Marketing Channels and Supply Chain Management
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Principles of Marketing
Learning Objectives
After studying this chapter, you should be able to:1. Explain how companies use marketing channels
and discuss the functions these channels perform2. Discuss how channel members interact and how
they organize to perform the work of the channel3. Identify the major channel alternatives open to a
company4. Explain how companies select, motivate, and
evaluate channel members5. Discuss the nature and importance of marketing
logistics and integrated supply chain management
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Chapter Outline
1. Supply Chains and the Value Delivery Network
2. The Nature and Importance of Marketing Channels
3. Channel Behavior and Organization4. Channel Design Decisions5. Channel Management Decisions6. Public Policy and Distribution Decisions7. Marketing Logistics and Supply Chain
Management
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Supply Chains and the Value Delivery Network
Supply Chain Partners
Upstream partners include raw material suppliers, components, parts, information, finances, and expertise to create a product or service
Downstream partners include the marketing channels or distribution channels that look toward the customer
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Supply Chains and the Value Delivery Network
Supply Chain Views
Supply chain “make and sell” view includes the firm’s raw materials, productive inputs, and factory capacity
Demand chain “sense and respond” view suggests that planning starts with the needs of the target customer and the firm responds to these needs by organizing a chain of resources and activities with the goal of creating customer value
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Supply Chains and the Value Delivery Network
The value delivery network is the firm’s suppliers, distributors, and ultimately customers who partner with each other to improve the performance of the entire system
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Value Delivery Network
Supply Chains and the Value Delivery Network
Marketing Channel Questions
• What is the nature of marketing channels and why are they important?
• How do channel firms interact and organize to do the work of the channel?
• What role do physical distribution and supply chain management play in attracting customers?
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The Nature and Importance of Marketing Channels
Marketing Channel Defined
Marketing channel is a set of independent organizations that help make a product or service available for use or consumption by the consumer or business users
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The Nature and Importance of Marketing Channels
How Channel Members Add Value
Channel members add value by bridging the major time, place, and possession gaps that separate goods and services from those who would use them
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The Nature and Importance of Marketing Channels
How Channel Members Add Value
Producers use intermediaries because they create greater efficiency in making goods available to target markets.
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The Nature and Importance of Marketing Channels
How Channel Members Add Value
Intermediaries offer the firm more than it can achieve on its own through their contacts, experience, specialization, and scale of operations
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The Nature and Importance of Marketing Channels
From an economic view, intermediaries transform the assortment of products into assortments wanted by consumers
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How Channel Members Add Value
The Nature and Importance of Marketing Channels
How Channel Members Add Value
Information refers to the gathering and distributing research and intelligence information about actors and forces in the marketing environment needed for planning and aiding exchange
Promotion refers to the development and spreading persuasive communications about an offer
Contacts refers to finding and communicating with prospective buyers
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The Nature and Importance of Marketing Channels
How Channel Members Add Value
Matching refers to shaping and fitting the offer to the buyer’s needs, including activities such as manufacturing, grading, assembling, and packaging
Negotiation refers to reaching an agreement on price and other terms of the offer so that ownership or possession can be transferred
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The Nature and Importance of Marketing Channels
How Channel Members Add Value
Physical distribution refers to transporting and storing goods
Financing refers to acquiring and using funds to cover the costs or carrying out the channel work
Risk taking refers to assuming the risks of carrying out the channel work
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The Nature and Importance of Marketing Channels
Number of Channel Members
Channel level refers to each layer of marketing intermediaries that performs some work in bringing the product and its ownership closer to the final buyer
Direct marketing channel has no intermediary levels; the company sells directly to consumers
Indirect marketing channels contain one or more intermediaries
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The Nature and Importance of Marketing Channels
Number of Channel Members
Connected by types of flows:• Physical flow of products• Flow of ownership• Payment flow• Information flow• Promotion flow
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Channel Behavior and Organization
Channel Behavior
Marketing channel consists of firms that have partnered for their common good with each member playing a specialized role
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Channel Behavior and Organization
Channel Behavior
Channel conflict refers to disagreement over goals, roles, and rewards by channel members
• Horizontal conflict• Vertical conflict
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Channel Behavior and Organization
Channel Behavior
Horizontal conflict is conflict among members at the same channel level
Vertical conflict is conflict between different levels of the same channel
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Channel Behavior and Organization
Conventional Distribution Systems
Conventional distribution systems consist of one or more independent producers, wholesalers, and retailers. Each seeks to maximize its own profits and there is little control over the other members and no formal means for assigning roles and resolving conflict.
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Channel Behavior and Organization
Vertical Marketing Systems
Vertical marketing systems (VMS) provide channel leadership and consist of producers, wholesalers, and retailers acting as a unified system and consist of:
• Corporate marketing systems• Contractual marketing systems• Administered marketing systems
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Channel Behavior and Organization
Corporate vertical marketing system integrates successive stages of production and distribution under single ownership
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Vertical Marketing Systems
Channel Behavior and Organization
Vertical Marketing Systems
Contractual vertical marketing system consists of independent firms at different levels of production and distribution who join together through contracts to obtain more economies or sales impact than each could achieve alone. The most common form is the franchise organization.
