Chapter 12 Distribution Channels and Supply Chain Management

Learning Goals 1. Explain why companies use distribution channels and discuss the functions that these channels perform 2. Discuss how channel members interact and how they organize to perform the work of the channel 3. Identify the major channel alternatives open to a company 4. Explain how companies select, motivate, and evaluate channel members 5. Discuss the nature and importance of physical distribution Copyright © 2008 Pearson Education Canada 2 Principles of Marketing, Seventh Canadian Edition

Case Study Caterpillar • Caterpillar stresses dealer profitability, extraordinary dealer support, personal relationships, dealer performance and full, honest, and frequent communications • Dominates world’s markets for heavy construction and mining equipment. • Independent dealers are key to success • Dealer network is linked via computers Copyright © 2008 Pearson Education Canada 3 Principles of Marketing, Seventh Canadian Edition

Learning Goals 1. Explain why companies use distribution channels and discuss the functions that these channels perform 2. Discuss how channel members interact and how they organize to perform the work of the channel 3. Identify the major channel alternatives open to a company 4. Explain how companies select, motivate, and evaluate channel members 5. Discuss the nature and importance of physical distribution Copyright © 2008 Pearson Education Canada 4 Principles of Marketing, Seventh Canadian Edition

Supply Chains and the Value Delivery Network • A supply chain consists of upstream and downstream partners • Marketers have traditionally focused on the downstream side – Supply chain – make-and-sell view – Demand chain – sense-and-respond-view • Value Delivery Network – The network made up of the company, suppliers, distributors, and ultimately customers who “partner” with each other to improve the performance of the entire system. Copyright © 2008 Pearson Education Canada 5 Principles of Marketing, Seventh Canadian Edition

Nature & Importance of Distribution Channels • Marketing channel – Set of interdependent organizations involved in the process of making a product or service available for use or consumption by the consumer or business user. Copyright © 2008 Pearson Education Canada 6 Principles of Marketing, Seventh Canadian Edition

Nature & Importance of Marketing Channels • Channel choices affect other decisions in the marketing mix – Pricing, marketing communications • A strong distribution system can be a competitive advantage • Channel decisions involve long-term commitments to other firms Copyright © 2008 Pearson Education Canada 7 Principles of Marketing, Seventh Canadian Edition

Nature & Importance of Marketing Channels • How Channel Members Add Value – Fewer contacts. – Match product assortment demand with supply. – Bridge, time, place, and possession gaps that separate products from users. Copyright © 2008 Pearson Education Canada 8 Principles of Marketing, Seventh Canadian Edition

How Channel Members Add Value • Channel members add value by bridging the major time, place, and possession gaps. • Key functions: – – – – – Information Promotion Contact Matching Negotiation Copyright © 2008 Pearson Education Canada 9 Physical Distribution Financing Risk taking Environmental sustainability Principles of Marketing, Seventh Canadian Edition

Nature & Importance of Marketing Channels • Number of Channel Levels – The number of intermediary levels indicates the length of a marketing channel. • Direct Channels • Indirect Channels – Producers lose more control and face greater channel complexity as additional channel levels are added. Copyright © 2008 Pearson Education Canada 10 Principles of Marketing, Seventh Canadian Edition

Channel Members are Connected Via a Variety of Flows • Physical Flow • Payment Flow • Information Flow • Promotion Flow • Flow of Ownership Copyright © 2008 Pearson Education Canada 11 Principles of Marketing, Seventh Canadian Edition

Learning Goals 1. Explain why companies use distribution channels and discuss the functions that these channels perform 2. Discuss how channel members interact and how they organize to perform the work of the channel 3. Identify the major channel alternatives open to a company 4. Explain how companies select, motivate, and evaluate channel members 5. Discuss the nature and importance of physical distribution Copyright © 2008 Pearson Education Canada 12 Principles of Marketing, Seventh Canadian Edition

Channel Behaviour and Organization • Channel Conflict – Occurs when channel members disagree on roles, activities, or rewards. – Types of Conflict: • Horizontal conflict: occurs among firms at the same channel level • Vertical conflict: occurs among firms at different channel levels Copyright © 2008 Pearson Education Canada 13 Principles of Marketing, Seventh Canadian Edition

