Ch. 14: Channel Relationships and Supply

Chains

Channels Can Create Efficiency

V1

V2

V3

V4

C1

C2

C3

C4

C1

C2

C3

C4

V1

V2

V3

V4

RS

Direct: V x C transactions

Via Reseller: V + C transactions

V = Vendors; C=Customers; RS=Reseller

Rationale for Channel Design

Marketing Channels & Economic Utility

Form Time Place Possession

Marketing Channels & Economic Utility:

Form

The usable quantity or mode of the product most preferred by the customer

Marketing Channels & Economic Utility:

Time

The availability of the product when the customer needs it

Marketing Channels & Economic Utility:

Place

“Locational Convenience,” the availability of the product where the customer needs it

Marketing Channels & Economic Utility:

Possession

Methodology by which the customer obtains ownership or the right to use of the product or service

Marketing Channel Flows Supplier to Customer

Manufacturers/Suppliers

End Users

Distributors

Manufacturers’ Representative

s

Direct Sellers

Missionary Sellers/Fiel

d Marketing

Sales and Marketing Flows

Product & Ownership

Flows

Install, Train, & Service Flows

Value-added Resellers

Specialized Installation &

Service Providers

Ancillary Members of the Channel (Facilitating

Agencies)

Transportation

Insurance

Promotion

Financing

Real estate/ Storage

This Exhibit is not intended to imply that all channels contain all flows shown or that all possible flows are shown here .

Exhibit 14-2a

Manufacturers/Suppliers

End Users

Distributors

Manufacturers’ Representative

s

Direct Sellers

Missionary Sellers/Field Marketing

Value-added Resellers

Specialized Installation &

Service Providers

This Exhibit is not intended to imply that all channels contain all flows shown or that all possible flows are shown here.

Customer and Market Information Flows

Payment Flows

Financial Institutions

Marketing Channel Flows Customer to Supplier Exhibit 14-2b

“Backward” Vertical Integration

Henry Ford developed his own iron ore mining operation, steel mills, glass factories, tire manufacturing, and so on

“Forward” Vertical Integration

Apple owns its own retail channels

Vertical Integration

Advantages

Economies of Scale

Complete Control Reliability and

Availability

Disadvantages

Lack of Flexibility Significant

Investment Slow to Innovate

(Myopia)

Functional Spin-Off

Alternative to Vertical Integration

Ancillary services are provided most efficiently by experts in each service› a basic application of the principle

of division of labor

A Value Network

SUPPLY CHAIN

MARKETING/DISTRIBUTION

CHANNEL

SUPPLIERCUSTOMER

OFFERING

SUPPLIER PARTNERS

Exhibit 14-5

Value Networks

“Fast Vertical Integration” create a lot of the advantages without the disadvantageso Greater flexibilityo Lower initial investmento Fast response to market

Distributors Serve Buyers and Sellers

Seller Benefits

Buy and hold inventory.

Combine supplier outputs (reduce discrepancy of assortment).

Share credit risk.

Share selling risk.

Forecast market needs.

Provide market information.

Buyer Benefits Provide fast delivery.

Provide market segment-based product assortment.

Provide local credit.

Provide product information.

Assist in buying decisions.

Anticipate needs.

Exhibit 14-4

Business Logistics

The management of movement, sorting, and storage of goods an important tactical function

Supply Chain Management

Creation of value for customers through effective and efficient flow of materials, components, finished goods, and services

Extends from raw materials through to end use customers

Physical Distribution Concept

System design aimed at minimizing costs while maintaining a given level of customer service through the simultaneous management of three elements Inventory Transportation Warehousing

Physical Distribution Concept: Inventory Management

Often largest cost associated with logistics system

Inventory implies carrying and finance charges and costs of storage and creating assortment

Tools to manage include, JIT inventory and manufacturing methods and facility location, and so on

Lower inventory quantities lead to lower costs but can result in more costly transportation needs and/or stockouts

Physical Distribution Concept: Transportation

Tradeoff of speed versus cost Slower transportation implies

larger safety stocks If transportation costs are

minimized with out regard necessary inventory levels, carrying costs increase

Physical Distribution Concept: Warehousing

Two primary functions of warehousing

Product flow/movement (associated with the creation of assortment) (Distribution Centers)

Product storage (Warehouses)

Logistics of a Competitive Edge

As technology and product advantages become more fleeting, efficient supply chains have become a competitive advantage

Best designs match “the way a customer buys” in that the marketing channel is differentially invisible to the customer

Differentially Invisible

Customer should not be required to adapt to the vendor o The process should be invisible

Channel Design – Dual Distribution

Different market segments require different channel design

Manufacturer

Multi-brand Distributor

Logistics Provider

Large Customer –

Direct Channel

Integrated Retailers

Independent Retailers

Auto Manufacturers – GM, Ford, Honda,

etc.

