Chapter 13 Marketing Channels and Supply-Chain Management Teaching Resources Quick Reference Guide Resource Location Purpose and Perspective IRM, p. 319 Lecture Outline IRM, p. 320 Discussion Starters IRM, p. 332 Class Exercises IRM, p. 333 Chapter Quiz IRM, p. 336 Semester Project IRM, p. 337 Answers to Issues for Discussion and Review IRM, p. 338 Answers to Marketing Applications IRM, p. 343 Answers to Internet Exercise IRM, p. 346 Answers to Developing Your Marketing Plan IRM, p. 347 Comments on Video Case 13 IRM, p. 348 PowerPoint Slides Instructor’s website Note: Additional resources may be found on the accompanying student and instructor websites at www.cengagebrain.com. Purpose and Perspective This chapter explores marketing channels and supply chain management. It begins by exploring the foundations of supply chain management, including a discussion of the concept of the supply chain and its various activities. The chapter elaborates on the role that marketing channels and supply chains play in marketing. Then it considers the different types of marketing channels and the role of supply chain management in choosing which channels are best for any given product. Next, it explores how marketers determine the appropriate intensity of market coverage for a product. It also looks at different strategic issues that affect marketing channels, such as leadership, cooperation, and conflict. It then examines how physical distribution plays into supply chain management. Finally, it looks at several legal issues affecting channel management. Lecture Outline I. Foundations of the Supply Chain The distribution component of the marketing mix focuses on the decisions and actions involved in making products available to customers when and where they want to purchase them. An important function of the marketing channel is the joint effort of all involved organizations to create an effective supply chain, which refers to all the activities associated with the flow and transformation of products from raw material through to the end customer. Integrating these activities requires marketing managers to work with counterparts in the following areas: Operations management is the total set of managerial activities used by an organization to transform resource inputs into goods, services, or both. Logistics management involves planning, implementing, and controlling the efficient and effective flow and storage of products and information from the point of origin to consumption in order to meet customers’ needs and wants. Supply management, in its broadest form, refers to the processes which enable the progress of value from raw material to final customer and back to redesign and final disposition. Supply-chain management is the set of approaches used to integrate the functions of operations management, logistics management, supply management, and marketing channel management so products are produced and distributed, in the right quantities to the right locations and at the right time. It includes activities like manufacturing, research, sales, advertising, shipping, and, most of all, cooperation and understanding of tradeoffs throughout the whole channel to achieve optimal levels of efficiency and service. The supply chain involves all entities that facilitate product distribution and benefit from cooperative efforts. These entities include suppliers of raw materials and other components to make goods and services, logistics and transportation firms, communication firms, and other firms that indirectly take part in marketing exchanges. Technology has dramatically improved the capability of supply-chain management globally. Information technology, in particular, has helped some firms create a seamless distribution process for matching inventory needs to manufacturer requirements upstream in the channel and customer’ requirements downstream. Integrated information helps to reduce costs, improve service, and provide increased value to the end consumer. As demand for innovative goods and services has escalated, marketers have had to increase their flexibility and responsiveness to new products and modify existing ones to meet the ever-changing needs of customers. Suppliers now provide material and service inputs. Customers are increasingly a source of knowledge when developing the right product. The entire supply chain is critically important to ensure that customers get the products when, where, and how they want them. Firms must be involved in the management of their own supply chains in partnership with the network of upstream and downstream organizations in the supply chain. Supply chain management is closely linked to a market orientation. All functional areas of business (marketing, management, production, finance, and information systems) overlap with and are involved in executing a customer orientation and participate in supply-chain management. II. The Role of Marketing Channels in Supply Chains A marketing channel (also called a channel of distribution or distribution channel) is a group of individuals and organizations that direct the flow of products from producers to customers within the supply chain. The major role of marketing channels is to make products available at the right time at the right place in the right quantities. Some marketing channels are direct—the product goes from the producer straight to the customer—but most channels have one or more marketing intermediaries that link producers to other intermediaries or to ultimate consumers through contractual arrangements or through the purchase and resale of products. Wholesalers buy and resell products to other wholesalers, retailers, and industrial customers. Retailers purchase products and resell them to the end consumers. Supply chain management begins with a focus on the customer and requires the cooperation of channel members to satisfy customer requirements. Cooperation increases coordination, reduces costs and increases profits. Each supply-chain member requires information from other channel members. Customer relationship management (CRM) systems exploit the information in supply-chain partners’ information systems making it available for easy reference to help all channel members make better marketing strategy decisions that develop and sustain desirable customer relationships. The Significance of Marketing Channels Although marketing channel decisions need not precede other marketing decisions, they are a powerful influence on the rest of the marketing mix. Channel decisions are critical because they determine a product’s market presence and buyers’ accessibility to the product. Channel decisions have additional strategic significance because they entail long-term commitments. It is usually easier to change prices or promotional efforts than to change marketing channels. Marketing Channels Create Utility Marketing channels create four types of utility: time, place, possession, and form. Time utility—making products available when the customer wants them. Place utility—making products available in locations where customers wish to purchase them. Possession utility—the customer has access to the product to use or to store for future use. Form utility—created by assembling, preparing, or refining the product to suit individual customer needs. Marketing Channels Facilitate Exchange Efficiencies Marketing intermediaries can reduce the costs of exchanges by performing certain services or functions efficiently. Intermediaries provide valuable assistance because of their access to and control over important resources used in the proper functioning of marketing channels. Nevertheless, the press, consumers, public officials, and other marketers freely criticize intermediaries, especially wholesalers. Detractors accuse wholesalers of being inefficient and adding to costs. Buyers often wish to make the distribution channel as short as possible, assuming the fewer the intermediaries, the lower the price. Eliminating intermediaries would not remove the need for the services they provide. Other channel members would have to perform the functions. Because suggestions to eliminate them come from both ends of the marketing channel, wholesalers must be careful to perform only those marketing activities that are truly desired and they must strive to be as efficient and customer-focused as possible. Types of Marketing Channels Multiple distribution paths have been developed