3.07 Channels of Distribution. Textbook Review pages 450 - 451

3.07 Channels of Distribution

Textbook

Review pages 450 - 451

What is distribution?

The moving or transferring of the ownership of goods and services from the producer to the consumer

What is a channel of distribution?

The path (channel) a product travels from the producer (manufacturer) to the ultimate consumer

MARKETING MIX

Remember the 4 P’s of Marketing?PriceProductPlacePromotion

DISTRIBUTION = PLACE

Channel management tasks

MarketingPackagingFinancingStorageDeliveryMerchandisingPersonal selling

Channel management decisions

Select channel membersManage and motivate channel membersEvaluate channel members

What is the best means to distribute the product?

Channel design decisions….

Analyze customer needsSet channel objectivesIdentify major alternatives

Types of intermediariesNumber of intermediariesResponsibilities of intermediaries

SO……

Who is an intermediary (middleman)?

Channel members who assist the producer in getting the goods and services to the final user

The various intermediaries include:

Wholesalers Rack jobber Drop shipper

Retailers Brick-and-mortar Non-store

Agents

Wholesalers

Companies that purchase large quantities from manufacturers, store products in warehouses and sell them to other businesses.

Example: BiLo buys their canned vegetables from Del Monte or Green Giant manufacturers

Types of wholesalers

Rack jobber: A wholesaler that provides racks filled with merchandise in space that is leased from retailers.

Ex. Rack jobber provides displays with music CDs in a series of convenience stores; rack jobber and convenience stores split revenues from sales of the CDs

Types of Wholesalers

Drop shipper: A wholesaler that accepts an order and ships directly from the manufacturer without taking possession of the goods.

Ex. Fuller Supply Company buys coat hangers from the manufacturer and if a dry cleaner wants 200 boxes, they will ship directly from the manufacturer

Retailers

Businesses that sell products to the final user or consumer.Brick-and-mortar retail: A physical store that

sells their products directly to customers.Ex. Belk, American Eagle, CVS, Food Lion

Non-store retail: A way to reach customers through vending machines, direct mail, catalog retailing, TV home shopping, and e-tailing.Ex. Drink machines, L.L. Bean catalog, QVC, E-bay

Exclusive Dealers

Situation where suppliers and distributors enter into an exclusive agreement that only allows the named distributor to sell a specific product. For example, Apple had an exclusive distribution deal with AT&T to provide the iPhone to consumers.

Agents

An individual or business that connects the buyers and sellers. Agents do not own the products they sell i.e. no legal ownership of the productsEx. A REALTOR links the homebuyer to the

home seller

What is a direct channel?Distribution that occurs directly from

the producer to the consumer For example: A consumer buys

apples from an apple farmer Cuts out the middleman

What is an indirect channel?

Distribution that occurs through one or more intermediaries before reaching the final user

For example: The apple farmer sells his apples to Harris Teeter and Harris Teeter sells them to the consumer

Indirect channel is used….

When a producer doesn’t want responsibility for the selling activities of a large retailerProducer to agent to retailer to consumer

OR

Because wholesalers usually buy in large quantitiesProducer to wholesaler to retailer to consumer

TRANSPORTATION SYSTEMS AND SERVICES

3.05

Physical distribution is…Organizing and moving products

through the channels aka: Logistics = ordering,

transporting, storing, handling and inventory control

The 3rd largest expensefor most businesses

#1 Materials #2 Labor

Physical distribution

Needs to be as efficient and cost effective as possible

Needs to be coordinated with other business functions such asPurchasingFinanceProductionPackagingPromotion

Transportation is…

Physically moving from Place A Place B

Methods include:Trucking or motor carriers Railroads Marine shipping Pipelines Air cargo services

Transportation is…

Trucking or motor carriers: tractor trailersCommon carriers – provide transportation services to

any business in their operating area for a fee; multiple shippers may be consolidated into single truckloads

Contract carriers – for-hire carriers that provide equipment and drivers for specific routes, according to agreements between carrier and the shipper; less flexibility; one-time or continual basis

Private carriers – transport for an individual business; more expensive = more control

Exempt carriers – carry agricultural products; rates are lower

Transportation is….Intermodal combines two or more transportation

modes to maximize advantagesPiggyback service is carrying loaded truck trailers on

railroad flatcars; trucks take trailers to final destination

Railroads: move heavy and bulky freightCoal, steel, lumber, grain, equipment; along rail linesTon mile is moving 1 ton (2,000 lbs) 1 mileCarload is minimum # of lbs. to fill a boxcar

Marine Shipping: within US and around world barges transport steel, iron ore, and grain; tankers;

merchant vesselsInland, intracoastal and international waterways

Transportation is…Pipelines: transport oil and natural gas

BP owns pipelines that move crude oil from Alaskan oil fields to the refineries

Product moves slowly but continuously

Air cargo: High value, low-weight and time-critical products; + speed - costFlowers shipped by air from Hawaii to NCSeafood shipped overnight Chocolates shipped from France

A transportation company…

Help move small packages from

A to B

For example: US Postal Service

A transportation company…

UPSFedEx

Private companies that combine shipments from several businesses to help reduce costs to those businesses

Freight forwarders

Private companies that combine less-than-carload or less-than truckload shipments from several different businesses and deliver them to their destinations.

