CHAPTER 14 Wholesaling, Retailing, and Physical Distribution 14.1 A WORD FROM THE AUTHORS This chapter deals with the third element in the marketing mix: distribution. Before examining in detail the various intermediaries in the distribution process, we consider several marketing channels for consumer and industrial products. We introduce the concept of market coverage and partnering through supply-chain management and identify three types of vertical marketing systems. Next, we discuss marketing intermediaries individually. Pointing out the importance of wholesaling services to retailers and manufacturers, we describe three broad categories of wholesalers based on the activities they perform: merchant wholesalers; commission merchants, agents, and brokers; and manufacturers’ sales branches and offices. Then we classify retailers (the intermediaries most familiar to students) as in-store or nonstore. We look briefly at the types of planned shopping centers. Finally, we discuss distribution functions: inventory management, order processing, warehousing, materials handling, and transportation. 14.2 TRANSITION GUIDE New in Chapter 14: Wholesaling, Retailing, and Physical Distribution • A new Inside Business feature describes how Chobani has become a top brand of Greek yogurt. • A new example about how Missoni switched to selective distribution has been added to the section “Level of Market Coverage.” • A new example about how Dunkin’ Donuts signed a long-term supply chain deal has been added to the section “Partnering Through Supply-Chain Management.” • A new example about how Apple uses vertical marketing has been added to the section “Vertical Marketing Systems.” • A new example of Houston Wire & Cable Company being a merchant wholesaler has been added to the section “Types of Wholesalers.” • Updated statistics have been added to the section “Marketing Intermediaries: Retailers.” • A new Entrepreneurial Success feature, “Small Business Saturday, a Day to Shop Local,” describes how American Express encourages consumers to purchase from small shops the Saturday after Thanksgiving. • Table 14.1, “Top Ten Largest U.S. Retailers,” has been updated with the most recent information. • The Plumbing Warehouse has been added as a new example of a warehouse showroom in the “Catalog and Warehouse Showrooms” section. • Updated statistics have been included in the “Convenience Stores” and “Warehouse Clubs” sections. • The Sustaining the Planet feature, “Food Distributors: How Big Are Your Carbon Footprints,” has been deleted. • A new Sustaining the Planet feature, “Green Logistics,” describes how Walmart is making its fleets more efficient and environmentally friendly. • The Spotlight feature, “Will You Pay More for a Luxury Item at a Brand Store or a Discount Store?,” has been deleted. • The Going for Success feature, “Major Brands Party at Home,” has been deleted. • Updated statistics and examples have been included in the “Direct Marketing,” “Telemarketing,” “Online Retailing,” and “Automatic Vending” sections. • Statistics have been updated in the section “Direct-Response Marketing.” • A new Going for Success feature, “Next-Generation Vending Machines,” describes how vending machines are equipped with the newest technology to make them faster and more convenient for consumers. • The Entrepreneurial Success feature, “Furniture Store? That Used to Be Our Roller Skating Rink!,” has been deleted. • New examples have been added to the “Transportation” section. • A new Case 14.2, “Dell Direct and Not-So-Direct,” has been added. • The Building Skills for Career Success section contains a new Social Media Exercise. • The Exploring the Internet feature in Building Skills for Career Success has been deleted. 14.3 QUICK REFERENCE GUIDE Instructor Resource Location Transition Guide IM, p. 522 Learning Objectives Textbook, p. 394; IM, p. 525 Brief Chapter Outline IM, pp. 525–526 Comprehensive Lecture Outline IM, pp. 527–542 Entrepreneurial Success Small Business Saturday, a Day to Shop Local Textbook, p. 405 Going for Success Next-Generation Vending Machines Textbook, p. 410 Sustaining the Planet Green Logistics Textbook, p. 414 Inside Business Through Distribution, Chobani Climbs to Number One Textbook, p. 395 Return to Inside Business Textbook, p. 417 Questions and Suggested Answers, IM, p. 543 Marginal Key Terms List Textbook, p. 418 Review Questions Textbook, pp. 418–419 Questions and Suggested Answers, IM, pp. 543–546 Discussion Questions Textbook, p. 419 Questions and Suggested Answers, IM, pp. 546–547 Video Case 14.1 (Taza Cultivates Channel Relationships with Chocolate) and Questions Textbook, pp. 419–420 Questions and Suggested Answers, IM, p. 547 Case 14.2 (Dell Direct and Not-So-Direct) and Questions Textbook, p. 420 Questions and Suggested Answers, IM, p. 548 Building Skills for Career Success Textbook, pp. 421–422 Suggested Answers, IM, pp. 548–549 IM Quiz I & Quiz II IM, pp. 550–552 Answers, IM, pp. 552–553 Classroom Exercises IM, pp. 553–554 14.4 LEARNING OBJECTIVES After studying this chapter, students should be able to: 1. Identify the various channels of distribution that are used for consumer and industrial products. 2. Explain the concept of market coverage. 3. Understand how supply-chain management facilitates partnering among channel members. 4. Describe what a vertical marketing system is and identify the types of vertical marketing systems. 5. Discuss the need for wholesalers and describe the services they provide to retailers and manufacturers. 6. Identify and describe the major types of wholesalers. 7. Distinguish among the major types of retailers. 8. Identify the categories of shopping centers and the factors that determine how shopping centers are classified. 