Channel Behaviour and Organization • Conventional Distribution Channels – Consist of one or more independent channel members – Each seeking to maximize its own profits – Often result in poor performance • Vertical Marketing Systems – Producers, wholesalers, and retailers act as a unified system – One channel member owns, has contracts with, or has so much power that they all cooperate – Benefits should include greater control, less conflict, and economies of scale due to the size of the system Copyright © 2008 Pearson Education Canada 14 Principles of Marketing, Seventh Canadian Edition

Channel Behaviour and Organization • Vertical Market System (VMS) • Integrates successive stages of production and distribution under single ownership – channel ownership is established through common ownership • Coordination and conflict through regular organizational channels – Corporate VMS – Contractual VMS – Administered VMS Copyright © 2008 Pearson Education Canada 15 Principles of Marketing, Seventh Canadian Edition

Channel Behaviour and Organization • Vertical Market System (VMS) • Individual firms who join through contracts • Franchise organizations – Corporate VMS – Contractual VMS – Administered VMS Copyright © 2008 Pearson Education Canada – Manufacturer-sponsored retailer franchise system – Manufacturer-sponsored wholesaler franchise system – Service-firm-sponsored retailer franchise system 16 Principles of Marketing, Seventh Canadian Edition

Channel Behaviour and Organization • Vertical Market System (VMS) • Leadership through the size and power of dominant channel members • Leadership could be manufacturer or retailer – Corporate VMS – Contractual VMS – Administered VMS Copyright © 2008 Pearson Education Canada 17 Principles of Marketing, Seventh Canadian Edition

Channel Behaviour and Organization • Horizontal Marketing Systems – Companies at the same level work together with channel members • Multichannel Distribution Systems – Also called hybrid marketing channels – Occurs when a firm uses two or more marketing channels • Changing Channel Organization – Disintermediation Copyright © 2008 Pearson Education Canada 18 Principles of Marketing, Seventh Canadian Edition

Learning Goals 1. Explain why companies use distribution channels and discuss the functions that these channels perform 2. Discuss how channel members interact and how they organize to perform the work of the channel 3. Identify the major channel alternatives open to a company 4. Explain how companies select, motivate, and evaluate channel members 5. Discuss the nature and importance of physical distribution Copyright © 2008 Pearson Education Canada 19 Principles of Marketing, Seventh Canadian Edition

Channel Design Decisions • Step 1: Analyzing Consumer Needs – Cost and feasibility of meeting needs must be considered • Step 2: Setting Channel Objectives – Set channel objectives in terms of targeted level of customer service – Many factors influence channel objectives • Nature of the company (size/financial position) and its products • Marketing intermediaries • Competition • Marketing environment Copyright © 2008 Pearson Education Canada 20 Principles of Marketing, Seventh Canadian Edition

Channel Design Decisions • Step 3: Identifying Major Alternatives – Types of intermediaries • Company sales force, manufacturer’s agency, industrial distributors – Number of marketing intermediaries • Intensive, selective, and exclusive distribution – Responsibilities of channel members Copyright © 2008 Pearson Education Canada 21 Principles of Marketing, Seventh Canadian Edition

Channel Design Decisions • Step 4: Evaluating Major Alternatives – Economic criteria – Control issues – Adaptive criteria Copyright © 2008 Pearson Education Canada 22 Principles of Marketing, Seventh Canadian Edition

Channel Design Decisions • Designing International Distribution Channels – Global marketers usually adapt their channel strategies to structures that exist within foreign countries – Key challenges: • May be complex or hard to penetrate • May be scattered, inefficient, or totally lacking Copyright © 2008 Pearson Education Canada 23 Principles of Marketing, Seventh Canadian Edition

Learning Goals 1. Explain why companies use distribution channels and discuss the functions that these channels perform 2. Discuss how channel members interact and how they organize to perform the work of the channel 3. Identify the major channel alternatives open to a company 4. Explain how companies select, motivate, and evaluate channel members 5. Discuss the nature and importance of physical distribution Copyright © 2008 Pearson Education Canada 24 Principles of Marketing, Seventh Canadian Edition

Channel Management Decisions • Selecting channel members • Managing and motivating channel members • Evaluating channel members Copyright © 2008 Pearson Education Canada • Which characteristics are important? – Years in business – Lines carried – Growth and profit record – Cooperativeness and reputation – Type of customer – Location 25 Principles of Marketing, Seventh Canadian Edition

Channel Management Decisions • Selecting channel members • Managing and motivating channel members • Evaluating channel members Copyright © 2008 Pearson Education Canada • Partner relationship management (PRM) for long-term partnerships • Software available to coordinate members 26 Principles of Marketing, Seventh Canadian Edition