Provide logistics expertise to companies

INVENTORY STORAGE3.07

Methods to store merchandise…

Storage: the holding of products until they are sold; produced in large quantities; amount of goods stored is called inventoryHarry Potter books are held until the retailers

place their order

Storage is needed….

Until orders are received from customersProduction is greater than consumption or

demand decreasesCommodity storage makes agricultural

products available year-round Buy in bulkFaster delivery to customers


Private vs. Public WarehousesPrivate warehouse: a facility designed to meet

the needs of the owner. It may be based on size, temperature control or refrigeration; costly to build and maintain

Ex. Carol’s Linens has its own private warehouse to replenish inventory when needed


Public warehouse: Storage and handling facility that may be provided for any business willing to pay for the space; rent-a-warehouseSingletary Warehouse Company has a variety

of rental spaces to lease business owners. They offer refrigerated or temperature controlled space.

Methods to store merchandise… Distribution center: A storage facility used

to centralize and speed up the delivery of goods and reduce storage costsJC Penney’s has a distribution center in

Atlanta to reach all stores in the southeast


Bonded warehouse: Private or public warehouse used to store products until federal taxes have been paid on the product(s)

U.S. Customs stores imported products

until duties have been paid

Methods of handling inventory include…

Products ordered by a business are received, checked, marked (priced), and transferred

Receiving record: document used to keep track of incoming inventory


Check the received merchandiseBlind check method Direct check method Spot check method Quality check method


Blind check method: writing a detailed list of merchandise and its quantity. This list is then compared to the actual invoice. This method is time consuming but is considered the MOST ACCURATE.


Direct check method: the merchandise is verified against the invoice or purchase order


Spot check method: Merchandise is randomly checked for quality and quantity.


Quality check method: Merchandise is inspected for workmanship and making sure there is no damage to merchandise.

Methods of handling inventory include…When merchandise has been received

and checked, other information must be marked on the merchandisePlacing the selling price on the merchandise

Cumberland = 1,2,3,4,5,6,7,8,9,0

UPC (universal product codes)Scanned at check out

Once marked, transferred to selling floor

Inventory is…

Storing of merchandise before it is soldPerpetual inventory controlPhysical inventory control

Inventory is…

Perpetual: Tracks inventory on a continuous basis. A company can track and know the value and quantity of products on hand at any timeHarris Teeter electronically restocks

items as they are sold; the scanner communicates to the warehouse that the item is in need of restocking

Inventory is…

Physical: Stock is physically counted periodically and verified for accuracy

Sam’s Club physically counts each item in the warehouse once each year

Distribution Planning

Marketing 3.05

Purpose of channel members

Channel members add value to a product by performing certain channel activities expertlyMarketingPackagingFinancingStorageDeliveryMerchandisingPersonal selling

Distribution planning involves…

Decisions about a product’s physical movement and transfer of ownership from producer to consumer.

Some of the major considerations are:Multiple channelsControl vs. costsIntensity of distribution desiredInvolvement in e-commerce

Multiple channels….

Some products meet the needs of both industrial and consumer markets.

J & J Snack Foods sells its pretzels, drinks and cookies using multiple channels to:SupermarketsMovie TheatersStadiumsSchoolsHospitals

Control vs. CostsAll manufacturers and producers must

weigh the control they want to keep over the distribution of their products against the costs and profitability.Direct sales force – company employees are

expensive with payroll, benefits, expenses; may set sales quotas and easily monitor performance

Agents – work independently, running their own businesses; less expensive = less control; agents sell product lines that make them more money

Distribution IntensityDistribution intensity is how widely a

product will be distributed; marketers want to achieve the ideal market exposureExclusive distribution – protected territories

for distribution of a product in a given geographic area; business maintains tight control over a product Ex. Franchisor legally requires a franchisee to sell only the franchisor’s productsIntegrated distribution is where the manufacturer

acts as wholesaler and retailer for its own products. Ex. The Gap sells its clothing in company-owned retail stores.

Distribution Intensity

Selective distribution – a limited number of outlets in a given geographical area are used to sell the product. Very important to select channel members that can maintain the image of the product and are good credit risks, aggressive marketers and good inventory planners. Ex. Dana Buckman sells its clothing only through top department stores that appeal to the affluent customers who buy its merchandise. It does not sell in a chain megastore or a variety store.

Distribution Intensity

Intensive distribution – the use of all suitable outlets to sell a product. The objective is complete market coverage and the ultimate goal is to sell to as many customers as possible, wherever they choose to shop. Ex. Motor oil is sold in quick-lube shops, farm stores, auto parts retailers, supermarkets, drugstores, hardware stores, warehouse clubs, and other mass merchandisers.