because different products require different marketing channels. The various marketing channels can be classified generally as channels for consumer products and channels for business products. Channels for Consumer Products As shown in Figure 13.2, Channel A moves goods directly from the producer to consumers. Channel B, which moves goods from the producer to a retailer and then to customers, is a frequent choice of large retailers because it allows them to buy in quantity from manufacturers. A long-standing channel, especially for consumer products, Channel C takes goods from the producer to a wholesaler, then to a retailer, and finally to consumers. Channel D, wherein goods pass from producer, to agents, to wholesalers, to retailers, and finally to consumers, is frequently used for products intended for mass distribution, such as processed foods. For some consumer goods, a long channel may be the most efficient distribution channel. When several channel members perform specialized functions, costs may be lower than when one channel member tries to perform them all. Channels for Business Products Figure 13.3 shows four of the most common channels for business products. Channel E illustrates the direct channel for business products, which is the most popular channel for business products. Business customers like to directly communicate with producers, especially when expensive or technically complex products are involved. With Channel F, an industrial distributor facilitates exchanges between the producer and customer. An industrial distributor is an independent business that takes title to products and carries inventories. Industrial distributors are most effectively used when a product has broad market appeal, is easily stocked and serviced, is sold in small quantities, and is needed on demand to avoid high losses. They offer sellers several advantages, such as performing the needed selling activities in local markets at relatively low cost to a manufacturer and reducing a producer’s financial burden by providing customers with credit services. Using industrial distributors also has several disadvantages, including the fact that they may be difficult to control, they often stock competing brands, incur expenses from maintaining inventories, and are less likely to handle bulky or slow-selling items. Channel G employs a manufacturer’s agent, an independent businessperson who sells complementary products of several producers in assigned territories and is compensated through commissions. Using manufacturers’ agents can benefit a business marketer because these agents possess considerable technical and market information and have an established set of customers. The use of manufacturers’ agents is not problem-free; even though straight commissions may be cheaper, the seller may have little control over manufacturers’ agents. Channel H includes both a manufacturer’s agent and an industrial distributor. This is appropriate when the producer wants to cover large geographic areas but does not maintain a sales force or when a marketer wants to enter a new geographic market without expanding the sales force. Multiple Marketing Channels and Channel Alliances To reach diverse target markets, manufacturers may simultaneously use several marketing channels, with each channel involving a different set of intermediaries. A manufacturer often uses multiple channels when the same product is directed to both consumers and business customers. Dual distribution is the use of two or more marketing channels for distributing the same products to the same target market. Dual distribution can cause dissatisfaction among wholesalers and smaller retailers when they must compete with large retail chains that make direct purchases from manufacturers. A strategic channel alliance exists when the products of one organization are distributed through the marketing channels of another. The products of the two firms are often similar with respect to uses or target markets, but are not direct competitors. Selecting Marketing Channels Channel selection decisions usually are significantly affected by one or more of the following factors: Customer characteristics Product attributes Type of organization Competition Marketing environmental forces Characteristics of intermediaries Customer Characteristics Marketing managers must consider the characteristics of target market members in channel selection. Business customers often prefer to deal directly with producers (or very knowledgeable channel intermediaries, such as industrial distributors), especially for highly technical or expensive products that require strict specifications and technical assistance and also buy in considerable quantities. Consumers generally buy limited quantities of a product, purchase from retailers, and often don’t mind limited customer service. When customers are concentrated in a small geographic area, a more direct channel may be ideal, but when many customers are spread across an entire state or nation, distribution through multiple intermediaries is likely to be more efficient. Product Attributes Product attributes have a strong effect on marketing channel choice. Marketers of complex and expensive products such as automobiles will likely employ short channels, as will marketers of perishable products such as dairy and produce. Less expensive, more standardized products, such as soft drinks and canned goods, can employ longer channels with many intermediaries. Fragile products that require special handling are more likely to be distributed through shorter channels to minimize the risk of damage. Type of Organization Due to their sheer size, larger firms may be better able to negotiate better deals with vendors or other channel members. a. Large firms may be in a position to have more distribution centers, which may reduce delivery times to customers. b. Large companies can use an extensive product mix as a competitive tool. A smaller regional company, using regional or local channel members, may be in a position to better serve customers in that region compared to a larger, less-flexible organization. a. Smaller firms may not have the resources to develop their own sales force, ship their products long distances, maintain a large inventory, or extend credit. Competition The success or failure of a competitor’s marketing channel may encourage or dissuade an organization from considering a similar approach. A firm may also be forced to adopt a similar strategy in order to remain competitive, which usually involves taking the steps necessary to keep costs low. Environmental Forces Adverse economic conditions might force an organization to use a low-cost channel, even though customer satisfaction is reduced, whereas a booming economy might allow a company to choose a channel previously too costly to consider. The introduction of new technology might cause an organization to add or modify its channel strategy. As labor and environmental regulations change, an organization may be forced to modify its existing distribution channel structure to comply with new laws. Characteristics of Intermediaries An organization may reconsider its channel choices if it feels that an intermediary is not adequately promoting its products. An existing intermediary may not offer an appropriate mix of services, forcing an organization to change to a new intermediary. Some firms may choose to eliminate intermediaries and perform the eliminated intermediaries’ functions. III. Intensity of Market Coverage In addition to deciding which marketing channels to use to distribute a product, marketers must determine the intensity of coverage a product should get—the number and kinds of outlets in which it will be sold. The decision depends on the product and the target market. Intensive Distribution In intensive distribution, all available outlets for distributing a product are used. Intensive distribution is appropriate for products that have a high replacement rate, require almost no service, and are often bought based on price cues. Most convenience products like bread, chewing gum, soft drinks, and newspapers are marketed through intensive distribution. Sales and product availability of low-cost convenience products may be directly related to product availability. Selective Distribution In selective distribution, only some available outlets in an area are chosen to distribute a product. Selective