Goodyear Sponsored/

Franchised Dealers

Sears, Wheel

Works, etc.

Example: Goodyear Tires

Goodyear may or may not use the

same distributor/logistics

provider as the independent stores.

Channel Design – Multi-Distribution

Customers within a segment with similar needs will expect locational convenience

Manufacturer

Dealer/Retaile

r

Example: Honda Automobiles

Dealer/Retaile

r

Dealer/Retaile

r

Dealer/Retaile

rNumber of dealers with same channel design

relates to the desired intensity of distribution.

Channel DesignReduce the Discrepancy of

Assortment

Channels convert manufacturers’ product lines to product assortments desired by particular market segments

When to Use DistributorsFavoring

• Product requires local stock.• Product line is small, unable to support direct sales.• Product is somewhat generic.• Product has low unit value.• Product is near end of PLC.• Customers are widely dispersed.• Local repackaging, sizing, or fabrication is required.• Market has many small-volume buyers.• Product requires extensive sales effort directed at buying

professionals.• Start-up venture or established company is entering a new

market.• Competition Uses distributors.• Customers prefer distributors.

Not Favoring• Product is highly customized. • Product is new or innovative.• Product is technically sophisticated.• Significant missionary selling is required.• Manufacturer requires control over product application.• Large buyers are geographically concentrated.

Exhibit 14-6

Selecting and Caring for Distributors

Determine right distributor for your marketing plan

Ask customers who they recommend Train and support them well, at both

your facilities and theirs Make calls on them Make calls with them

Bases of Power in Marketing Channels “Soft” Bases of Power

oExpertiseoInformationoIdentification

“Hard” Bases of PoweroRewardoCoercion oLegitimate

Control and Cooperation in Vertical Marketing Systems

Increasing centralized control

Mutual Goals

Contractual systems

Corporate vertical marketing systems(CVMS)

Administered systems

Conventional Systems

Horizontal Sprawl

Value Networks

Contractual systems include wholesaler and retailer sponsored voluntary chains, and franchise Systems. Ace and Tru-Value Hardware and IGA are voluntary chains. New car dealers and fast food restaurants (e.g., McDonalds, Burger King) are franchises.

CVMS were likely developed when there were no other channel alternatives. In a CVMS all functions and flows are performed by (or contracted by) the integrator. CVMS have the greatest degree of centralized control but less flexibility. Many Goodyear tire dealers are forms of a forward integrated CVMS; Sears is a backward integrated CVMS.

By most traditional views, administered marketing systems are the closest to conventional systems. Independent intermediaries agree on goals related to a particular administrative leader’s market segment while maintaining disparate goals associated with their own operations.

Conventional systems, not a vertical channel patterns, are similar to administered channels but without agreement on goals. Intermediaries are independent businesses with concerns only for their own operations.

Horizontal Sprawl is a term applied to the Japanese keiretsu channel pattern. A keiretsu is a group of loosely associated companies that may have many ties at the ownership and management level. A keiretsu is often a complete supply chain with many buyers, sellers, and ancillary service providers. There is significant sharing of goals, risks, and benefits among members of the chain.

Value Networks are almost totally dependent on relationships that create cooperation and win-win scenarios. The assembled team creates a solution to a particular customer need. The team will be unified in the approach at that customer, but there is not necessarily any agreement to participate together beyond the immediate collaboration. Today’s may be part of a competing network tomorrow.

Directed GoalsIncreasing Voluntary Cooperation

Exhibit 14-7

Control and Cooperation in Vertical Marketing Systems

Increasing centralized control

Administered Systems

Horizontal Sprawl / Keiretsu

Contractual systems

Corporate Vertical

Marketing Systems

Conventional Systems

Value

Networks

Mutual Goals Directed GoalsIncreasing Voluntary Cooperation

Exhibit 14-7

Web Opportunities for B2B Marketers

Better and faster channel flows market data more readily available

Faster communications provides rapid ordering and order tracking

Reduced transaction costs through online processing and tracking

Product information available at the customers’ convenience

New Channel Types

Affiliates - link on a web site that refers to a product or service supplier’s site

Hubs – Intermediate that brings

buyers and sellers together in a market