Channel Management Decisions • Selecting channel members • Managing and motivating channel members • Evaluating channel members Copyright © 2008 Pearson Education Canada • Check channel performance of: – – Sales Inventory Customer delivery Promotion and training – Customer service 27 Principles of Marketing, Seventh Canadian Edition

Public Policy and Distribution Decisions • Exclusive dealing. Sellers cannot demand exclusivity for their product from resellers if it can be proven that it will lessen competition or create a monopoly • Exclusive territories. Sellers may grant exclusive territories, but may have trouble demanding that resellers deal only within that exclusive territory • Tying agreements. demanding that resellers buy and/or stock all products within a product line, as a condition of doing business. Not illegal but a source of much channel conflict Copyright © 2008 Pearson Education Canada 28 Principles of Marketing, Seventh Canadian Edition

Public Policy and Distribution Decisions • Dealers’ rights. Producers are free to select dealers, but are limited in their ability to terminate dealers; they must show cause, and cannot drop dealers who refuse to participate in doubtful legal arrangements • Sources of supply. Ethical concerns over supply sources from countries with human rights violations or use the proceeds to fund armed conflict Copyright © 2008 Pearson Education Canada 29 Principles of Marketing, Seventh Canadian Edition

Learning Goals 1. Explain why companies use distribution channels and discuss the functions that these channels perform 2. Discuss how channel members interact and how they organize to perform the work of the channel 3. Identify the major channel alternatives open to a company 4. Explain how companies select, motivate, and evaluate channel members 5. Discuss the nature and importance of physical distribution Copyright © 2008 Pearson Education Canada 30 Principles of Marketing, Seventh Canadian Edition

Marketing Logistics and Supply Chain Management • Marketing logistics (physical distribution). – Tasks involved in planning, implementing, and controlling the physical flow of materials, final goods and related information • Supply chain management. – Managing upstream and downstream valueadded flows of materials, final goods, and related information among suppliers, the company, resellers, and final consumers Copyright © 2008 Pearson Education Canada 31 Principles of Marketing, Seventh Canadian Edition

Marketing Logistics and Supply Chain Management • Marketing Logistics – Outbound distribution – Inbound distribution – Reverse distribution – Involves the entire supply chain management system Copyright © 2008 Pearson Education Canada 32 Principles of Marketing, Seventh Canadian Edition

Marketing Logistics and Supply Chain Management • Why Greater Emphasis is Being Placed on Logistics: – Offers firms a competitive advantage – Can yield cost savings – Greater product variety requires improved logistics – Improvements in distribution efficiency are possible due to information technology Copyright © 2008 Pearson Education Canada 33 Principles of Marketing, Seventh Canadian Edition

Marketing Logistics and Supply Chain Management • Goals of the Logistics System – No system can both maximize customer service and minimize costs. – The goal of marketing logistics should be to provide a targeted level of customer service at the least cost. – Firms must first weigh the benefits of higher service against the costs. Copyright © 2008 Pearson Education Canada 34 Principles of Marketing, Seventh Canadian Edition

Marketing Logistics and Supply Chain Management • Major Logistics Functions – Warehousing – Inventory Management – Transportation – Logistics Information Management Copyright © 2008 Pearson Education Canada 35 Principles of Marketing, Seventh Canadian Edition

Marketing Logistics and Supply Chain Management Transportation Carrier Options • Truck • Rail • Water • Pipeline • Air • Internet Intermodal transportation is becoming more common Copyright © 2008 Pearson Education Canada 36 Principles of Marketing, Seventh Canadian Edition

Marketing Logistics and Supply Chain Management • Integrated Logistics Management – Cross-functional teamwork inside the company is critical – Logistics partnerships are also built through shared projects – Outsourcing of logistics firms to third-party firms is becoming more common Copyright © 2008 Pearson Education Canada 37 Principles of Marketing, Seventh Canadian Edition

Learning Goals 1. Explain why companies use distribution channels and discuss the functions that these channels perform 2. Discuss how channel members interact and how they organize to perform the work of the channel 3. Identify the major channel alternatives open to a company 4. Explain how companies select, motivate, and evaluate channel members 5. Discuss the nature and importance of physical distribution Copyright © 2008 Pearson Education Canada 38 Principles of Marketing, Seventh Canadian Edition