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

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Managing the Supply ChainManaging the Supply Chain

Chapter 5

Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved.

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Learning ObjectivesLearning 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.

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The Supply ChainThe 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

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The supply chain, or channel, is affected by five external forces:

Consumer behaviorCompetitor behaviorSocioeconomic environmentTechnological environmentLegal and ethical environment

LO 1

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A supply chain or channel must perform eight marketing functions:

BuyingSellingStoringTransportingSortingFinancingInformation gatheringRisk taking

LO 1

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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

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• 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

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• 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

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Primary Marketing InstitutionsPrimary 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

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• 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

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The Supply Chain: Institutions Participating inThe 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

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• 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

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Facilitating InstitutionsFacilitating Institutions

• Freelance broker

• Manufacturer’s agent

• Sales agent

• Purchasing agents

LO 1

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The Supply Chain: Sorting ProcessThe Supply Chain: Sorting Process

LO 1

SOURCE: Virginia Newell Lusch, used with permission.

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LO 1


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LO 1


ASSORTMENT

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Types of Supply ChainsTypes of Supply Chains

LengthWidthControl

LO 2

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Supply Chain Length 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

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Supply Chain Length: Strategic Decisions inSupply Chain Length: Strategic Decisions in

LO 2: Exhibit 5.2

Supply ChainLength

Supply ChainLength

DirectDirect IndirectIndirect

Supply Chain Width(Intensive, Selective,

and Exclusive)

Supply Chain Width(Intensive, Selective,

and Exclusive)

Controllingthe

Supply Chain

Controllingthe

Supply Chain

Supply Chain Design

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Supply Chain Length: Direct and IndirectSupply Chain Length: Direct and Indirect

LO 2: Exhibit 5.3

Manufacturer

Consumer

Manufacturer

Retailer

Manufacturer

Consumer

Wholesaler

Retailer

Consumer

Direct Supply Chain Indirect Supply ChainsSupply Chains

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Supply Chain WidthSupply 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

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Width of Marketing Supply Chain:Width of Marketing Supply Chain:

LO 2: Exhibit 5.4

Manufacturer

Retailer

Only one retailer in trading area sells the product(s)

Exclusive Distribution

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LO 2: Exhibit 5.4

Manufacturer

Retailer

Moderate number of retailers in each trading area sell the product(s)

Retailer

Selective Distribution

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LO 2: Exhibit 5.4

Manufacturer

Retailer

All possible retailers in the trading area sell the product(s)

RetailerRetailer Retailer

Intensive Distribution

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Control of the Supply ChainControl 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

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Marketing Channel PatternsMarketing Channel Patterns

LO 2: Exhibit 5.5MarketingChannels

ConventionalMarketingChannels

VerticalMarketing

Channel System

CorporateSystems

ContractualSystems

AdministeredSystems

Wholesaler-Sponsored

Groups

Retailer-Owned

Cooperatives

Franchised Retail

Programs

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Vertical Marketing ChannelsVertical 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

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Stock-Keeping Units

Are the lowest level of identification of merchandise.

LO 2

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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

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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

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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

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Wholesale Sponsored Voluntary GroupWholesale 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

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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.

TRU*SERV, Ace, Handy Hardware

LO 2

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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

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Advantages to Franchise OwnershipAdvantages 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

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Disadvantages to Franchise OwnershipDisadvantages 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

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Yum! Brands Inc.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

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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

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Managing Retailer-Supplier RelationsManaging Retailer-Supplier Relations

• Dependency

• Power

• Conflict

• Managing Cooperative Relations

LO 3

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• 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

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• Power

Is the ability of one channel member to influence the decisions of the other channel members.

LO 3

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Managing Retailer-Supplier Relations: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 3Types of Power

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• 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 3Types of Power

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• 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

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• 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 3Conflict

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• 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 3Conflict

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• 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 3Conflict

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Conflict Process Role of Channel InterdependencyConflict Process Role of Channel Interdependency

LO 3

Conflict Resolution

Dependency ofRetailer on Supplier

Dependency of Supplier on Retailer

Fel

t

Man

if est

Per

cei v

ed

Power of Supplier Over

Retailer

Conflict

ConflictPotential

Power of Retailer Over

Supplier

Conflict

Fel

t

Man

if est

Per

cei v

ed

ConflictPotential

Supplier’s Power

Sources

Retailer’s Power

Sources

Interdependency

FE

ED

BA

CK

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Collaboration in the ChannelCollaboration in the Channel

Facilitating Channel CollaborationCategory Management

LO 4

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Facilitating Channel CollaborationFacilitating 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

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Facilitating Channel Collaboration: Supply Chain Best Management PracticesFacilitating 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

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Facilitating Channel Collaboration: Supply Chain Best Management PracticesFacilitating 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

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Facilitating Channel CollaborationFacilitating 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

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Category ManagementCategory 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

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Question to PonderQuestion to Ponder

• How can a manufacturer employ an e-tailing strategy while maintaining a strong partnership with its retailers?

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