distribution is appropriate for shopping products, which includes durable goods like televisions or stereos. Selective distribution is desirable when a special effort—such as customer service from a channel member—is important. Exclusive Distribution In exclusive distribution, only one outlet is used in a relatively large geographic area. Exclusive distribution is suitable for products infrequently purchased, consumed over a long period of time, or requiring a high level of customer service or information to fit them to buyers’ needs. Exclusive distribution is often used as an incentive to sellers when only a limited market is available for products. IV. Strategic Issues in Marketing Channels Marketing channels require a strategic focus on competitive priorities including developing channel leadership, fostering cooperation between channel members, managing channel conflict, and possibly consolidating marketing channels through channel integration. Competitive Priorities in Marketing Channels Supply chains can be a source of competitive advantage for many marketers and a means of maintaining a strong market orientation because supply-chain decisions cut across all functional areas of business. Building the most effective and efficient supply chain can sustain a business and help it to use resources effectively and be more efficient. To unlock the potential of a supply-chain, activities must be integrated so that all functions are coordinated into an effective system. Channel Leadership, Cooperation, and Conflict Each channel member performs a specific role in the distribution system and agrees (implicitly or explicitly) to accept rights, responsibilities, rewards, and sanctions for nonconformity. Each channel member has certain expectations for other channel members. Channel Leadership Although many marketing channels are determined by through channel member compromise with a better marketing channel as the end goal, some are organized and controlled by a single leader, or channel captain (or channel leader), who may be a producer, wholesaler, or retailer. To attain desired objectives, the captain must possess channel power, the ability to influence another channel member’s goal achievement. Channel Cooperation Channel cooperation is vital if each member is to gain something from the other members. Channel cooperation helps to speed up inventory replenishment, improve customer service, and cut the costs of bringing products to the consumer. Without cooperation, neither overall channel goals nor individual member goals will be realized. There are several ways to improve channel cooperation. If a marketing channel is viewed as a unified supply chain competing with other systems, individual members will be less likely to take actions that would create disadvantages for other members. Channel members should agree to direct efforts toward common objectives so channel roles can be structured for maximum effectiveness in working toward achieving objectives, which in turn can help members achieve individual objectives. Channel Conflict Channel members work toward the same goal—distributing products profitably and efficiently—but members may sometimes disagree on the best methods for attaining this goal. Channel conflicts may arise from self-interest which creates misunderstandings about role expectations; the end result is frustration and conflict for the whole channel. Communication difficulties are a potential form of channel conflict because ineffective communication leads to frustration, misunderstandings, and ill-coordinated strategies, jeopardizing further coordination. Although there is no single method for resolving conflict, partners can improve relations if two conditions are met. The role of each channel member must be clearly defined and adhered to. Members of channel partnerships must agree on certain measures of coordinating channels, which requires strong, but not polarizing, leadership. To prevent channel conflict from arising, producers, or other channel members, may provide competing resellers with different brands, allocate markets among resellers, define policies for direct sales to avoid potential conflict over large accounts, negotiate territorial issues among regional distributors, and provide recognition to certain resellers for their importance in distributing to others. Channel Integration Channel functions may be transferred between intermediaries and to producers, and even customers. Various channel stages may be combined under the management of a channel captain either horizontally or vertically. Vertical Channel Integration Vertical channel integration combines two or more stages of the channel under one management. This may occur when one member of a marketing channel purchases the operations of another member or simply performs the functions of another member, eliminating the need for that intermediary. Vertical channel integration represents a more progressive approach to distribution in which channel members become extensions of one another as they are combined under a single management. Integration has been successfully institutionalized in a marketing channel called the vertical marketing system (VMS), in which a single channel member coordinates or manages all activities to maximize efficiencies, resulting in an effective and low-cost distribution system that does not duplicate services. Most vertical marketing systems take one of three forms: corporate, administered, or contractual. A corporate VMS combines all stages of the marketing channel, from producers to consumers, under a single owner. In an administered VMS, channel members are independent, but a high level of inter-organizational management is achieved by informal coordination. Under a contractual VMS, the most popular type of vertical marketing system, channel members are linked by legal agreements spelling out each member’s rights and obligations. Horizontal Channel Integration Combining organizations at the same level of operation under one management constitutes horizontal channel integration. An organization may integrate horizontally by merging with other organizations at the same level in a marketing channel. Although horizontal integration permits efficiencies and economies of scale in purchasing, marketing research, advertising, and specialized personnel, it is not always the most effective method of improving distribution. V. Physical Distribution in Supply-Chain Management Physical distribution, also known as logistics, refers to the activities used to move products from producers to consumers and other end users. Within the marketing channel, physical distribution activities may be performed by a producer, a wholesaler, or a retailer or they may be outsourced. Outsourcing is the contracting of physical distribution tasks to third parties. Most physical activities can be outsourced to outside firms with special expertise. Cooperative relationships with third-party organizations can help reduce marketing channel costs and boost service and customer satisfaction. Planning an efficient physical distribution system is crucial to developing an effective marketing strategy because it can decrease costs and increase customer satisfaction. Although physical distribution mangers try to minimize the costs associated with order processing, inventory management, materials handling, warehousing and transportation, decreasing the costs in one area often raises them in another. Physical distribution managers must be sensitive to the issue of cost trade-offs. Trade-offs are strategic decisions to combine (and recombine) resources for greatest cost-effectiveness. The goal is not always to find the lowest cost. Another important goal of physical distribution involves cycle time, the time need to complete a process. Order Processing Order processing is the receipt and transmission of sales order information. When quickly and accurately carried out, order processing contributes to customers’ satisfaction, decreased costs and cycle time, and increased profits. Order processing involves three main tasks: order entry, order handling, and order delivery. Order entry begins when customers or salespeople place purchase orders via telephone, regular mail, e-mail, or a website. Order handling involves several tasks. Once the order is entered, it is transmitted to a warehouse where product availability is verified, and to the credit department where