Creating Value Through

Supply Chain Management:

Channels of Distribution,

Logistics, and Wholesaling

Place: The Final Frontier

• Parity in product, promotion and price

• Place offers opportunity for differentiation• E.g. Netflix, Walmart, I-tunes

• Managing distribution can spell enormous cost savings and profits

15-2

Supply Chain Management

• The supply chain – firms involved in all activities from raw material procurement to delivering the final product to the consumer

• Supply chain management – management of flows among the firms in a supply chain to maximize total profitability

• E.g. Hewlett Packard (Identify the flows)

15-3

What Is a Distribution Channel?

• Series of firms or individuals that facilitate the movement of a product from the producer to the final customer• Direct• Indirect

• Channel Intermediaries

15-4

Functions of Distribution Channels• Time, place, and ownership utilities

• Logistics functions • Transportation and storage

• Efficiency creation• Breaking bulk• Creating assortments

• Facilitating functions• Repairs and replacements• Credit and financing

• Risk taking

• Information flow & research

15-5

Creating Efficiencies

• Breaking bulk – channel members purchase large quantities from manufacturers and sell smaller quantities to many different customers

• Creating assortments – channel members provide a variety of products in one location

15-6

The Internet

• Small firms selling products distributable over the Internet (e.g. software, music, books, magazines, newspapers, etc.)

• Small firms completing the sale over the Internet but outsourcing logistics and transportation functions

• Disintermediation - process by which traditional intermediaries are eliminated

15-7

Types of Wholesaling Intermediaries

• Wholesaling intermediaries – firms that handle the flow of products from the manufacturer to retailer or business user• Independent• Merchant wholesalers (assume title

and full risks, earn profits)• Agents and brokers (merely bring

buyers and sellers together; earn commissions)

• Manufacturer owned• Sales branches, offices and showrooms

15-8

Independent Intermediaries

Merchant wholesalers

• Full-service• Limited-service• Cash-and-carry

wholesalers• Truck jobbers• Drop shippers• Mail-order

wholesalers• Rack jobbers

Merchandise Agents or Brokers

• Manufacturers’ agents• Selling agents• Commission

merchants• Merchandise

brokers

15-9

Types of Distribution Channels• Consumer channels

• Direct (e.g. farmers market, Internet)• Manufacturer-retailer-consumer (e.g. HP’s

computers through Best Buy)• Manufacturer-wholesaler-retailer-consumer

(e.g. Breyers ice cream)

• Business-to-business channels• Direct (most high value industrial products)• Manufacturer-industrial distributor-business

customer (smaller industrial products, e.g. valves, etc.)

15-10

Dual Distribution Systems

• Multiple channel usage

• Example:• pharmaceutical industry sells to hospitals,

clinics, and organizational customers directly and to consumers indirectly through drug retailers

• Hybrid marketing systems• Using several channels at the same time

15-11

Deciding on a channel strategy

• Profit potential

• Control over distribution, promotion and pricing

• Resources availability

15-12

Marketing Systems• Conventional – multi-level distribution

channel in which members work independently of one another

• Vertical – channel in which there is cooperation among channel members at two or more different levels of the channel

• Horizontal – two or more firms at the same channel level agree to work together (e.g. Smaller stores in Walmart; banks inside grocery stores)

15-13

Vertical Marketing Systems

• Administered – channel members remain independent but voluntarily work together

• Corporate – single firm owns manufacturing, wholesaling, and retailing operations (e.g. Sears)

• Contractual – cooperation is enforced by contracts that spell out member rights and the terms of cooperation (e.g. IGA food stores ; Ace Hardware)

15-14

Contractual VMS• Wholesaler-sponsored – wholesalers get

retailers to work together under their leadership in a voluntary chain (e.g. IGA)

• Retailer-cooperative – group of retailers with a wholesaling operation to help them compete more effectively with large chains (e.g. True Value Hardware)

• Franchise organizations – cooperation is explicitly defined and strictly enforced by franchiser (e.g. McDonalds)

15-15

Distribution Intensity

• Intensive distribution• Maximize coverage by using all

available outlets (e.g. gum, sodas, milk, bread, etc.)

• Exclusive distribution• Limited outlets in a region• Generally for high priced products (e.g.

cars, jewelry, pianos, etc.)

• Selective distribution• In between (e.g. house hold

appliances, electronic equipment, etc.)

15-16

Managing the Channel

• Selecting channel partners

• Managing the channel of distribution• Channel leader is the dominant firm that

controls the channel (channel captain)• Channel leaders have some form of power

relative to other members

15-17

Logistics and Customer Satisfaction

• Traditionally, logistics was thought of as physical distribution• order processing, warehousing, materials

handling, transportation, and inventory control• objective to deliver product at lowest cost

• Now, deliver products at the lowest cost provided, expected service quality is maintained

15-18

Logistics Functions

• Order processing

• Warehousing

• Materials handling

• Transportation

• Inventory Control

15-19

Transportation Mode Considerations

• Dependability

• Cost

• Speed of Delivery

• Accessibility

• Capability

• Traceability

15-20

Modes of Transportation

• Rail

• Water

• Truck

• Air

• Pipeline

• Internet

15-21