Chapter 14

Part SevenDistribution Decisions

Marketing Channels andSupply-Chain Management

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Copyright © Houghton Mifflin Company. All rights reserved. 14–2

Chapter Learning Objectives

1. Describe the nature and functions of marketing channels

2. Identify the types of marketing channels

3. Explore the concepts of leadership, cooperation, and conflict in channel relationships

4. Recognize common strategies for integrating marketing channels

5. Examine the major levels of marketing coverage


Chapter Learning Objectives (cont’d)

6. Recognize the importance of the role of physical distribution activities in supply-chain management and overall marketing strategies

7. Examine the major physical distribution functions of order processing, inventory management, materials handling, warehousing, and transportation


Chapter Outline

• Marketing Channels and Supply-Chain Management

– The Importance of Marketing Channels

– Types of Marketing Channels

– Channel Leadership, Cooperation, and Conflict

– Channel Integration

– Intensity of Market Coverage

• Physical Distribution in Supply-Chain Management

– Order Processing - Materials Handling

– Inventory Management - Warehousing

– Transportation


Marketing Channels and Supply-Chain Management

• Marketing Channel

–A group of individuals and organizations directing products from producers to customers

• Supply Chain Management

–Long term partnerships among marketing channel members that reduce inefficiencies, costs, and redundancies in the marketing channel to satisfy customers


Marketing Channels Consist of Intermediaries

• Marketing Intermediary

–An intermediary linking producers to other intermediaries or to ultimate consumers through contractual arrangements or through the purchase and resale of products

Direct ChannelDirect ChannelProducerProducerProducer CustomerCustomerCustomerProducerProducerProducer CustomerCustomerCustomer

Indirect ChannelIndirect Channel

ProducerProducerProducer CustomerCustomerCustomerIntermediaryIntermediaryIntermediaryProducerProducerProducer CustomerCustomerCustomerIntermediaryIntermediaryIntermediary


Marketing Channels Form a Supply Chain

• Supply-Chain Management

– Long-term partnerships among marketing channel members that reduce inefficiencies, costs, and redundancies and develop innovative approaches to satisfy customers

– Optimizes costs throughout the whole channel for efficiency and service

– Includes all entities that facilitate product distribution and benefit from cooperative efforts

– Arises from the need to achieve a more competitive position


Marketing Channels Create Utility

• Time Utility

– The product is available when the customer wants it (newspaper delivery).

• Place Utility

– The product is available in locations where customers wish to purchase it (convenience stores).

• Possession Utility

– The customer has access to the product to use or to store for future use (raincoats).

• Form Utility

– The product is assembled, prepared or otherwise refined to suit customer needs.


Marketing Channels Facilitate Exchange Efficiencies

• Reduce the overall costs of market exchanges

• Reduce search costs for customers

• Maintain order in the marketplace


Efficiency in Exchanges Provided by an Intermediary

FIGURE 14.1


Typical Marketing Channels forConsumer Products

FIGURE 14.2


Typical Marketing Channels forBusiness Products

FIGURE 14.3


Distribution Intermediaries

• Industrial Distributor

–An independent business that takes title to business products and carries inventories

• Manufacturers’ Agent

–An independent businessperson who sells, on commission, the complementary products of several producers; does not takes title to or hold inventories.


Multiple Marketing Channels and Channel Alliances

• Dual Distribution

–The use of two or more channels to distribute the same product to the same target market

• Strategic Channel Alliance

–An agreement whereby the products of one organization are distributed through the marketing channels of another


Channel Leadership, Cooperation, and Conflict

• Channel Captain

–A dominant member (producer, wholesaler, or retailer) of a marketing channel or supply chain• Establishes channel policies and coordinates

development of the marketing mix

• Channel Power

–The ability of one channel member to influence another member’s goal achievement


Channel Conflict

• Sources of Channel Conflict

– Disagreements arising among channel members

– Communication difficulties jeopardizing coordination

– Increased use of multiple distribution channels by manufacturers creating conflicts with distributors and retailers

– Intermediaries diversifying into and offering competing products

– Producers attempting to circumvent intermediaries and dealing directly with retailers


Channel Cooperation

• Improving Channel Cooperation

–Unifying channel to maintain market order

–Agreeing to direct efforts toward common objectives

–Precisely defining each channel member’s tasks


Channel Integration

• Vertical Channel Integration

– Two or more stages of the marketing channel are under one management.

– Channel members coordinate their efforts to reach a target market.

