Delivering Value Through Supply Chain

Management: Channels of Distribution and Logistics

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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

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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.

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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

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Figure 15.2:The Generic Value Chain

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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.

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Links in the Supply Chain

• Supply chain management: the management of flows among the firms in a supply chain to maximize total profitabilityIncludes physical movement of and sharing of information about goods

Insourcing: contracting with a specialist that services the company’s supply chains

UPS.COM

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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

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Figure 15.3: Supply Chain

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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?

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The Importance of Distribution:You Can’t Sell What Isn’t There!

• Direct channel: a producer and a customer• Indirect channel: one or more

intermediariesFirms/individuals such as wholesalers, agents, brokers, and retailers that help moveproduct to consumer or business user

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Functions of Distribution Channels

• To ease the flow of goods from producer to customer

• To provide time, place, and ownership utility

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Functions of Distribution Channels (cont’d)

• To provide logistics or physical distribution functions

• To create efficiencies by reducing number of transactionsBreaking bulk: purchasing large quantities of goods to

sell one/few at a time to customersCreating assortments: providing variety of products in

one location

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Figure 15.4: Reducing Transactions via Intermediaries

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Functions of Distribution Channels (cont’d)

• To make purchase process easier

• To manage risk• To perform

communication and transaction functions

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The Internet in the Distribution Channel

• Radical changes in distribution strategiesDisintermediation: eliminating traditional

intermediariesKnowledge management: sharing knowledge with

other supply chain members

DELL

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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?

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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?

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Channel Composition: Types of Wholesaling Intermediaries

• Wholesaling intermediaries: firms that handle the flow of products from the manufacturer to the retailer/business user

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Independent Intermediaries

• Merchant wholesalers: buy goods from manufacturers and sell to retailers and other B2B customersFull-service merchant wholesalersLimited-service merchant wholesalers Cash-and-carry wholesalers Truck jobbers

Drop shippers Rack jobbersMail-order wholesalers

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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

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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?

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Types of Distribution Channels

• Consumer ChannelsDirect channel: producer sells directly to customers

Indirect channel: producer uses one or more intermediaries to reach consumers

SALAMI.COM

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Types of Distribution Channels (cont’d)

• Business-to-business channels

• Dual distribution systems

• Hybrid marketing systems

MERCK.COM

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Figure 15.6: Steps in Distribution Planning

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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 functionsChannel intermediaries availableHow the competition distributes its products

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Planning a Channel Strategy (cont’d)

• Step 3: Choose a distribution strategyChannel relationships: conventional, vertical, or

horizontal systemConventional marketing system: members work

independently of one another

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Planning a Channel Strategy (cont’d)

• Step 3: Choose a distribution strategyVertical marketing system (VMS): formal cooperation

among channel members• Administered VMS• Corporate VMS• Contractual VMS• Retailer cooperative• Franchise organizations

IGAINC.COM

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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?

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Planning a Channel Strategy (cont’d)

• Step 3: Choose a distribution strategyHorizontal marketing system: two or more firms at the

same channel level agree to work together to get their product to the customer

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Planning a Channel Strategy (cont’d)

• Step 3: Choose a distribution strategyDistribution intensity Intensive distribution: selling through all suitable

wholesalers or retailers Exclusive distribution: selling only through a single

outlet in a regionSelective distribution: using fewer outlets than intensive but more than exclusive distribution

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Planning a Channel Strategy (cont’d)

• Step 4: Develop distribution tacticsSelecting channel partners: normally a long-term

commitmentManaging the channel

• Channel leader/captain: dominant firm that controls the channel (via economic, legitimate, reward/coercive power)

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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?

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Distribution Channels and the Marketing Mix

• Place decisions affect:PricingProduct and its positioning

ENTERPRISERENT-A-CAR

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Logistics: Implementingthe Supply Chain

• Logistics: the process of designing, managing, and improving the movement of products through the supply chainPurchasingManufacturingStorageTransport

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Logistics: Implementingthe Supply Chain (cont’d)

• Physical distribution: the activities used to move finished goods from manufacturers to final customers

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Logistics Functions

• Order processing

• Warehousing

• Materials handling

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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)

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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

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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

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Logistics Functions (cont’d)

• Inventory control: activities to ensure foods are always available to meet customers’ demandsRadio frequency identification (RFID)Just in time (JIT)

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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

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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?

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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?

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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?