prices, terms, and the customer’s credit rating is checked. When the order is assembled and packed for shipment, the warehouse schedules delivery with an appropriate carrier. Electronic Data Interchange (EDI) uses computer technology to integrate order processing with production, inventory, accounting, and transportation. Within the supply chain, EDI functions as an information system that links marketing channel members and outsourcing firms together. Inventory Management Inventory management involves developing and maintaining adequate assortments of products to meet customers’ needs. It is essential in any effective physical distribution system. Inventory decisions have a major impact on physical distribution costs and the level of customer service provided. When too few products are carried in inventory, the result is stockouts or product shortages, which in turn results in brand switching, lower sales, and loss of customers. An excess of products can lead to a cost increase, risks of product obsolescence, pilferage, and damage. To determine when to order, a marketer calculates a reorder point at which the inventory level signals the need to place a new order. To calculate the reorder point the marketer must know the order lead time, the usage rate, and the amount of safety stock required. The order lead time refers to the average time lapse between placing the order and receiving it. The usage rate is the rate at which a product’s inventory is used or sold during a specific time period. Safety stock is the amount of extra inventory a firm keeps to guard against stockouts, resulting from above-average usage rates and/or longer-than-expected lead times. The reorder point can be calculated using the following formula: Reorder Point = (Order Lead Time × Usage Rate) + Safety Stock Efficient inventory management with accurate reorder points is crucial for firms that use just-in-time (JIT) wherein supplies arrive just as they are needed for use in production or for resale. Materials Handling Materials handling is the physical handling of tangible goods, supplies, and resources. Efficient materials handling minimizes inventory management costs, reduces the number of times a good is handled, improves customer service, and increases customer satisfaction. A growing number of firms are using radio waves to track materials tagged with radio frequency identification (RFID) through every phase of handling. Product characteristics often determine how they are handled. Most companies employ packaging consultants during the product design process. Unit loading and containerization are two common methods used in materials handling. Unit loading and containerization are two common methods used in materials handling. Unit loading is when one or more boxes are placed on a pallet or skid, these units then can be loaded efficiently by mechanical means. Containerization is the consolidation of many items into a single, large container that is sealed at the point of origin and opened at is destination. Warehousing Warehousing is the design and operation of facilities for storing or moving goods. Warehousing provides time utility by enabling firms to compensate for dissimilar production and consumption rates. The choice of warehouse facilities is an important strategic consideration because they allow a company to reduce transportation and inventory costs and improve service to customers. Warehouses fall into two general categories: private and public. Private warehouses are company-owned facilities for shipping and storing their own products. Public warehouses are storage spaces and related physical distribution facilities leased to other companies. A distribution center is a large facility used for receiving, warehousing, and redistributing products to stores or customers. The focus is on the rapid flow of goods rather than storage. Transportation Transportation is the movement of products from where they are made to intermediaries and end users, and is the most expensive distribution function. Because product availability and timely deliveries depend on transportation functions, transportation decisions directly affect customer service. In some cases, a firm may choose to build its distribution and marketing strategy around a unique transportation system, if that system can ensure on-time deliveries and give the firm a competitive edge. Companies may build their own transportation fleets (private carriers) or outsource the transportation function to a common or contract carrier. Transportation Modes There are five basic transportation modes for moving physical goods: railroads, trucks, waterways, airways, and pipelines. Railroads carry heavy, bulky freight that must be shipped long distances over land. Trucks provide the most flexible schedules and routes of all major transportation modes. Trucks are often used with other modes of transportation. Waterways are the cheapest method of shipping heavy, low-value, non-perishable goods. Air transportation is the fastest but most expensive form of shipping. It is used most often for perishable goods; for high-value, low-bulk items; and for products requiring quick delivery over long distances, such as emergency shipments. Pipelines are the most automated transportation mode, usually belonging to the shipper and carrying the shipper’s products. Most pipelines carry petroleum products or chemicals. Choosing Transportation Modes Logistics managers select a transportation mode based on the combination of cost, speed, dependability, load flexibility, accessibility, and frequency that is most appropriate for their products and generate the desired level of customer service. Marketers compare transportation modes to determine if the benefits from a more expensive mode are worth the higher costs (such as greener modes or faster modes). Coordinating Transportation To take advantage of the benefits offered by various transportation modes and compensate for deficiencies, marketers often combine and coordinate two or more modes. Intermodal transportation is easier than ever because of developments within the transportation industry. It occurs when two or more transportation modes are used in combination. Freight forwarders are organizations that combine shipments from several firms into efficient lot sizes. Megacarriers are freight transportation companies that offer several modes of shipment methods. VI. Legal Issues in Channel Management Dual Distribution Many companies may use dual distribution by utilizing two or more marketing channels to distribute the same products to the same target market. Courts do not consider this practice illegal when it promotes competition, but they view as a threat to competition a manufacturer that uses company-owned outlets to dominate or drive out of business independent retailers or distributors that handle its products. Restricted Sales Territories To tighten control over distribution of its products, a manufacturer may try to prohibit intermediaries from selling its products outside designated sales territories. Although the courts have deemed restrictive sales territories a restraint of trade among intermediaries handling the same brands, they have also determined that exclusive territories can promote competition among dealers handling different brands. Tying Agreements A tying agreement exists when a supplier furnishes a product to a channel member with the stipulation that the channel member must purchase other products as well. A related practice is full-line forcing, in which a supplier requires channel members to purchase the supplier’s entire line to obtain any of the supplier’s products. The courts accept tying agreements when the supplier alone can provide products of a certain quality, when the intermediary is free to carry competing products as well, and when a company has just entered the market. Most other tying agreements are considered illegal. Exclusive Dealing Exclusive dealing occurs when a manufacturer forbids an intermediary to carry products of competing manufacturers. The legality of an exclusive-dealing contract is generally determined by applying three tests. If the exclusive dealing blocks competitors from 15 percent of the market or more, the sales volume is large, and the producer is considerably larger than the retailer, then the arrangement is considered anticompetitive. If dealers and customers in a given market have access to