• Vertical Marketing System (VMS)

– A marketing channel managed by a single channel member to achieve efficient, low-cost distribution• Corporate VMS

• Administered VMS

• Contractual VMS


Channel Integration (cont’d)

• Horizontal Integration

–Organizations at the same level of operation are combined under one management.


Intensity of Market Coverage

• Intensive Distribution

–Uses all available outlets to distribute a product.• Appropriate for convenience products with high

replacement rates

• Provides availability and reduces search time


• Selective Distribution

–Uses only some available outlets to distribute a product• Appropriate for shopping products and

durable goods with low replacement rates

• Desirable when special effort—such as customer service—is important

Intensity of Market Coverage (cont’d)

Tuscaloosa’s Only Authorized

Dealer


Intensity of Market Coverage (cont’d)

• Exclusive Distribution

–Uses a single outlet in a fairly large geographic area to distribute a product• Appropriate for expensive, high-quality products

purchased infrequently


Physical Distribution in Supply-Chain Management

• Physical Distribution (Logistics)

–Activities used to move products from producers to consumers and other end users• Order processing • Inventory management

• Material handling • Warehousing

• Transportation

• Outsourcing

–The contracting of physical distribution tasks to third parties with specialized logistics skills who do not have managerial authority within the marketing channel


Proportional Cost of Each Physical Distribution Function as a Percentage of Total Distribution Costs

FIGURE 14.4

Source: Herbert W. Davis and Company, Fort Lee, NJ. “Logistics Cost and Service, 2000,” Reprinted by permission of Herbert W. Davis and Company.

6%5%

39%

23%

27%

Customer Service/order entry

Administration

Transportation

Warehousing

Inventory carrying


Order Processing

• The receipt and transmission of sales order information

–Order entry

–Order handling

–Order delivery

• Electronic Data Interchange (EDI)

–A computerized means of integrating order processing with production, inventory, accounting, and transportation


Inventory Management

• Developing and maintaining adequate assortments of products to meet customers’ needs

– Objective is to minimize inventory costs yet have on hand a sufficient supply of goods to satisfy customers• Stockouts—inventory-related shortages of products

• Reorder point= (Order Lead Time x Usage Rate) + Safety Stock

• Just-in-Time

– An inventory management in which supplies arrive just when needed for production or resale


Materials Handling

• The physical handling of products in warehousing operations and the transportation from points of production to points of consumption

– Unit loading—one or more boxes of product are placed on a pallet and handled by mechanical means (e.g., forklift)

– Containerization—consolidation of many small items into a single large container providing increased handling efficiency and security in shipping


Warehousing

• The design and operation of facilities for storing and moving goods

–Enables compensation for dissimilar production and consumption rates

–Helps stabilize prices and availability of seasonal items


Types of Warehouses

• Private Warehouses

– Company-operated warehouses for storing and shipping products

• Public Warehouses

– Businesses that lease storage space and related physical distribution facilities to other firms• Field public warehouses

• Bonded storage

• Distribution Centers

– Large centralized warehouses that focus on moving rather than storinggoods


Transportation

• The movement of products from where they are made to where they are used

• Transportation modes

– Railroads—heavy, bulky full carloads of freight

– Trucks—flexible schedules, speed and access

– Waterways—heavy, low-value nonperishables

– Airways—fast delivery, high-value or perishable goods

– Pipelines—bulk petroleum and chemicals


Proportion of Intercity Freight Carried by Various Transportation Modes

FIGURE 14.5

Source: Bureau of the Census, Statistical Abstract of the United States 2004-2005, p. 675.

41.7%

28.2%

16.5%

13.2%0.4%

Railroads

Trucks

Pipelines

Waterways

Airways


Coordinating Transportation

• Intermodal Transportation

– An integrated transportation approach in which two or more transportation modes are used in combination• Containerization: piggyback, fishyback, birdyback modes

• Freight Forwarders

– Organizations that consolidate shipments from several firms into efficient lot sizes

• Megacarriers

– Freight transportation firms that provide several modes of shipment


After reviewing this chapter you should:

1. Be able to describe the nature and functions of marketing channels.

2. Be able to identify the types of marketing channels.

3. Understand the concepts of leadership, cooperation, and conflict in channel relationships.

4. Be able to recognize common strategies for integrating marketing channels.

5. Be familiar with the major levels of marketing coverage.


After reviewing this chapter you should: (cont’d)

6. Be able to recognize the importance of the role of physical distribution activities in supply-chain management and overall marketing strategies.

7. Be familiar with the major physical distribution functions of order processing, inventory management, materials handling, warehousing, and transportation.

Chapter 14

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