Delivering Value Through Supply Chain Management: Channels of Distribution and Logistics

Chapter Objectives Understand the concept of the value chain and the key elements in a supply chain Explain what a distribution channel is and what functions distribution channels perform Describe the types of wholesaling intermediaries found in distribution channels Describe the types of distribution channels and the steps in planning distribution channel strategies Explain how the supply chain uses logistics

Real People, Real Choices Darden Restaurants (Jim Lawrence) Volatility in the foodservice supply chain Darden needed to protect its foodservice supply Option 1: develop a food distribution network owned and operated by Darden to support all its restaurants. Option 2: work with third party logistics (3PL) providers. Option 3: work with traditional systems distributors under a new operating model.

Place: The Final Frontier Value chain: a series of activities directed at designing, producing, marketing, delivering, and supporting any product. Supply chain: Activities necessary to turn raw materials into a good or service and put it in the hands of the consumer: LIDROCK.COM

Figure 15.2: The Generic Value Chain

Group Activity Your group of marketers has been hired by a furniture manufacturer. You feel marketing should have input into supplier selection, but the purchasing department disagrees. --Explain the importance of the value chain perspective.

Links in the Supply Chain Supply chain management: the management of flows among the firms in a supply chain to maximize total profitability Includes physical movement of and sharing of information about goods Insourcing: contracting with a specialist that services the company’s supply chains UPS.COM

Supply Chain vs. Channel of Distribution Channel of distribution: facilitates movement of a product from producer to final customer Supply chain: begins with raw materials

Figure 15.3: Supply Chain

Discussion The supply chain concept looks at both inputs and ways to move the product from manufacturer to consumer. --Should marketers concern themselves with the total supply chain concept? Why or why not?

The Importance of Distribution: You Can’t Sell What Isn’t There! Direct channel: a producer and a customer Indirect channel: one or more intermediaries Firms/individuals such as wholesalers, agents, brokers, and retailers that help move product to consumer or business user

Functions of Distribution Channels To ease the flow of goods from producer to customer To provide time, place, and ownership utility

Functions of Distribution Channels (cont’d) To provide logistics or physical distribution functions To create efficiencies by reducing number of transactions Breaking bulk: purchasing large quantities of goods to sell one/few at a time to customers Creating assortments: providing variety of products in one location

Figure 15.4: Reducing Transactions via Intermediaries

Functions of Distribution Channels (cont’d) To make purchase process easier To manage risk To perform communication and transaction functions

The Internet in the Distribution Channel Radical changes in distribution strategies Disintermediation: eliminating traditional intermediaries Knowledge management: sharing knowledge with other supply chain members DELL

Discussion Some say music, video, or textbook downloading, even if unauthorized, merely creates a more efficient supply chain by “cutting out the middleman.” --Do you agree? --Why or why not?

Group Activity You’re responsible for direct marketing at a firm that sells its industrial cleaning products through manufacturers’ reps. You’re considering adding a direct Internet channel to your distribution strategy, but you wonder about channel conflict. --List the pros and cons of adding an Internet channel. --What do you think is the best decision?

Channel Composition: Types of Wholesaling Intermediaries Wholesaling intermediaries: firms that handle the flow of products from the manufacturer to the retailer/business user

Independent Intermediaries Merchant wholesalers: buy goods from manufacturers and sell to retailers and other B2B customers Full-service merchant wholesalers Limited-service merchant wholesalers Cash-and-carry wholesalers Truck jobbers Drop shippers Rack jobbers Mail-order wholesalers

Independent Intermediaries (cont’d) Merchandise Agents/Brokers: provide services in exchange for commissions Manufacturers’ agents/reps Selling agents Commission merchants Merchandise brokers Manufacturer-Owned Intermediaries Sales branches Sales offices Manufacturers’ showrooms

Discussion You’ve probably heard someone say, “The reason products cost so much is all the intermediaries.” --Do intermediaries increase the cost of products? --Would consumers be better off or worse off without intermediaries?