similar products or if the exclusive-dealing contract strengthens an otherwise weak competitor, the arrangement is allowed. Refusal to Deal For nearly a century, the courts have held that producers have the right to choose channel members with which they will do business. Within existing distribution channels, however, suppliers may not legally refuse to deal with wholesalers or dealers just because these wholesalers or dealers resist policies that are anticompetitive or in restraint of trade. discussion starters Discussion Starter 1: Keeping Up with Demand for a Hot Product ASK: How does a firm ensure they are able to meet demand for a hot new product? Even before Apple’s iPad launched, the demand was through the roof. This was before anyone had a chance to see the product, know what it did, or interact with it. After its release, demand continued to be sky-high. Luckily, Apple has ample experience dealing with high demand products. Unfortunately, LG, the company that produces the iPad screens, was not ready. LG decided to cut back TV screen production in favor of iPads in order to come closer to meeting the demand. This video has a short news clip outlining LG’s production problem. http://www.youtube.com/watch?v=drytcFSsKck Discussion Starter 2: Warehousing and Shipping ASK: How many of you have ever been inside a distribution warehouse? Often people who have never been inside a warehouse are struck by the mere size and scope of these operations. In this video two different warehouses for Nike are shown along with the breadth of services conducted in each warehouse. http://www.youtube.com/watch?v=NkfHVYv5nUo&feature=related CLASS EXERCISES Class Exercise 1: Channel Conflict The objective of this class exercise is to aid student understanding of the dimensions of channel selection and their possible relationships with channel conflict. Prompt for students: Many manufacturers sell products in outlet stores at 25 to 70 percent off retail prices. Retailers do not like the added competition from their own suppliers despite manufacturers’ claims that they are only selling last season’s merchandise. 1. How could business objectives, buyer behavior, product attributes, or environmental forces affect a manufacturer’s decision to distribute through outlet stores? 2. By selling in outlet stores, how have these manufacturers changed their intensity of market coverage? How is customer service different at an outlet store? 3. Which of the following may be responsible for the conflict between manufacturers and retailers? a. Lack of clear communication b. Deviation from role expectations c. Diversification into product lines traditionally handled by other intermediaries 4. Should retailers develop store brands, refuse to stock certain items, or focus their buying power on one supplier or group of suppliers? How should the conflict be resolved? Answers: These manufacturers have the resources to control their own channels and apparently have altered objectives to include increased coverage in new segments. Many manufacturers suggest that because outlet stores are located outside metro areas, they are not competing directly with retailers. The buyer behavior of outlet store shoppers is different from that of upscale department store shoppers: for outlet store shoppers, price is the deciding factor and customer service is unimportant. Because most items in an outlet store are past season, retailers are usually unwilling to carry them (product attributes are different). The economy and social forces (environmental forces) may encourage people to shop for value rather than for status. If market coverage is seen as a continuum, then these manufacturers have moved from a selective or exclusive intensity to a more intensive coverage. As coverage intensifies, customer service is decreased (particularly at outlet stores). Additionally, consumers’ perceptions of brand quality typically decrease as coverage intensity increases. Retailers expect manufacturers to supply relatively exclusive rights to distribute their branded goods. In the case of outlet stores, manufacturers have deviated from their role as producer to the role of retailer. (This might be a good time to define wholesaling and retailing.) Additionally, it appears that some manufacturers are selling some new items through outlet stores. It is also likely that manufacturers did not effectively or honestly communicate their distribution intentions to retailers. If retailers try to use coercive power, they will most likely hurt themselves by eliminating some of their best-selling brands. The conflict might be resolved by specifying the roles of each channel member (i.e., who sells what season’s merchandise). Class Exercise 2: Market Coverage The purpose of this exercise is to improve students’ understanding of the intensities of market coverage. Identify the intensity of market coverage for each of the following products: Question Answer 1. Potato chips intensive 2. Gucci handbags exclusive 3. Large-screen televisions selective 4. Rolex watches exclusive 5. Clinique cosmetics selective 6. Carbonated beverages intensive 7. Range Rover vehicles exclusive 8. Stereo systems selective 9. Levi jeans selective 10. IBM personal computers selective 11. Gasoline intensive 12. Cannondale bicycles selective 13. Jaguar automobiles exclusive 14. Nintendo video games selective 15. Reebok shoes selective Class Exercise 3: Finding the Best Distribution Channels In this chapter, students learned about the complexity of choosing the appropriate channel for distributing goods and creating value for the organization and the consumers. In this exercise, students can explore the issues of matching goods to the best suited supply chain—delivering goods to the appropriate consumers. For each of the following products list the key considerations in selecting a supply chain and the appropriate level of distribution intensity. 1. A new brand of bubble gum. 2. An innovative new home appliance. 3. An orthopedic dog bed. 4. A regional pasta brand which is expanding nationally. Class Exercise 4: Planning a Distribution Strategy for Your School In this chapter, students learned of the importance of matching the supply chain elements to the strategic objectives of the product, most importantly to meet the needs of the consumers. In this exercise students can plan a distribution strategy for the campus. Students’ answers should be based on the following questions, which are based on this scenario: An alumnus of your university has agreed to donate a truckload of Florida oranges (packaged in cases) to be used as a fundraiser for the marketing club. The truck will be arriving in four weeks and must be unloaded and on its way back to Florida in 48 hours of its arrival. Step 1: What issues will have to be dealt with to make best use of this donation? Step 2: What costs will have to be managed to make this a successful fundraiser? Step 3: How will you ensure the commitment to a 48-hour turnaround on the truck? Chapter Quiz 1. Industrial distributors are increasingly carrying more _____ products. a. convenience b. business c. consumer d. expensive e. bulky 2. The elimination of marketing intermediaries a. reduces the total costs to consumers. b. reduces the total number of transactions. c. requires that the services they provide be performed by someone else in the marketing channel. d. is beneficial to both manufacturers and consumers. e. assures consumers of higher product quality. 3. An agreement in which the products of one organization are distributed through the marketing channel of another organization is called a. dual distribution. b. marketing intermediation. c. channel conflict. d. a strategic channel alliance. e. a channel partnership. 