9. Explain the five most important physical distribution activities. 14.5 BRIEF CHAPTER OUTLINE I. Channels of Distribution A. Channels for Consumer Products 1. Producer to Consumer 2. Producer to Retailer to Consumer 3. Producer to Wholesaler to Retailer to Consumer 4. Producer to Agent to Wholesaler to Retailer to Consumer B. Multiple Channels for Consumer Products C. Channels for Business Products 1. Producer to Business User 2. Producer to Agent Middleman to Business User II. Level of Market Coverage III. Partnering Through Supply-Chain Management IV. Vertical Marketing Systems V. Marketing Intermediaries: Wholesalers A. Justifications for Marketing Intermediaries B. Wholesalers’ Services to Retailers 1. Promotion 2. Market Information 3. Financial Aid C. Wholesalers’ Services to Manufacturers 1. Providing an Instant Sales Force 2. Reducing Inventory Costs 3. Assuming Credit Risks 4. Furnishing Market Information VI. Types of Wholesalers A. Merchant Wholesalers B. Commission Merchants, Agents, and Brokers C. Manufacturers’ Sales Branches and Sales Offices VII. Marketing Intermediaries: Retailers A. Classes of In-Store Retailers 1. Department Stores 2. Discount Stores 3. Catalog and Warehouse Showrooms 4. Convenience Stores 5. Supermarkets 6. Superstores 7. Warehouse Clubs 8. Traditional Specialty Stores 9. Off-Price Retailers 10. Category Killers B. Kinds of Nonstore Retailing 1. Direct Selling 2. Direct Marketing 3. Automatic Vending VIII. Planned Shopping Centers A. Lifestyle Shopping Centers B. Neighborhood Shopping Centers C. Community Shopping Centers D. Regional Shopping Centers IX. Physical Distribution A. Inventory Management B. Order Processing C. Warehousing D. Materials Handling E. Transportation 1. Railroads 2. Trucks 3. Airplanes 4. Waterways 5. Pipelines 14.6 COMPREHENSIVE LECTURE OUTLINE More than 2 million firms in the United States help move products from producers to consumers. Many of these firms operate stores in which consumers make purchases. In addition, there are more than half a million wholesalers that sell merchandise to other firms. These and other intermediaries are concerned with the transfer of both products and ownership. They thus help create the time, place, and possession utilities that are so important in marketing. I. CHANNELS OF DISTRIBUTION. A channel of distribution, or marketing channel, is a sequence of marketing organizations that directs a product from the producer to the ultimate user. Every marketing channel begins with the producer and ends with either the consumer or the business user. A marketing organization that links producer and user within a marketing channel is called a middleman, or marketing intermediary. A merchant middleman (or a merchant) is a middleman that actually takes title to products by buying them. A functional middleman helps in the transfer of ownership of products but does not take title to the products. Different channels of distribution are generally used to move business and consumer products. A. Channels for Consumer Products. Different channels of distribution are used to move consumer and business products. The four most commonly used channels for consumer products are illustrated in Figure 14.1. 1. Producer to Consumer. This channel, which is often called the direct channel, includes no marketing intermediaries. a) Practically all services and a few consumer goods are distributed through a direct channel. b) Producers sell directly to consumers for several reasons. (1) They can better control the quality and price of their products. (2) They don’t have to pay (through discounts) for the services of inter-me diaries. (3) They can maintain closer ties with customers. 2. Producer to Retailer to Consumer. A retailer is a middleman that buys from producers or other middlemen and sells to consumers. a) Producers sell directly to retailers when retailers can buy in large quantities. b) This channel is most often used for products that are bulky, such as furniture and automobiles, for which additional handling would increase selling costs. c) It is also the usual channel for perishable products and for high-fashion products that must reach the consumer in the shortest possible time. 3. Producer to Wholesaler to Retailer to Consumer. This channel is known as the traditional channel, because most consumer goods pass through wholesalers to retailers. a) A wholesaler is a middleman that sells products to other firms, such as retailers, industrial users, or other wholesalers. b) A producer uses wholesalers when its products are carried by so many retailers that the producer cannot deal with all of them. 4. Producer to Agent to Wholesaler to Retailer to Consumer. Agents are functional middlemen who do not take title to products and are compensated by commissions paid by producers. Often, these products are inexpensive, frequently purchased items. a) This channel is also used for highly seasonal products and by producers that do not have their own sales forces. B. Multiple Channels for Consumer Products. Often, manufacturers use different channels to reach different market segments. 1. A manufacturer may use multiple channels when the same product is sold to consumers and business users. 2. Multiple channels are also used to increase sales or to capture a larger share of the market. C. Channels for Business Products. Producers of business products tend to use short channels. (See lower part of Figure 14.1 for these channels.) 