Dual distribution

A manufacturer may sell its products through multiple outlets at the same time:Toll-free phone systemCompany websiteMultiple retailers

Horizontal and Vertical Conflict

Horizontal Conflict: occurs between channel members at the same levelGood, old-fashioned business competitionEx: two retailers selling pet supplies compete to sell

to the same target market

Vertical Conflict: occurs between channel members at different levels within the same channelProducers and wholesalers or producers and

retailers

LEGAL CONSIDERATIONS, ETHICS, CUSTOMER SERVICE AND TECHNOLOGY

3.07

Legal considerationsFranchisor requirements of franchisee is

legal. Ex. McDonalds’ requires franchisees to purchase all their supplies from them; requires facilities built to corporate standards. Etc.

Closed territories - Part of an economy or market not open to new entrants or foreigners. McDonald’s won’t allow 2 McDonalds on the same corner or within a certain mileage.

Anti-trust laws

Sherman Act - US federal legislation of 1890 that prohibited the creation of monopolies by outlawing direct or indirect attempts to interfere with the free and competitive nature of the production and distribution of goods. Amended by the Clayton Act of 1914.

Anti-trust lawsClayton Act - US federal legislation of 1914

that amended the anti-monopoly provisions of the Sherman Act of 1890 to include prohibition of (1) price discrimination and tying arrangements, (2) sales based on exclusive-dealing contracts, (3) mergers and interlocking directorates where "the effect of such acquisition may be substantially to lessen competition, or tend to create a monopoly in any line of commerce

Robinson-Patman Act of 1936

the Act prohibits sales that discriminate in price on the sale of goods to equally-situated distributors when the effect of such sales is to reduce competition. Price means net price and includes all compensation paid. The seller may not throw in additional goods or services. Injured parties or the US government may bring an action under the Act.

Customer service and appropriate channel management

Ensures timely delivery of productsEffective communication is important

Order processingCorrect shipping informationCorrect productsHandling complaintsReducing the probability of complaintsNice and friendly people

Bad Customer service and Channel ManagementVendor consistently has back orders

Product not available when ordered

Coercion – large business threatening to stop using a supplier unless given major concessionsTying agreement - Purchase agreement in which

the customer is forced to purchase a slow-selling or unknown brand or product with a fast-selling or well known one. Such coercion is usually illegal.

Customer Service and Channel ManagementGrey-market strategy – selling product in

foreign countries for a lower price than customers can get domestically

Full-line forcing - Producer or supplier insistence that the dealer must carry the full range of products in the line. This policy may not be illegal if it can be established that it serves a legitimate business need.

Slotting allowance or feeSum paid by a vendor or manufacturer to a

retail chain or establishment for (1) making room for a product on its store shelves, (2) making room for the product in its warehouse, (3) entering the product data in its inventory system, and (4) programming its computers to recognize the product's bar code. In the US, slotting fees often run up to $50,000 or more per product per store, on an annual basis. Also called slotting allowance.

Use of Technology in Distribution

Some businesses have the capacity to distribute most or all of their products through the internete-commerce: Products are sold to customers

and industrial buyers through the Internet.e-marketplace

Satellite tracking = a dispatcher has current knowledge of a delivery truck’s location and destination


Tracking of packageBar coding on packagePackage scanned at transition points in

distribution chainCustomer uses internet to follow package along

distribution chain; e-mail may be usedGlobal distribution: in some countries the postal

service is not reliable; package tracking facilitates global trade


ProblemsCost of technologyChanging technology = updating equipmentNeed for compatible systems within and

between countries

Channels of Distribution

US Post Officehttp://www.youtube.com/watch?

v=VQReRnmCaqA&feature=related&safety_mode=true&persist_safety_mode=1

UPShttp://www.youtube.com/watch?

v=2C5KDH2o28o&feature=related&safety_mode=true&persist_safety_mode=1&safe=active

Extreme Engineering

http://www.youtube.com/watch?v=Eg4lnKPBcqk&feature=related&safety_mode=true&persist_safety_mode=1

Ship Catastrophe

http://www.youtube.com/watch?v=8HFARxn73dk&feature=related&safety_mode=true&persist_safety_mode=1

http://www.youtube.com/watch?v=BX3kFCgvKp4&feature=related&safety_mode=true&persist_safety_mode=1

Dell Computers

http://www.youtube.com/watch?v=EEhNkzdKyrw&feature=related&safety_mode=true&persist_safety_mode=1

Amazon.comhttp://www.youtube.com/watch?

v=i6H7nfHjHtY&feature=related&safety_mode=true&persist_safety_mode=1

Coca-cola

http://www.youtube.com/watch?v=jRo8_XBCSvw&feature=related&safety_mode=true&persist_safety_mode=1&safe=active

Documents

3.07 Channels of Distribution. Textbook Review pages 450 - 451