4. When only one outlet in a relatively large geographic area is used to distribute a product that is consumed over a long period of time, a(n) ___________ channel arrangement is developed. a. inclusive b. general c. exclusive d. selective e. physical Answers to Chapter Quiz: 1. b; 2. c; 3. d; 4. c semester project In this chapter, you learned the importance of having your product in the right place for consumers to access it. In this exercise, you will determine the appropriate channels for you to distribute your product, you. Since it would be impossible to personally visit every potential employer, in this exercise you will focus on how to get your resume in a position to be viewed by potential employers. Step 1: Identify any parameters you want to apply to your product, you. For example, do you want to stay in the town you currently live in? Another parameter might be the industry you want to work in. Step 2: Identify distribution channels that meet the needs of your product taking into consideration the identified parameters. Remember to think through both electronic and non-electronic means, such as a career resource center. http://www.forwardyourresume.com/partners.html Step 3: Discuss how the parameters you placed on your product impact your distribution choices. How would your distribution strategy change if you changed your parameters? ANSWERS to ISSUES FOR DISCUSSION AND REVIEW 1. Define supply-chain management. Why is it important? Supply-chain management encapsulates all entities that facilitate product distribution. It is a set of approaches or systems used to integrate the functions of operations management, logistics management, supply management, and marketing channel management. Supply-chain management is crucial to the accurate production, distribution, and timing of any product. 2. Describe the major functions of marketing channels. Why are these functions better accomplished through the combined efforts of channel members? The major functions of marketing channels include creating utility and facilitating exchange efficiencies. Marketing channels create time utility by making products available when customers want them, place utility by having them where customers can purchase them, and possession utility by providing customers with the opportunity to use or store products. Because intermediaries are specialists at the services they provide, they can make exchanges more efficient. By dividing responsibilities, each channel member becomes expert at what each does, making the marketing channel more efficient and therefore providing more reliable services to ultimate consumers. 3. List several reasons consumers often blame intermediaries for distribution inefficiencies. To consumers, intermediaries are not always visible in the distribution system and therefore are not worth what they cost. Throughout history, form utility has been perceived as having more value for consumers than time and place utility. However, many consumers do not realize that if the intermediaries are eliminated, either the producer or the consumer must perform the intermediaries’ functions, leading to higher prices if the producer must perform those functions. Many people believe intermediaries are parasitic and contribute to inefficiency. In other words, consumers do not understand the role and function of intermediaries. 4. Compare and contrast the four major types of marketing channels for consumer products. Through which type of channel is each of the following products most likely to be distributed? New automobiles Saltine crackers Cut-your-own Christmas trees New textbooks Sofas Soft drinks The first type of consumer product channel is from producer directly to consumer. Although this type of channel is the simplest, it is not always the cheapest or most efficient. The second type of channel is producer to retailer to consumer and is efficient when retailers can buy in large quantities from producers. The third channel, producer to wholesaler to retailer to consumer, is one of the most traditional and is practical for producers of goods that sell to hundreds of thousands of consumers. The last type of consumer products distribution channel is from producer to agent to wholesaler to retailer to consumer. This method is most often used by producers of mass-marketed products. The specified products are most likely to be distributed as follows: New automobiles—producer to retailer to consumer Saltine crackers—producer to food broker to wholesaler to retailer to consumer (In some cases, the producer may sell to a wholesaler, without using a broker. Also, when a very large retailer like Walmart is involved, producer to retailer to consumer channel is employed.) Cut-your-own Christmas trees—producer to consumer New textbooks—producer to retailer to consumer Sofas—producer to wholesaler to retailer to consumer, or possibly producer to retailer to consumer Soft drinks—producer to retailer to consumer (Soft drinks usually are bottled locally.) 5. Outline the four most common channels for business products. Describe the products or situations that lead marketers to choose each channel. The first type of channel for business products is direct from producer to organizational customer. Expensive and technically complex products, such as computers and aircraft, are often sold through direct channels. A second business distribution channel is from producer to industrial distributor to industrial buyer. This channel is used when a product has broad market appeal, is easily stocked and serviced, is sold in small quantities, and is needed rapidly. The third business channel is from producer to manufacturers’ agent to organizational buyer. This channel is effective for highly seasonal products. The last common channel for business products is from producer to agent to industrial distributor to organizational buyer. This type of channel is practical when the organizational marketer wants to cover a large geographic area but does not maintain a sales force, or when a marketer wants to enter a new geographical region without expanding its existing sales force. 6. Describe an industrial distributor. What types of products are marketed through an industrial distributor? An industrial distributor is an independent business that takes title to products and carries inventories. Industrial distributors usually sell standardized organizational products, such as maintenance supplies, production tools, and small operating equipment. The functions of an industrial distributor vary with the number of links in the channel. 7. Under what conditions is a producer most likely to use more than one marketing channel? A producer uses more than one marketing channel to reach diverse target markets, such as when the same product is directed to both consumers and organizational buyers. In other cases, companies may distribute the same products to the same target markets under different brand names through multiple channels, a practice called dual distribution. 8. Identify and describe the factors that may influence marketing channel selection decisions. Channel selection decisions usually are significantly affected by one or more of the following factors: customer characteristics, product attributes, type of organization, competition, marketing environmental forces, and characteristics of intermediaries. Business customers generally prefer shorter channels, while longer channels may be more efficient for consumer products. Complex and expensive products, perishable products, and fragile products will likely employ short channels, while less expensive, more standardized products can employ longer channels with many intermediaries. Larger firms may be better able to negotiate better deals with vendors or other channel members, have more distribution centers that may reduce delivery times to customers, and can use an extensive product mix as a competitive tool. The success or failure of a competitor’s marketing channel may encourage or dissuade an organization from considering a similar approach. Environmental forces can also play a role in channel selection. The quality of the service provided by an existing intermediary may dictate the need to reconsider channel choices. 9. Explain the differences among intensive, selective, and exclusive methods of distribution. In intensive distribution, the product is distributed through many outlets for the convenience of customers; examples of products likely to be distributed intensively include candy, gum, and soft drinks. Selective distribution employs only some available outlets in an area and is used for products like typewriters, stereos, and other products that buyers want to compare in terms of price, design, and style. Exclusive distribution employs only one outlet in a relatively large geographic area. It is typically used for specialty products that are purchased infrequently or require a high degree of adjustment to buyers’ needs, such as Rolex watches and Jaguar automobiles. 