1. Producer to Business User. This channel allows the manufacturer’s own sales force to sell directly to business users. a) Heavy machinery, large computers, and major equipment are usually distributed this way. b) This channel allows the producer to provide customers with expert and timely services, such as delivery, machinery installation, and repairs. Teaching Tip: Ask students to name examples of products that are sold through different channels. For example, Victoria’s Secret items can be purchased from stores, from catalogs, and through eBay. 2. Producer to Agent Middleman to Business User. This channel is employed by manufacturers to distribute such items as operating supplies, accessory equipment, small tools, and standardized parts. a) The agent is an independent intermediary and generally represents sellers. II. Level of Market Coverage. The level of market coverage refers to the number of wholesalers and retailers that are used for a specific geographic area. The three levels of market coverage are as follows: A. Intensive distribution is the use of all available outlets for a product. 1. The producer who wants to give the widest possible exposure in the marketplace chooses intensive distribution. 2. The manufacturer saturates the market by selling to any intermediary of good financial standing that is willing to stock and sell the product. B. Selective distribution is the use of only a portion of the available outlets in each geographic area. C. Exclusive distribution is the use of only a single retail outlet for a product in a large geographic area. 1. Exclusive distribution is usually limited to very prestigious products. 2. The producer usually places many requirements (such as inventory levels, sales training, service quality, and warranty procedures) on exclusive dealers. Teaching Tip: Use the “Lots, Less, and Least Coverage” exercise here. It can be done individually or in teams, and it will only take five minutes to complete the handout. III. Partnering Through Supply-Chain Management. Supply-chain management is a long-term partnership among channel members working together to create a distribution system that reduces inefficiencies, costs, and redundancies, while creating a competitive advantage and satisfying customers. A. Supply-chain management requires cooperation among members of the channel, including manufacturing, research, sales, advertising, and shipping. B. Supply-chain management cooperation can reduce inventory, transportation, administrative, and handling costs; speed order cycle time; and increase profits for all channel members. C. Suppliers are having a greater impact on determining what items retail stores carry. 1. This phenomenon, called category management, is becoming common for mass merchandisers, supermarkets, and convenience stores. 2. Through category management, the retailer asks a supplier in a particular category how to stock the shelves. D. Supply-chain management encourages cooperation in reducing the costs of inventory, transportation, administration, and handling; in speeding order-cycle times; and in increasing profits for all channel members. 1. When buyers, sellers, marketing intermediaries, and facilitating agencies work together, customers’ needs regarding delivery, scheduling, packaging, and other requirements are better met. E. Technology facilitates supply-chain management, especially the use of computerized information sharing. IV. Vertical Marketing Systems. Vertical channel integration occurs when two or more stages of a distribution channel are combined and managed by one firm. A. A vertical marketing system (VMS) is a centrally managed distribution channel resulting from vertical channel integration. 1. This merging eliminates the need for certain intermediaries, because one member of the marketing channel may assume the responsibilities of another member or purchase the operations of that member. 2. Total vertical integration occurs when a single management team controls all operations from production to final sale. B. There are three types of VMSs: administered, contractual, and corporate. 1. In an administered VMS, one of the channel members dominates the other members, perhaps because of its large size. Although the goals of the entire system are considered when decisions are made, control rests with individual channel members, as in conventional marketing channels. 2. Under a contractual VMS, cooperative arrangements and the rights and obligations of channel members are defined by contracts or other legal measures. 3. In a corporate VMS, ownership is the vehicle by which production and distribution are joined. V. MARKETING INTERMEDIARIES: WHOLESALERS. Producers sometimes try to eliminate them from distribution channels by dealing directly with retailers or consumers. Yet, wholesalers provide a variety of essential marketing services. Wholesalers can be eliminated; however, their functions cannot be. These functions must be performed by other channel members or by consumers. A. Justifications for Marketing Intermediaries. The press, consumers, public officials, and other marketers often assume that, the fewer the intermediaries in a distribution channel, the lower the price of the product will be. 1. Those who believe that the elimination of wholesalers would bring about lower prices do not recognize that the services wholesalers perform would still be needed. Those services would simply be provided by other means, and consumers would still bear the costs. Manufacturers would have to keep extensive records and employ enough personnel to deal with multiple retailers individually. a) Even with direct distribution, products might be considerably more expensive because prices would reflect the costs of producers’ inefficiencies. 2. Figure 14.3 shows that 16 contacts could result from the efforts of four buyers and four producers. With the assistance of an intermediary, only eight contacts would be necessary. 