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Channel Behavior and Organization
Vertical Marketing Systems
Franchise organization links several stages in the production distribution process
• Manufacturer-sponsored retailer franchise system
• Manufacturer-sponsored wholesaler franchise system
• Service firm-sponsored retailer franchise system
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Channel Behavior and Organization
Vertical Marketing Systems
Administered vertical marketing system has a few dominant channel members without common ownership. Leadership comes from size and power.
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Channel Behavior and Organization
Horizontal Marketing Systems
Horizontal marketing systems include two or more companies at one level that join together to follow a new marketing opportunity. Companies combine financial, production, or marketing resources to accomplish more than any one company could alone.
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Channel Behavior and Organization
Multichannel Distribution Systems Hybrid Marketing Channels
Hybrid marketing channels exist when a single firm sets up two or more marketing channels to reach one or more customer segments
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Channel Behavior and Organization
Multichannel Distribution Systems Hybrid Marketing Channels
• Advantages• Increased sales and market coverage• New opportunities to tailor products and
services to specific needs of diverse customer segments
• Challenges• Hard to control• Create channel conflict
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Channel Behavior and Organization
Changing Channel Organization
Disintermediation occurs when product or service producers cut out intermediaries and go directly to final buyers, or when radically new types of channel intermediaries displace traditional ones
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Channel Design Decisions
Analyzing Consumer Needs
Designing a channel system requires:• Analyzing consumer needs• Setting channel objectives• Identifying major channel alternatives• Evaluation
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Channel Design Decisions
Analyzing Consumer Needs
Designing a marketing channel starts with finding out what target customers want from the channel
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Channel Design Decisions
Setting Channel Objectives
In terms of:• Targeted levels of customer service• What segments to serve• Best channels to sue• Minimizing the cost of meeting
customer service requirements
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Channel Design Decisions
Objectives are influenced by:• Nature of the company• Marketing intermediaries• Competitors• Environment
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Setting Channel Objectives
Channel Design Decisions
Identifying Major Alternatives
In terms of:
• Types of intermediaries• Number of intermediaries• Responsibilities of each channel
member
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Channel Design Decisions
Identifying Major Alternatives
Types of intermediaries refers to channel members available to carry out channel work. Examples include:
• Company sales force• Manufacturer’s agency• Industrial distributors
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Channel Design Decisions
Identifying Major Alternatives
Company sales force strategies• Expand direct sales force• Assign outside salespeople to
territories• Develop a separate sales force • Telesales
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Channel Design Decisions
Identifying Major Alternatives
Manufacturer’s agencies are independent firms whose sales forces handle related products from many companies in different regions or industries
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Channel Design Decisions
Identifying Major Alternatives
Industrial distributors• Find distributors in different regions or
industries • Exclusive distribution• Margin opportunities• Training• Support
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Channel Design Decisions
Identifying Major Alternatives
Number of marketing intermediaries to use at each level
• Strategies:• Intensive distribution• Exclusive distribution• Selective distribution
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Channel Design Decisions
Identifying Major Alternatives
Intensive distribution is a strategy used by producers of convenience products and common raw materials in which they stock their products in as many outlets as possible
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Channel Design Decisions
Exclusive distribution is a strategy in which the producer gives only a limited number of dealers the exclusive right to distribute its products in their territories
• Luxury automobiles• High-end apparel
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Identifying Major Alternatives
Channel Design Decisions
Identifying Major Alternatives
Selective distribution is a strategy when a producer uses more than one but fewer than all of the intermediaries willing to carry the producer’s products
• Televisions• Appliances
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Channel Design Decisions
Responsibilities of Channel Members
Producers and intermediaries need to agree on:
• Price policies• Conditions of sale• Territorial rights• Services provided by each party
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Channel Design Decisions
Evaluating the Major Alternatives
Each alternative should be evaluated against:
• Economic criteria• Control• Adaptive criteria
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Channel Design Decisions
Evaluating the Major Alternatives
Economic criteria compares the likely sales costs and profitability of different channel members
Control refers to channel members’ control over the marketing of the product
Adaptive criteria refers to the ability to remain flexible to adapt to environmental changes
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Channel Design Decisions
Designing International Distribution Channels
Channel systems can vary from country to country
Must be able to adapt channel strategies to the existing structures within each country
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Channel Management Decisions
Channel management involves:• Selecting channel members• Managing channel members• Motivating channel members• Evaluating channel members
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Channel Management Decisions
Selecting Channel Members
Selecting channel members involves determining the characteristics that distinguish the better ones by evaluating channel members
• Years in business• Lines carried• Profit record
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Channel Management Decisions
Selecting Channel Members
Selecting intermediaries that are sales agents involves evaluating:
• Number and character of other lines carried
• Size and quality of sales force
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Channel Management Decisions
Selecting Channel Members
Selecting intermediaries that are retail stores that want exclusive or selective distribution involves evaluating:
• Store’s customers• Locations• Growth potential
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Channel Management Decisions
Managing and Motivating Channel Members
Partner relationship management (PRM) and supply chain management (SCM) software are used to forge long-term partnerships with channel members and to recruit, train, organize, manage, motivate, and evaluate channel members
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Public Policy and Distribution Decisions
Exclusive distribution is when the seller allows only certain outlets to carry its products
Exclusive dealing is when the seller requires that the sellers not handle competitor’s products
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Public Policy and Distribution Decisions
Benefits of exclusive distribution include:• Seller obtains more loyal and
dependable dealers• Dealers obtain a steady and stronger
seller support
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Public Policy and Distribution Decisions
Exclusive territorial agreement refers to an agreement where the producer may agree not to sell to other dealers in a given area or the buyer may agree to sell only in its own territory
Tying agreements, while not necessarily illegal as long as they do not substantially lessen competition, are agreements where there is a strong brand that producers sometimes sell to dealers only if the dealers will take some or all of the rest of the line
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Marketing Logistics and Supply Chain Management
• Nature and importance of logistics management in the supply chain
• Goals of the logistics system• Major logistics functions• Need for integrated supply chain
management
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Marketing Logistics and Supply Chain Management
Nature and Importance of Marketing Logistics
Marketing logistics (physical distribution) involves planning, implementing, and controlling the physical flow of goods, services, and related information from points of origin to points of consumption to meet consumer requirements at a profit
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Marketing Logistics and Supply Chain Management
Nature and Importance of Marketing Logistics
Marketing logistics involves:• Outbound distribution: Moving products from
the factory to resellers and consumers• Inbound distribution: Moving products and
materials from suppliers to the factory• Reverse distribution: Moving broken,
unwanted, or excess products returned by consumers or resellers
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Marketing Logistics and Supply Chain Management
Nature and Importance of Marketing Logistics
Supply chain management is the process of managing upstream and downstream value-added flows of materials, final goods, and related information among suppliers, the company, resellers, and final consumers
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Marketing Logistics and Supply Chain Management
Nature and Importance of Marketing Logistics
Importance of logistics• Competitive advantage by giving customers
better service at lower prices• Cost savings to the company and its
customers• Product variety requires improved logistics• Information technology has created
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Marketing Logistics and Supply Chain Management
Goals of the Logistics System
To provide a targeted level of customer service at the least cost with the objective to maximize profit, not sales
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Marketing Logistics and Supply Chain Management
Major Logistics Functions
• Warehousing• Inventory management• Transportation• Logistics information management
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Marketing Logistics and Supply Chain Management
Major Logistics Functions
Warehousing is the storage function that overcomes differences in need quantities and timing, ensuring that the products are available when customers are ready to buy them
• Storage warehouses• Distribution centers
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Marketing Logistics and Supply Chain Management
Major Logistics Functions
Storage warehouses are designed to store goods, not move them
Distribution centers are designed to move goods, not store them
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Marketing Logistics and Supply Chain Management
Major Logistics Functions
Inventory management balances carrying too little and too much inventory
• Just-in-time logistics systems• RFID
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Marketing Logistics and Supply Chain Management
Major Logistics Functions
Just-in-time logistics systems allow producers and retailers to carry small amounts of inventories of parts or merchandise
RFID (radio frequency identification devices) are small transmitter chips embedded in or placed on products or packages to provide greater inventory control
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Marketing Logistics and Supply Chain Management
Transportation affects the pricing of products, delivery performance, and condition of the goods when they arrive
• Truck• Rail• Water• Pipeline• Air• Internet
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Major Logistics Functions
Marketing Logistics and Supply Chain Management
Major Logistics Functions
Intermodal transportation combines two or more modes of transportation
• Piggyback uses rail and truck• Fishyback uses water and truck• Airtruck uses air and truck
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Marketing Logistics and Supply Chain Management
Logistics Information Management
Logistics information management is the management of the flow of information, including customer orders, billing, inventory levels, and customer data
• EDI (electronic data interchange)• VMI (vendor-managed inventory)
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Marketing Logistics and Supply Chain Management
Integrated Logistics Management
Integrated logistics management is the recognition that providing customer service and trimming distribution costs require teamwork internally and externally
• Cross-functional teamwork inside the company
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Marketing Logistics and Supply Chain Management
Integrated Logistics Management
Cross-functional teamwork inside the company refers to the inter-relationship of different departments within the company to achieve the goals of integrated supply chain management
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Marketing Logistics and Supply Chain Management
Integrated Logistics Management
Building partner relationships refers to the understanding that one company’s distribution is another company’s supply system
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Marketing Logistics and Supply Chain Management
Integrated Logistics Management
Third-party logistics is the outsourcing of logistics functions to third-party logistics providers (3PLs)
• Provide logistics functions more efficiently • Provide logistics functions at lower cost• Allow the company to focus on its core
business• Are more knowledgeable of complex logistics
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The End