should be used as a last resort with sincere efforts to improve performance have not succeeded. FEEDBACK Evaluating

Nature and Importance of Marketing Logistics Involves getting the right product to the right customers in the right place at the right time. Companies today place greater emphasis on logistics because: effective logistics is becoming a key to winning and keeping customers. logistics is a major cost element for most companies. the explosion in product variety has created a need for improved logistics management. information technology has created opportunities for major gains in distribution efficiency.

Goals of the Logistics System Provide a Targeted Level of Customer Service at the Least Cost. Maximize Profits, Not Sales. Higher Distribution Costs/ Higher Customer Service Levels Lower Distribution Costs/ Lower Customer Service Levels

Logistics Systems Order Processing Costs Logistics Functions This CTR relates to the material on pp. 374-377. Instructor’s Note: Transportation is covered separately on the following CTR. Logistics Systems Order Processing Submitted Processed Shipped Costs Minimize Costs of Attaining Logistics Objectives Nature of Logistics Systems Costs. Distribution costs stem from factors other than just size. How products are transported, stored, sorted, inventoried, ordered, and tracked can all affect distribution costs over and above the sheer volume being distributed. Modern facilities utilizing technology to help innovate what it means to physically distribute goods both save on costs and become a viable promotional tool in providing customer service. Order Processing. Processing orders is an area of distribution that benefits from the application of computer technology. Innovative applications of hardware and software can streamline order processing by connecting the salesperson with dispatchers and warehouses. Warehousing. Storage of products to best meet demand requires decisions on stocking locations, estimation of time to be stored and distinguishing between storage warehouse needs and distribution centers utilizing automation to move goods quickly. Inventory. The cost of holding inventory requires developing accurate knowledge on when to order and how much to order to meet demand but not overburden inventory processing capacity. Logistics Functions Warehousing Storage Distribution Transportation Water, Truck, Rail, Pipeline & Air Inventory When to order How much to order Just-in-time

Transportation Modes Rail Truck Water Pipeline Air This CTR relates to the material on pp. 375-377. Transportation Modes Rail Nation’s largest carrier, cost-effective for shipping bulk products, piggyback Truck Flexible in routing & time schedules, efficient for short-hauls of high value goods Transportation Rail. Rail is the largest carrier mode with 37% of the total cargo shipped. Rail is especially cost effective for large amounts of bulk products shipped over long distances. Truck. Trucks account for some 25% of the total cargo shipped. Trucks are the largest movers of within city shipping. Truck are highly flexible in routing and scheduling. Trucks are an efficient short-haul mode. Water. Water is very inexpensive for shipping high bulk nonperishable goods but is also the slowest transportation mode. Pipeline. Pipelines are specialized modes for such goods as oil and natural gas. Pipelines are usually owned by companies that also own the raw materials being piped. Air. Air is the most expensive mode of transportation but also the quickest. Extremely perishable goods, high-value, low-bulk, and time-sensitive goods often require air transport. Containerization Containerization consists of putting goods in boxes or trailers that are designed for easy transfer between two transportation modes. Key forms include: Piggyback describes the use of rail and trucks. Fishyback refers to the use of water and trucks. Tranship involves water and rail. Airtruck combines air and trucks. Water Low cost for shipping bulky, low-value goods, slowest form Pipeline Ship petroleum, natural gas, and chemicals from sources to markets Air High cost, ideal when speed is needed or to ship high-value, low-bulk items

Choosing Transportation Modes This CTR corresponds to Table 13-2 on p. 416 and relates to the discussion on p. 416. Checklist for Choosing Transportation Modes 1. Speed. Choosing Transportation Modes Deregulation in the 1970s of the transportation industry has made each mode more flexible, competitive, and responsive to customer needs. In choosing transportation mode, shippers consider up to five criteria: Speed. Speed is measured in door-to-door delivery time. Dependability. Dependability involves meeting schedules on time. Capability. Capability refers to the ability to handle various products. Availability. Availability refers to the number of geographic points served. Cost. Costs are usually figured in per ton-mile. 2. Dependability. 3. Capability. 4. Availability. 5. Cost.

Integrated Logistics Management Cross-Functional Teamwork inside the Company Integrated Logistics Management Building Channel Partnerships Concept Recognizes that Providing Better Customer Service and Trimming Distribution Costs Requires Teamwork, Both Inside the Company and Among All the Marketing Channel Organizations. Third-Party Logistics