3. Wholesalers are more efficient and economical, not only for manufacturers but also for consumers. B. Wholesalers’ Services to Retailers. Wholesalers help retailers by buying in large quantities and then selling to retailers in smaller quantities and by delivering goods to retailers. They also stock—in one place—the variety of goods that retailers otherwise would have to buy from many producers. Wholesalers also provide assistance in three other vital areas. 1. Promotion. Some wholesalers help promote the products they sell to retailers. This service is usually either free or provided at cost. a) Wholesalers are major sources of display materials and may help retailers build effective window, counter, and shelf displays. b) Some assign their own employees to work on the retail sales floor during special promotions. 2. Market Information. Wholesalers are a constant source of market information. a) Through dealings with local businesses and distant suppliers, they accumulate information about consumer demand, prices, supply conditions, and new developments within the trade. b) They relay this information informally through the wholesaler’s sales force. 3. Financial Aid. Most wholesalers provide a type of financial aid that retailers often take for granted. a) By making prompt and frequent deliveries, wholesalers enable retailers to keep their own inventory investments small in relation to sales. b) Such indirect financial aid reduces the amount of operating capital that retailers need. C. Wholesalers’ Services to Manufacturers. Some of the services that wholesalers perform for producers are similar to those provided to retailers. Others are quite different. 1. Providing an Instant Sales Force. A wholesaler provides its producers with an instant sales force so that producers’ sales representatives need not call on retailers. 2. Reducing Inventory Costs. Wholesalers purchase goods in sizable quantities from manufacturers and store these goods for resale. In doing so, they reduce the amount of finished goods inventory that producers must hold and, thereby, reduce the cost of carrying inventories. 3. Assuming Credit Risks. When producers sell through wholesalers, the wholesalers extend credit to retailers, make collections from retailers, and assume the risks of nonpayment. a) These services reduce the producers’ cost of extending credit to customers and the resulting bad-debt expense. 4. Furnishing Market Information. Just as they do for retailers, wholesalers supply market information to the producers they serve. VI. Types of Wholesalers. Wholesalers generally fall into three categories. Of these, merchant wholesalers constitute the largest portion, accounting for about four-fifths of all wholesale employees and establishments. A. Merchant Wholesalers. A merchant wholesaler is a middleman that purchases goods in large quantities and then sells them to other wholesalers or retailers and to institutional, farm, government, professional, or industrial users. 1. Merchant wholesalers usually operate one or more warehouses where they receive, take title to, and store goods. They are sometimes called distributors or jobbers. 2. Merchant wholesalers may be classified as full-service or limited-service whole-sales, depending on the number of services they provide. a) Full-service wholesalers perform the entire range of wholesaler functions. They deliver goods, supply warehousing, arrange for credit, support promotional activities, and provide general customer assistance. b) General-merchandise wholesalers deal in a wide variety of products, such as drugs, hardware, nonperishable foods, cosmetics, detergents, and tobacco. c) Limited-line wholesalers stock only a few product lines but carry numerous product items within each line. d) Specialty-line wholesalers carry a select group of products within a single line. e) Limited-service wholesalers assume responsibility for only a few wholesale services. B. Commission Merchants, Agents, and Brokers. These functional middlemen do not take title to products. They perform a small number of marketing activities and are paid a commission that is a percentage of the sales price. 1. A commission merchant usually carries merchandise and negotiates sales for manufacturers. a) In most cases, commission merchants have the power to set prices and terms of sale. b) After a sale is made, they either arrange for delivery or provide transportation services. 2. An agent is a middleman who expedites exchanges, represents a buyer or a seller, and often is hired permanently on a commission basis. When agents represent producers, they are known as sales agents or manufacturers’ agents. a) As long as the products represented do not compete, a sales agent may represent one or several manufacturers on a commission basis. b) The agent solicits orders for the manufacturers within a specific territory. The manufacturers then ship the merchandise and bill the customers directly. c) Manufacturers gain from using a sales agent because the agent provides immediate entry into a territory, regular calls on customers, selling experience and a known, predetermined selling expense (commission). 3. A broker is a middleman who specializes in a particular commodity, represents either a buyer or a seller, and is likely to be hired on a temporary basis. a) Brokers may perform only the selling function, or both buying and selling, using established contacts or special knowledge of their fields. C. Manufacturers’ Sales Branches and Sales Offices. A manufacturer’s sales branch is essentially a merchant wholesaler that is owned by a manufacturer. 1. Sales branches carry inventory, extend credit, deliver goods, and offer help in promoting products. 