Types of Distribution Channels Consumer Channels Direct channel: producer sells directly to customers Indirect channel: producer uses one or more intermediaries to reach consumers SALAMI.COM

Types of Distribution Channels (cont’d) Business-to-business channels Dual distribution systems Hybrid marketing systems MERCK.COM

Figure 15.6: Steps in Distribution Planning

Planning a Channel Strategy Step 1: Develop distribution objectives that support the firm’s overall marketing goals. Step 2: Evaluate internal and external environmental influences to develop best channel structure. Firm’s ability to handle distribution functions Channel intermediaries available How the competition distributes its products

Planning a Channel Strategy (cont’d) Step 3: Choose a distribution strategy Channel relationships: conventional, vertical, or horizontal system Conventional marketing system: members work independently of one another

Planning a Channel Strategy (cont’d) Step 3: Choose a distribution strategy Vertical marketing system (VMS): formal cooperation among channel members Administered VMS Corporate VMS Contractual VMS Retailer cooperative Franchise organizations IGAINC.COM

Discussion Many entrepreneurs choose to start a franchise business rather than “go it alone.” --Do you think franchises offer the typical businessperson good opportunities? --What are some positive and negative aspects of purchasing a franchise?

Planning a Channel Strategy (cont’d) Step 3: Choose a distribution strategy Horizontal marketing system: two or more firms at the same channel level agree to work together to get their product to the customer

Planning a Channel Strategy (cont’d) Step 3: Choose a distribution strategy Distribution intensity Intensive distribution: selling through all suitable wholesalers or retailers Exclusive distribution: selling only through a single outlet in a region Selective distribution: using fewer outlets than intensive but more than exclusive distribution

Planning a Channel Strategy (cont’d) Step 4: Develop distribution tactics Selecting channel partners: normally a long-term commitment Managing the channel Channel leader/captain: dominant firm that controls the channel (via economic, legitimate, reward/coercive power)

Discussion Colleges and universities seeking better ways to satisfy their customers are increasingly looking at the distribution of their product – education. --Describe your school’s channel(s) of distribution. --What innovative distribution methods do you think your school could try?

Distribution Channels and the Marketing Mix Place decisions affect: Pricing Product and its positioning ENTERPRISE RENT-A-CAR

Logistics: Implementing the Supply Chain Logistics: the process of designing, managing, and improving the movement of products through the supply chain Purchasing Manufacturing Storage Transport

Logistics: Implementing the Supply Chain (cont’d) Physical distribution: the activities used to move finished goods from manufacturers to final customers

Logistics Functions Order processing Warehousing Materials handling

Logistics Functions (cont’d) Transportation: mode by which products move among channel members Modes differ in their-- Dependability (safety and punctuality) Cost Speed of delivery Accessibility (different locations served) Capability (variety of products handled) Traceability (ability to locate goods in shipment)

Modes of Transportation Railroads: carry heavy, bulky items over long distances Water: carry large, bulky goods (especially internationally) Trucks: carry consumer goods in short haul; allow flexibility in locations

Modes of Transportation (cont’d) Air: carry high value-items; fastest and most expensive mode Pipelines: carry petroleum/chemical products Internet: distribute services such as banking, news, and entertainment

Logistics Functions (cont’d) Inventory control: activities to ensure foods are always available to meet customers’ demands Radio frequency identification (RFID) Just in time (JIT)

Real People, Real Choices Darden Restaurants (Jim Lawrence) Jim chose option 3: work with traditional systems distributors under a new operating model. Restaurants experienced greater manager satisfaction and significant savings from collaborative efforts of all supply chain partners DARDEN.COM

Marketing Plan Exercise Dell Computer has used one simple supply chain system—direct sales over the Internet or by phone to both business and consumer users. --If you were a marketing executive at Dell, what new supply chain options would you suggest?

Marketing in Action Case: You Make the Call What is the decision facing Procter and Gamble? What factors are important in understanding this decision situation? What are the alternatives? What decision(s) do you recommend? What are some ways to implement your recommendation?

Keeping It Real: Fast-Forward to Next Class, Decision Time at Eskimo Joe’s Meet Stan Clark, entrepreneur. New law increased drinking age to 21, threatening the future of a college-town beer bar. The decision: how to survive the new law?