Chapter 14: “Value Chain Management and Logistics” Joel R. Evans & Barry Berman Marketing, 10e: Marketing in the 21st Century

Chapter Objectives To discuss the role of the value chain and the value delivery chain in the distribution process To explore distribution planning and review its importance, distribution functions, the factors used in selecting a distribution channel, and the different types of distribution channels To consider the nature of distribution contracts, cooperation and conflict in a channel of distribution, the special aspects of a distribution channel for industrial products, and international distribution To examine logistics and demonstrate its importance To discuss transportation alternatives and inventory management issues

The Distribution Process Supplier/ Manufacturer Goals Value Chain Distribution Intermediary Goals Total Delivered Product Level of Satisfaction Value Delivery Chain Customer Goals

Key Points of the Distribution Process The goals of various channel members are considered as inputs to the value chain and value delivery chain. The value chain and value delivery chain are parallel processes. The total delivered product is the actual result of the value chain and value delivery chain. Satisfaction is based on the perceived value received from the value chain and value delivery chain. Feedback regarding service gaps and breakdowns must be handled systematically in the process. Goals Satisfaction

Functions Performed in a Channel of Distribution Channel Functions Distribution Marketing Research Pricing Functions Performed in a Channel of Distribution Product Planning Buying Customer Services Promotion

Distribution and the Web The Internet affects marketing functions and logistics by: Speedily conveying information. Improving communication with channel members. Allowing firms to reach distant parts of the world. Providing customers with the option of worldwide vendors. Offering Web-enhanced services for each distribution function.

Factors to Consider in Selecting a Distribution Channel The Consumer The Company The Product The Competition Distribution Channels Legalities

A Direct Distribution Channel In this direct channel, an umbrella manufacturer sells directly to final consumers. It makes 200,000 separate transactions, one for each customer. Manufacturer 200,000 Customers

An Indirect Distribution Channel Manufacturer In this indirect channel, an umbrella maker has only 4 transactions. It sells to regional wholesalers, which resell to 50 retailers each. The retailers each sell to 1,000 final consumers. Wholesaler (East U.S.) Wholesaler (South U.S.) Wholesaler (North U.S.) Wholesaler (West U.S.) 50 Retailers 50 Retailers 50 Retailers 50 Retailers 1,000 Customers per Retailer 1,000 Customers per Retailer 1,000 Customers per Retailer 1,000 Customers per Retailer

Typical Indirect Channels of Distribution 1 2 3 4 Manufacturer/ Service Provider Manufacturer/ Service Provider Manufacturer/ Service Provider Manufacturer/ Service Provider Merchant Wholesaler or Sales Agent Merchant Wholesaler or Sales Agent Retailer Wholesaler Organizational Consumer Final Consumer Retailer Distributor Final Consumer Organizational Consumer

Pushing Versus Pulling Strategies Manufacturer/ Service Provider Distribution Intermediaries Consumers Pulling Manufacturer/ Service Provider Distribution Intermediaries Consumers

Intensity of Channel Coverage Exclusive Distribution A firm severely limits the number of resellers in an area. It seeks a prestige image, channel control, and high profit margins and accepts lower total sales. Selective Distribution A firm employs a moderate number of resellers in an area. It tries to combine some channel control and a solid image with good sales volume and profits. Intensive Distribution A firm uses a large number of resellers in an area. Its goals are to have wide market coverage, channel acceptance, and high total sales and profits. Per-unit profits are low.

International Distribution Planning International distribution requires additional considerations and planning: The channel length may depend on a nation’s stage of economic development. Less-developed and developing nations tend to use shorter, more direct channels than industrialized ones. Limited transportation and communication networks foster local shopping. Cultural norms always affect channel member interactions.

Logistics Logistics, also known as physical distribution, encompasses the activities concerned with efficiently delivering raw materials, parts, semi-finished items, and finished products to designated places. It includes customer service, shipping, warehousing, inventory control, trucking operations, packaging, receiving, materials handling, and plant, warehouse, and store location planning. It affects costs, the value of customer service, its relationship with other functional areas.

Logistics and Other Functional Areas There is a critical interaction between logistics and each of the firm’s marketing functions and this requires careful coordination. Product variations (color, size, features, styles) may impose a burden on distribution facilities. Logistics planning is related to overall channel strategy. Promotion campaigns must realistically coordinate with potential logistics delivery. Pricing may be the firm’s differential advantage based on superior logistical service.

Selected Physical Distribution Activities Involved in a Typical Order Cycle Insufficient goods in stock Customer places an order Supplier receives and enters order Inventory on hand checked Production scheduled Sufficient goods in stock Goods stored until enough orders are placed Goods packaged, sorted, tagged, and sent to local warehouse Orders shipped to individual customers

An Illustration of the Total-Cost Approach in Distribution Annual freight costs Carrier $100,000 Annual warehousing costs Air $1.5 mill $1.6 mill. Annual costs of lost sales due to being out of stock Rail $300,000 $800,000 $300,000 $1.4mil. Truck $500,00 $500,000 $1.2 mil. $200,000 Costs

What Happens When a Firm Has Stock Shortages When a firm runs out of stock, customers can Purchase a substitute product from the same seller. Switch to a new seller while merchandise is not available. Permanently switch to a new seller for all purchases. Wait until merchandise is available. Most Desirable Action Least Desirable Action

5 Transportation Forms for Shipping Next Day, Inc. Railroads carry heavy, bulky items over long distances but have high fixed costs due to facility investments. Motor Carriers usually transport small shipments short distances and handle most U.S. shipments less than 500 or 1,000 pounds. Waterways in the U.S. include barges on inland rivers, and tankers and freighters on Great Lakes, and intercoastal shipping. Airways are fast and expensive but move high-value perishable and emergency goods. Speed may provide a differential advantage. Pipelines move gas and petroleum products with low costs.

Inventory Management Good inventory management matches the quantity of goods kept in inventory with customer demand. To improve efficiency, many firms use a just-in-time inventory system and electronic data interchange. Four specific aspects of inventory management are stock turnover, when to reorder, how much to reorder, and warehousing. Stock turnover refers to the number of times during a stated period that average inventory on hand is sold. A reorder point depends on lead time, usage, and safety stock. The economic order quantity (EOQ) is the order volume corresponding to the lowest sum of order-processing and inventory-holding costs.

Chapter Summary This chapter discusses the role of the value chain and the value delivery chain in distribution. It explores distribution planning and examines its importance, distribution functions, the factors used in selecting a distribution channel, and the different types of distribution channels. It considers distribution intermediary contracts, cooperation and conflict in a distribution channel, special aspects of a distribution channel for industrial products, and international distribution. It examines logistics and shows its importance. It discusses transportation alternatives and inventory management issues.