2. Their customers are retailers, other wholesalers, and industrial purchasers. a) Because they are owned by producers, they stock primarily the goods manufactured by their own firms, and selling policies and terms are established centrally and then transmitted to branch managers for implementation. b) A manufacturer’s sales office is essentially a sales agent owned by a manufacturer. Sales offices may sell goods manufactured by their own firms as well as certain products of other manufacturers that complement their own product lines. Teaching Tip: Use the “What Is It That You Sell Again?” exercise here to introduce this topic. It will take no more than five minutes and can be done individually or in groups. VII. MARKETING INTERMEDIARIES: RETAILERS. Retailers are the final link between producers and consumers. They may buy from either wholesalers or producers and sell not only goods but also such services as auto repairs, haircuts, and dry cleaning. According to the most recent census data, there are over 1 million retail establishments in the United States. Table 14.1 lists the ten largest retail organizations and their approximate sales revenues and yearly profits. A. Classes of In-Store Retailers. One way to classify retailers is by the number of stores owned and operated by the firm. An independent retailer is a firm that operates only one retail outlet. Approximately three-fourths of retailers are independent. A chain retailer is a firm that operates more than one retail outlet. About one-fourth of retail organizations operate chains. Another way to classify in-store retailers is by store size and the kind and number of products carried. 1. Department Stores. According to the U.S. Bureau of the Census, a department store is a retail store that (1) employs 25 or more employees and (2) sells at least home furnishings, appliances, family apparel, and household linens and dry goods, each in a different part of the store. a) Department stores traditionally have been service oriented. Along with goods they sell, they provide credit, delivery, personal assistance, liberal return policies, and a pleasant shopping atmosphere. 2. Discount Stores. A discount store is a self-service, general-merchandise outlet that sells products at lower-than-usual prices. a) These stores can offer lower prices by operating in smaller markets, by locating large retail showrooms in low-rent areas, and by offering minimal customer service. b) To keep prices low, discount stores operate on the basic principle of high turnover of certain items. c) As competition among discount stores has increased, some discounters have improved their services, store environments, and locations. Teaching Tip: Ask students what their favorite retail department and discount stores are and what makes these stores special. 3. Catalog and Warehouse Showrooms. A catalog showroom is a retail outlet that displays well-known brands and sells them at discount prices through catalog sales within the store. a) The customer selects the merchandise, either from the catalog or from the showroom display, fills out an order form, and hands the form to a clerk. b) The clerk retrieves the merchandise from an adjacent warehouse room. c) A warehouse showroom is a retail facility with five basic characteristics: (1) Large, low-cost buildings (2) Warehouse materials-handling technology (3) Vertical merchandise displays (4) Large on-premise inventories (5) Minimum service 4. Convenience Stores. A convenience store is a small food store that sells a limited variety of products but remains open well beyond normal business hours. a) Their limited product mixes and higher prices keep convenience stores from becoming a major threat to other grocery retailers. 5. Supermarkets. A supermarket is a large self-service store that sells primarily food and household products. a) Supermarkets are large-scale operations that emphasize low prices and one-stop shopping for household needs. b) A supermarket has minimum annual sales of $2 million. c) Many traditional supermarket chains have experienced shrinking profit margins and are finding it difficult to compete with superstores, which stock the same items as supermarkets as well as a wide variety of other items. Teaching Tip: Ask students whether they prefer to purchase food and beverage items at supermarkets or convenience stores. Why? 6. Superstores. A superstore is a large retail store that carries not only food and nonfood products ordinarily found in traditional supermarkets but also additional product lines that include housewares, hardware, small appliances, clothing, personal-care products, garden products, and automotive merchandise. Superstores also provide a number of services to entice customers, such as automotive repair, snack bars, film developing, and banking. 7. Warehouse Clubs. A warehouse club is a large-scale, members-only operation that combines cash-and-carry wholesaling features with discount retailing. a) For an annual fee, small retailers may purchase products at wholesale prices for business use or for resale, but warehouse clubs also sell to ultimate consumers. b) Warehouse clubs offer the same types of products offered by discount stores, but in a limited range of sizes and styles. c) Warehouse clubs are characterized by a high inventory turnover rate, meaning they often sell their goods before manufacturers’ payment periods are up, so this reduces warehouse clubs’ need for capital. d) To keep their prices lower than those of supermarkets and discount stores, warehouse clubs provide few services. (1) Usually customers must transport purchases themselves. 8. Traditional Specialty Stores. A traditional specialty store carries a narrow product mix with deep product lines. They are sometimes called limited-line retailers. a) If they carry depth in one particular product category, they may be called single line retailers. b) Specialty stores usually offer deeper product mixes than department stores. c) They attract customers by emphasizing service, atmosphere, and location. 