10. “Channel cooperation requires that members support the overall channel goals to achieve individual goals.” Comment on this statement. Cooperation is required of all channel members to provide an integrated system which will deliver the products that customers desire. Failure of one link in the channel could cause customer dissatisfaction and therefore channel failure. 11. Explain the major characteristics of each of the three types of vertical marketing systems (VMSs): corporate, administered, and contractual. A vertical marketing system (VMS) is coordinated or managed by a single channel member to achieve efficient, low-cost distribution aimed at satisfying target market customers. A corporate VMS combines all channel stages from producers to consumers under a single ownership. An administered VMS is a centrally coordinated system with a channel leader to establish strategy. In a contractual VMS, channel members are linked by legal agreements which spell out each member’s rights and obligations. 12. Discuss the cost and service trade-offs involved in developing a physical distribution system. As with many marketing decisions, the type of physical distribution system chosen involves a series of costs and service trade-offs. For example, the first decision is whether or not to outsource some, if not all, of the distribution tasks to third parties. The trade-off is between efficiency and control. Often, the third party has expertise but the firm will give up some control and obviously incur a cost. What managers must realize is that higher costs in one functional area of a distribution system may be necessary to achieve lower costs in another. 13. What are the main tasks involved in order processing? There are three main tasks involved in order processing: order entry, order handling, and order delivery. Order entry begins when customers or salespeople place purchase orders via telephone, regular mail, e-mail, or a website. Order handling involves several tasks. Once an order is entered, it is transmitted to a warehouse, where product availability is verified, and to the credit department, where prices, terms, and the customer’s credit rating are checked. If the credit department approves the purchase, warehouse personnel (sometimes assisted by automated equipment) pick and assemble the order. If the requested product is not in stock, a production order is sent to the factory, or the customer is offered a substitute. When the order has been assembled and packed for shipment, the warehouse schedules delivery with an appropriate carrier. The customer is sent an invoice, inventory records are adjusted, and the order is delivered. 14. Explain the trade-offs that inventory managers face when they reorder products or supplies. How is the reorder point computed? Inventory managers must balance the threat of losses due to stockouts against the threat of inventory and host of issues with too much stock. In order to balance these two threats, organizations establish a reorder point, which is the lowest level of stock an organization allows before triggering an order. To calculate the reorder point, use the following formula: Reorder point = (order lead time × usage rate) + safety stock 15. Explain the major differences between private and public warehouses. How do they differ from a distribution center? The primary difference between a public and private warehouse is ownership. Private warehouses are owned by firms for the storage and shipping of their own products. A public warehouse is a space used by firms for storing and shipping goods. A distribution center is often privately owned and is generally larger than a warehouse. Many distribution centers are highly automated and serve a variety of functions from product receiving, storing, bulk braking, truck loading, and shipping. 16. Compare and contrast the five major transportation modes in terms of cost, speed, and dependability. Railroads Trucks Pipelines Waterways Airplanes Selection criteria Cost Moderate High Low Very low Very high Speed Average Fast Slow Very slow Very fast Dependability Average High High Average High Load flexibility High Average Very low Very high Low Accessibility High Very high Very limited Limited Average Frequency Low High Very high Very low Average Products carried Coal, grain, lumber, heavy equipment, paper and pulp products, chemicals Clothing, computers, books, groceries and produce, livestock Oil, processed coal, natural gas Chemicals, bauxite, grain, motor vehicles, agricultural implements Flowers, food (highly perishable), technical instruments, emergency parts and equipment, overnight mail 17. Under what conditions are tying agreements, exclusive dealing, and dual distribution judged illegal? Tying agreements exist when a supplier furnishes a product to a channel member with the stipulation that the channel member purchase other products as well. Most tying agreements are illegal unless the supplier alone can provide a particular quality of products, the intermediary is free to carry competing products, or the company has just entered the market. Exclusive dealing occurs when a manufacturer forbids an intermediary to carry products of competing manufacturers. It is considered illegal if it blocks competitors from 15 percent of the market or more, the sales revenue involved is sizable, and the manufacturer is much larger than the dealer. Dual distribution occurs when a producer distributes the same product through two or more different channel structures. It is not usually considered illegal unless it inhibits competition. For example, a manufacturer might use a company-owned outlet to drive independent firms out of business. answers to MARKETING APPLICATIONS Keurig is the North American leader in single-cup coffee brewing. Introduced in 1998, the Keurig system uses self-contained coffee K-Cups, which allow users to brew one cup of coffee or other hot beverage in about one minute. After the K-Cup is pierced with a nozzle, hot water is forced through its contents and filter and into a mug below. Because the K-Cup is self-contained, disposal is easy and cleanup is almost totally eliminated. Keurig was purchased by Green Mountain Coffee Roasters in 2006, and today offers more than 200 different beverages, including specialty beverages from Dunkin’ Donuts, Wolfgang Puck, and Caribou Coffee. Keurig’s K-Cups are sold in many supermarkets, selected big box stores, some specialty stores, and department stores. Macy’s, for example, has a small selection of popular flavors displayed next to its coffee-maker aisle. K-Cups also can be found online at specialty coffee websites as well as both the Keurig and Green Mountain Coffee Roasters e-commerce stores. Describe the different channels used to distribute Keurig’s K-Cups in terms of customer characteristics, competition, and characteristics of the intermediaries. How would you define the intensity of market coverage? Does it make sense? Are there any strategic issues in managing these marketing channels? Students’ answers will vary. Students’ answers should include the following points. Some of the different channels used by Keurig to distribute its K-Cups are dual distribution, strategic channel alliance, and selective distribution. Students should compare the attributes associated with each channel (supermarkets, big box stores, specialty stores, coffee websites, Green Mountain website). Customer characteristics will be slightly different for each channel; for example, customers shopping at big box stores may be looking for a low price while customer shopping at specialty stores may be looking for quality or brand-name coffees. Competition will also differ, although all channels are competing with coffee shops like Starbucks. The characteristics of the intermediaries will also vary, especially if Green Mountain sells to customers directly. Intensity of coverage refers to the number and kinds of outlets in which a product will be sold. The intensity of coverage for Keurig’s K-Cups is good as the cups are sold in many places such as supermarkets, selected big box stores, specialty stores, and department stores. They are also found online at specialty coffee websites and Keurig and Green Mountain Coffee Roasters e-commerce stores. Some may believe that covering so many channels is a good decision while other may believe that Green Mountain may be creating too much competition with itself. Students may say that there are strategic issues like channel conflict, disagreements on objectives and policies, environmental