Dunne, Lusch, & Carver

Chapter 5

Managing the Supply Chain

A Supply Chain

• The set of institutions that move goods from the point of production to the point of consumption.

• Synonymous with the term “channel”

• Must perform eight marketing functions:

Note: None of these functions can be eliminated; they can only be shifted.

BuyingSellingStoringTransporting

SortingFinancingInformation gatheringRisk taking

Supply Chain Participants

• A channel is made up of only two types of institutions…• Primary marketing institutions

• Members that take possession of and title to the goods handled as they move through the marketing channel.

• Only primary institutions are formal members of a channel

• Facilitating marketing institutions• Members that do not actually take title to the goods they

handle, but assist in the marketing process by specializing in the performance of one or more of the eight marketing functions.

Development of the Supply Chain

• There are three general strategic decision areas that must addressed when designing a supply chain

1. Length

2. Width

3. Level of Control

• All three will impact supply chain efficiency and the channel’s ability to meet its ultimate goal.• Goal of every channel is to minimize suboptimization

• Achieved via specialization of labor in the 8 mkt. functions

Choices Concerning Length

Length:Direct vs. Indirect

Choices Concerning Width

Choices Concerning Control

Managing Retailer – Supplier Relations

• Power• Ability of one channel member to influence the

decisions and behavior of the other channel members.• Pab = Dba

• Dependency• Occurs when a retailer needs another supply chain

member or vice versa to perform certain marketing functions.

• All channel members are interdependent upon one another.• Interdependency is at the root of all major sources of conflict.

Bases of Power

• Bases of Power:

1. Expertise power

2. Referent power

3. Legitimate power

4. Reward power

5. Coercive power

Use of Power within the Supply Chain*

Note this information is not within your text

and was supplied in class.

(L.P. Bucklin’s “Theory of Channel Control,” JM 1973)

• Payoff Function• The amount of benefits (or profits) that accrue as a result of giving up control

Theory of Channel Control

Benefit(eg, $)

Control Given Up

• Tolerance Function• The amount of pain/burden felt as a result of giving up control to another.

Theory of Channel Control

Benefit(eg, $)

Control Given Up

• Zone of Indifference• Corresponds to the indifference of keeping/ending the relationship due to the costs associated with

“breaking-up” an arrangement• Zone is the area between the Tolerance Function and the red line denoting the outside edge of the zone

Theory of Channel Control

Benefit(eg, $)

Control Given Up

• Area “A”• The only area where the Payoff Function is above the Tolerance Function, and it’s increasing• As one gives up more control initially, they experience greater benefit (e.g., why consultants exist)

Theory of Channel Control

A

Benefit(eg, $)

Control Given Up

• Area “B”• The only area where the Payoff Function is above the Tolerance Function, but it’s decreasing• As one continues to give up control, the benefits begin to fall. Burden simultaneously begins to rise

substantially as benefits continue to fall (i.e., steep rise in the Tolerance function).

Theory of Channel Control

A

Benefit(eg, $)

Control Given Up

B

• Area “C”• The area where the Payoff Function is below the Tolerance Function, and still in the zone of

indifference• Here the amount of burden felt outstrips the benefit gained, but there’s a cost assoc. with breaking up

Theory of Channel Control

A

Benefit(eg, $)

Control Given Up

B C

• What bases of power should be used in “A”? And why should the others not?

Theory of Channel Control

A

Benefit(eg, $)

Control Given Up

• What bases of power should be used in “B”? And why should the remaining not?

Theory of Channel Control

A

Benefit(eg, $)

Control Given Up

B

• Why should the remaining bases of power be used in “C”? What do they do?

Theory of Channel Control

A

Benefit(eg, $)

Control Given Up

B C

• Reward power impacts one’s payoff function & shifts it up temporarily

Theory of Channel Control

Benefit(eg, $)

Control Given Up

• Now consider how coercive power impacts the same scenario…

Theory of Channel Control

A

Benefit(eg, $)

Control Given Up

B C

• Coercive power impacts one’s tolerance function & shifts it down temporarily

Theory of Channel Control

Benefit(eg, $)

Control Given Up

Conflict Within the Supply Chain

• Conflict• Exists when a member of the channel perceives that

another member’s actions impede the attainment of his/her goals.*

• Sources of conflict: 1. Perceptual incongruity

2. Goal incompatibility• Dual distribution

3. Domain disagreements• Diverting, Gray Marketing, Free Riding

4. Role incongruities*

5. Expectational differences*

Facilitating Channel Collaboration

• Compromise vs. Collaboration• Win/Lose vs. Win/Win

• Requires:

1. Mutual trust• Faith that each (retailer & supplier) will be truthful and fair in their

dealings with the other.

2. Two-way communication• When both communicate openly their ideas, concerns, & plans.

3. Solidarity• High value is placed on the relationship & results in flexible

dealings where adaptations are made as circumstances change.

Category Management

• Process of managing all the SKUs within a product category.

• Involves the simultaneous management of…1. Price

2. Shelf space

3. Merchandising strategy

4. Promotional efforts

Category Management

• Category Manager• The individual who uses detailed knowledge of the consumer

and consumer trends, detailed point-of-sale (POS) information, and specific analysis provided by each supplier to the category to create various store displays based on local market conditions.

• Works for the retailer

• Category Advisor• In cases where the solidarity of the channel partners is high, a

supplier may serve as the retailer’s category manager.• Works for a supplier but manages all brands within the category.

What You Should Have Learned…Chapter’s Learning Objectives

1. The retailer’s role as one of the institutions involved in the supply chain.

2. How to discuss the types of supply chains by length, width, and level of control.

3. The terms dependency, power, and conflict, as well as their impact on supply chain relationships.

4. The importance of a collaborative supply-chain relationship.