9. Off-Price Retailers. An off-price retailer buys manufacturers’ seconds, overruns, returns, and off-season merchandise at below wholesale prices and sells them to consumers at deep discounts. Off-price stores charge up to 50 percent less than department stores do for comparable merchandise but offer few customer services. 10. Category Killers. A category killer is a very large specialty store that concentrates on a single product line and competes by offering low prices on an enormous number of products. a) These stores are called category killers because they take business away from smaller, high-cost retail stores. B. Kinds of Nonstore Retailing. Nonstore retailing is selling that does not take place in conventional store facilities; consumers purchase products without visiting a store. 1. Direct Selling. Direct selling is the marketing of products to customers through face-to-face sales presentations at home or in the workplace. a) Traditionally called door-to-door selling, direct selling has grown to a large industry. b) The “party plan” method of direct selling takes place in homes or in the workplace. c) Benefits of direct selling include product demonstration, personal attention, and convenience. 2. Direct Marketing. Direct marketing is the use of the Internet, telephones, and nonpersonal media to communicate product and organizational information to customers, who can then buy products by mail, by telephone, or online. a) With catalog marketing, an organization provides a catalog from which customers make selections and place orders by mail, by telephone, or on the Internet. (1) Many catalog companies increasingly rely on their Web sites, which are cheaper to produce, maintain, and distribute. (2) The advantage of catalog marketing includes efficiency and convenience for customers. (3) The retailer benefits by being able to locate in remote, low-cost areas, save on store fixtures, and reduce personal selling and store operating expenses. (4) The disadvantage is that catalog selling is inflexible, provides limited service, and is most effective for only a selected set of products. b) Direct-response marketing occurs when a retailer advertises a product and makes it available through mail, telephone, or online orders. c) Telemarketing is using the telephone to perform marketing-related activities. (1) Telemarketing can help generate sales leads, improve customer service, speed up payments on past-due accounts, raise funds for nonprofit organizations, and gather marketing data. (2) The laws and regulations regarding telemarketing have become more restrictive over time, and several states have do-not-call registries of customers who do not wish to receive telemarketing calls. (3) Recently, the Federal Communications Commission (FCC) created a regulation that restricts the use of prerecorded messages to make telemarketing calls. The law also requires that an “opt-out” mechanism be embedded in the call for consumers who do not wish to receive the calls. (4) Certain exceptions apply to do-not-call lists. A company can still use telemarketing to communicate with existing customers. In addition, charitable, political, and telephone survey organizations are not restricted by the national registry. d) Television home shopping displays products to television viewers who can order them by calling toll-free numbers and paying with credit cards. This medium is growing in popularity because it offers several benefits: (1) Products can be demonstrated easily. (2) An adequate amount of time can be spent showing the product so as to make viewers well informed. (3) The length of time a product is shown depends not only on the length of the demonstration but also on whether the product is selling. Once the calls peak and begin to decline, a new product is shown. Teaching Tip: Ask students if they have ever watched an infomercial for a product. Have they ever purchased a product as a result of watching the infomercial? Which product and why did they purchase it? How effective was the infomercial in demonstrating the product? e) Online retailing makes the presentation and sale of products possible through computer connections. (1) Most brick-and-mortar retailers have Web sites to sell products, provide information about their company, or distribute coupons. Teaching Tip: Consider using the “Marketing Channels” exercise here. This group activity takes approximately 15 minutes and reinforces the use of differing marketing channels to reach consumers. 3. Automatic Vending. Automatic vending is the use of machines to dispense products. It accounts for less than 2 percent of all retail sales. a) Small, routinely purchased products (e.g., chewing gum, candy, newspapers, soft drinks, coffee, etc.) can be sold in machines because consumers usually buy them at the nearest available location. b) Vending machines need only a small amount of space and no sales personnel, which gives them an advantage over stores. These advantages are partly offset by high equipment costs and frequent servicing and repairs. Teaching Tip: Currently, vending machines are used primarily to sell snack and beverage products. Ask students what other products could be sold through vending machines. VIII. PLANNED SHOPPING CENTERS. The planned shopping center is a self-contained retail facility, constructed by independent owners and consisting of a variety of stores. Shopping centers are designed and promoted to serve diverse groups of consumers with widely differing needs. The management of a shopping center strives for a coordinated mix of stores, a comfortable atmosphere, adequate parking, landscaping, and special events to attract customers. The convenience of shopping for most family and household needs in a single location is an important part of shopping-center appeal. There are four types of planned shopping centers: A. Lifestyle Shopping Centers. A lifestyle shopping center is an open air environment with upscale chain specialty stores. 