issues, arguments on channel leadership, etc. Supply-chain management involves long-term partnerships among channel members that are working together to reduce inefficiencies, costs, and redundancies and develop innovative approaches to satisfy customers. Select one of the following companies and explain how supply-chain management could increase marketing productivity. a. Dell b. FedEx c. Nike d. Taco Bell Students should conduct research on the Internet or through the school’s library to find out more about the supply chain for each of these companies. They should support their recommendations with information from the text. Marketers can select from three major levels of marketing coverage when determining the number and kinds of outlets in which to sell a product: intensive, selective, or exclusive distribution. Characteristics of the product and its target market determine the intensity of coverage a product should receive. Indicate the intensity level best suited for the following products, and explain why it is appropriate. a. Personal computers b. Deodorant c. Canon digital cameras d. Nike athletic shoes Intensive distribution uses all available outlets for distributing a product and is appropriate for most convenience products. Selective distribution uses only some available outlets in an area to distribute a product and is appropriate for shopping products and durable goods. Selective distribution is also desirable when a special effort, such as customer service from a channel member, is important to customers. Exclusive distribution uses only one outlet in a relatively large geographic area and is suitable for products purchased infrequently, consumed over a long period of time, or requiring service or information to fit them to buyers’ needs. a. Personal computers (selective) b. Deodorant (intensive) c. Canon digital cameras (selective) d. Nike athletic shoes (intensive/selective) Describe the decision process you might go through if you were attempting to determine the most appropriate distribution channel for one of the following: a. Shotguns for hunters b. Women’s lingerie c. Telephone systems for small businesses d. Toy trucks for toddlers For each product, students should adapt a general process that includes evaluating costs, competing priorities, channel cooperation and conflict, channel integration, etc. Assume that you are responsible for the physical distribution of computers at a web-based company. What would you do to ensure product availability, timely delivery, and quality service for your customers? Students should discuss each element of a distribution strategy. They could also conduct research into companies like Amazon.com and Zappos to see what strategies are successful. Develop your analytical and communication skills using the Role-Play Exercises Online at www.cengagebrain.com. Students can visit the website and develop their analytical and communication skills. ANSWERS TO INTERNET EXERCISE Fed Ex Many companies lack their own distribution systems. Firms in this situation may rely on the services provided by companies like FedEx to handle their distribution. Learn more about the services provided by FedEx at www.fedex.com. What tools does FedEx provide to make the shipping process easier? FedEx provides a variety of tools, including online pickup scheduling, online ordering, online payment, online address books, package tracking, etc. Other than shipping products, what other services does FedEx provide? FedEx recently purchased Kinkos, so they also provide copying and printing services. They also provide a knowledge sharing site and some computer services. Is there information on the FedEx website that would help a potential FedEx customer evaluate FedEx regarding some of the selection criteria shown in Figure 13.3? Figure 13.3 shows common marketing channels for business products. FedEx sells services directly to business consumers, so a potential customer has all the information available on the website. FedEx provides options depending on the size and type of package, shipping speed, transportation method, etc. Answers to Developing Your Marketing Plan The information obtained from these questions should assist students in developing various aspects of their marketing plan found in the Interactive Marketing Plan exercise at www.cengagebrain.com. Marketing intermediaries perform many activities. Using Table 13.2 as a guide, discuss the types of activities where a channel member could provide needed assistance. The major ways that channel members can provide assistance is though providing marketing information, performing marketing management functions like establishing strategic and tactical plans, facilitating exchanges, promotional efforts, establishing pricing policies, and managing physical distribution activities. Using Figure 13.2 (or 13.3 if your product is a business product), determine which of the channel distribution paths is most appropriate for your product. Given the nature of your product, could it be distributed through more than one of these paths? Students’ answers will vary based on their products. Determine the level of distribution intensity that is appropriate for your product. Consider the characteristics of your target market(s), the product attributes, and environmental factors in your deliberation. The three categories of distribution intensity are intensive, selective, and exclusive distribution. Students should consider the characteristics of their target markets, the product attributes, and environmental factors in their deliberation. Students’ answers will vary. Discuss the physical functions that will be required for distributing your product, focusing on materials handling, warehousing, and transportation. Students’ answers will vary, depending on the product, the intensity of distribution, and where their target markets are located. Comments on Video Case 13: Taza Cultivates Channel Relationships with Chocolate Summary Taza Chocolate is a small manufacturer of stone-ground organic chocolate made in the classic Mexican tradition. The company markets most of its products through U.S. retailers, wholesalers, and distributors. Individual customers around the world can also buy Taza chocolate directly from the Taza website, and local customers can visit the company’s food truck or factory. The case presents the different marketing challenges that come with each form of distribution. Taza also seeks to build positive relationships across the entire supply chain. Questions for Discussion Which distribution channels does Taza use, and why are they appropriate for this company? Taza markets most of its products through U.S. retailers, wholesalers, and distributors. Individual customers around the world can also buy Taza chocolate bars, baking squares, chocolate-covered nuts, and other specialty items directly from the Taza website. If they live in Somerville, Massachusetts, they might even find a Taza employee riding a “chococycle,” selling products and distributing samples at an upscale food truck festival or a weekend market festival. Selling to distributors and retailers helps the company to sell a high volume of product, while selling to individuals helps them to make personal connections and reach a different set of customers. In what ways does Taza benefit from selling directly to some consumers? What are some potential problems of selling directly to consumers? Students should think creatively about this one. Selling directly to consumers helps the company to reach people who aren’t near a retailer or who want a specific product. Selling directly to consumers also helps to forge relationships. However, it is less efficient to ship directly to individuals and complicated to control the chocolate’s quality (i.e., melting). In what ways are Taza’s distribution efforts influenced by the fact that its products are organic? Taza seeks to make personal connections with all the certified organic growers who supply its ingredients. High quality ingredients are important to the company, so Taza believes that direct relationships with farmers ensure the best product. Dealing directly with suppliers allows Taza to meet its social responsibility goals while ensuring the kind of quality that commands a premium price. Solution Manual for Foundations of Marketing William M. Pride, O. C. Ferrell 9781305361867, 9781305405769, 9780357033760
Download
Close
Close