1. Such shopping centers are more convenient than a traditional enclosed mall, but offer the same quality of upscale retail, department stores, movie theaters, and dining. 2. This shopping model has grown in popularity because it combines shopping with the feel of being in a town and allows consumers to stroll around outside. Teaching Tip: Use the “Lifestyle Shopping Mall” activity here. B. Neighborhood Shopping Centers. A neighborhood shopping center usually consists of several small convenience and specialty stores. 1. Businesses might include small grocery stores, drugstores, gas stations, and fast-food restaurants. They serve consumers who live less than 10 minutes from the shopping center. 2. Because most purchases in the neighborhood shopping center are based on convenience or personal contact, these retailers generally make only limited efforts to coordinate promotional activities among stores in the shopping center. C. Community Shopping Centers. A community shopping center includes one or two department stores and some specialty stores, along with convenience stores. 1. It attracts consumers from a wider geographic area who will drive longer distances to find products and specialty items unavailable in neighborhood shopping centers. 2. Carefully planned and coordinated community shopping centers generate traffic by holding special events. 3. The management of a community shopping center maintains a balance of tenants so that the center can offer wide product mixes and deep product lines. D. Regional Shopping Centers. A regional shopping center usually has large department stores, numerous specialty stores, restaurants, movie theaters, and sometimes hotels. It carries merchandise offered by a downtown shopping district. 1. It carefully coordinates management and marketing activities to reach the 150,000 or more consumers in its target market. 2. National chain stores can gain leases in regional shopping centers more easily than small independent stores because they are better able to meet the centers’ financial requirements. IX. PHYSICAL DISTRIBUTION. Physical distribution is all those activities concerned with the efficient movement of products from the producer to the ultimate user. Physical distribution is the movement of the products themselves—both goods and services—through their channels of distribution. It combines several interrelated business functions, such as inventory management, order processing, warehousing, materials handling, and transportation. A. Inventory Management. In Chapter 8, we defined inventory management as the process of managing inventories in such a way as to minimize inventory costs, including both holding costs and potential stock-out costs. 1. Holding costs are the costs of storing products until they are purchased or shipped to customers. Holding costs can be reduced by minimizing inventories, but then stock-out costs could be financially threatening to the organization. 2. Stock-out costs are the costs of sales lost when items are not in inventory. 3. Inventory management is a balancing act between stock-out costs and holding costs, such as cost of money invested in inventory, cost of storage space, insurance costs, and inventory taxes. 4. Often, even a relatively small reduction in inventory management can provide a relatively large increase in working capital. 5. Companies frequently rely on technology and software to help manage inventory. 6. Efficient inventory management is critical for firms that use a just-in-time (JIT) approach, because companies maintain low inventory levels and purchase products and materials in small quantities whenever they need them. 7. JIT inventory management requires a high level of coordination between producers and suppliers but it eliminates waste and reduces inventory costs significantly. B. Order Processing. Order processing consists of activities involved in receiving and filling customers’ purchase orders. 1. Fast, efficient order processing is an important marketing service—one that can provide a dramatic competitive edge. 2. Those who purchase goods for intermediaries are concerned with their suppliers’ promptness and reliability in order processing because it means minimal inventory costs and the ability to order goods when they are needed, rather than weeks in advance. C. Warehousing. Warehousing is the set of activities involved in receiving and storing goods and preparing them for reshipment. In addition to storage, warehousing includes the following: 1. Receiving goods—The warehouse accepts delivered goods and assumes responsibility for them. 2. Identifying goods—Records are made of the quantity and items may be marked, coded, or tagged for identification. 3. Sorting goods—Delivered goods may have to be sorted before being stored. 4. Dispatching goods to storage—Items must be moved to specific storage areas where they can be found later. 5. Holding goods—Goods are kept in storage under proper protection until needed. 6. Recalling, picking, and assembling goods—Items that are to leave the warehouse must be selected from storage and assembled efficiently. 7. Dispatching shipments—Each shipment is packaged suitably and directed to the proper transport vehicle. Shipping and accounting documents are prepared. A firm may use its own warehouses or rent space in public warehouses. 1. A private warehouse, owned and operated by a particular firm, can be designed to serve the firm’s specific needs. a) However, the firm must finance the facility, determine the best location for it, and ensure that it is used fully. b) As a result, only companies that deal in large quantities of goods can justify private warehouses. 2. Public warehouses offer their services to all individuals and firms. a) They provide storage facilities, areas for sorting and assembling shipments, and office and display spaces for wholesalers and retailers. b) Public warehouses will also hold—and issue receipts for—goods used as collateral for borrowed funds. D. Materials Handling. Materials handling is the actual physical handling of goods, in warehouses as well as during transportation. 1. Proper materials-handling procedures and techniques can increase the usable capacity of a warehouse or that of any means of transportation. 2. It can also reduce breakage and spoilage. 3. Modern materials-handling efforts are aimed at reducing the number of times a product is handled. (a) One method is called unit loading, in which several smaller cartons, barrels, or boxes are combined into a single standard-size load that can be handled efficiently by forklift, conveyer, or truck. E. Transportation. As a part of physical distribution, transportation is the shipment of products to customers. The greater the distance between seller and purchaser, the more important the choice of the means of transportation and the particular carrier. Transportation is an essential component of the marketing mix because it can add significant cost. Firms that offer transportation services are called carriers. A common carrier is a transportation firm whose services are available to all shippers. A contract carrier is available for hire by one or several shippers. A private carrier is owned and operated by the shipper. In addition, a shipper can hire agents called freight forwarders to handle its transportation. Freight forwarders pick up shipments from the shipper, ensure that the goods are loaded on selected carriers, and assume responsibility for safe delivery. They can often group a number of small shipments into one large load, which is carried at a lower rate and saves money for shippers. The U.S. Postal Service offers parcel post delivery, which is widely used by mail-order houses. It provides complete geographic coverage at the lowest rates, but it limits the size and weight of the shipments it will accept. UPS, a privately owned firm, also provides small-parcel services for shippers. Other privately owned carriers, such as Federal Express, DHL and Airborne, offer fast—often overnight—parcel delivery, both within and outside the United States. There are also many local parcel carriers. There are six major criteria used for selecting transportation modes: • Cost—At times, marketers choose higher-cost modes of transportation because of the benefits they provide. • Speed is measured by the total time that a carrier possesses the products. Usually, there is a direct relationship between cost and speed; faster = more expensive. • Dependability is determined by the consistency of service provided by that mode. • Load flexibility is the degree to which a transportation mode can provide appropriate equipment and conditions for moving specific kinds of products. • Accessibility refers to a transportation mode’s ability to move goods over a specific route or network. • Frequency refers to how often a marketer can ship products by a specific transportation mode. In Table 14.2, each transportation mode is rated on a relative basis for these six selection criterion. It also shows a breakdown by use of the five different modes of transportation. 1. Railroads. In terms of total freight carried, railroads are the most important mode of transportation. They are also the least expensive for many products. a) Almost all railroads are common carriers. b) Many commodities carried by railroads (i.e., foodstuffs, coal) could not be transported easily by any other means. 2. Trucks. The trucking industry consists of common, contract, and private carriers. a) Trucks can move goods to suburban and rural areas not served by railroads. b) They can handle freight quickly and economically, and they carry a wide range of shipments. c) Railroad and truck carriers have teamed up to provide a form of transportation called piggyback. Truck trailers are carried from city to city on specially equipped railroad flatcars. Within each city, the trailers are then pulled in the usual way by truck trailers. 3. Airplanes. Air transport is the fastest but most expensive means of transportation. a) All certified airlines are common carriers. Supplemental or charter lines are contract carriers. b) Because of the high cost, the lack of airport facilities in many areas, and reliance on weather conditions, airlines carry less than 1 percent of all intercity freight. 4. Waterways. Cargo ships and barges offer the least expensive, but slowest, form of transportation. They are used mainly for bulky, nonperishable goods. a) Shipment by water is limited to cities by navigable waterways. 5. Pipelines. Pipelines are a highly specialized mode of transportation. They are used primarily to carry petroleum and natural gas. a) Pipelines have become more important as the nation’s need for petroleum products has increased. b) Such products as semiliquid coal and wood chips can also be shipped through pipelines. Teaching Tip: Use the “And the Best Way to Ship Is …” group exercise here. It will take approximately 10 to 15 minutes. Instructor Manual for Business William M. Pride, Robert J. Hughes, Jack R. Kapoor 9781133595854, 9780538478083, 9781285095158, 9781285555485, 9781133936671, 9781305037083
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