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Chapter Twelve: Marketing Channels: Distribution Strategy Chapter Objectives 1. Explain the importance of distribution and the interrelationships between distribution channels, supply chain management and logistics management 2. Identify how distribution channels add value to businesses and consumers 3. Describe distribution channel design and management decisions and strategies 4. Explain how logistics and supply chain management affect distribution strategy Annotated Chapter Outline PowerPoint Slides Instructor’s Notes The chapter objectives and roadmap are intended to help students understand the content to be discussed. Opening Vignette: Zara Unlike its competitors, Zara owns its own stores, manufactures its own products, and even produces its own fabric. Zara also employs people who search for trend setters and send images of the latest trends to its production department. Using advanced information technology, Zara delivers cutting-edge fashion to its stores twice a week. Ask students: Why is Zara’s supply chain superior to many of its suppliers? Answer: It is able to get merchandise from concept to stores in a very short time. This means merchandise is always fresh, markdowns are minimal, and customers always find new things, which stimulates sales. Topic One: The Importance of Distribution Even if companies engage in research that yields in-depth consumer insights which they use to design new products and price them at attractive levels, it is unlikely they will succeed unless they can reach consumers by convincing retailers to distribute their products. Companies need to convince retailers their products will sell, be supported by advertising, perhaps increase category sales, etc. Relationship among Supply Chains, Marketing Channels, and Logistics I. A Marketing Channel Consists of Institutions. A. These institutions transfer the ownership of goods from the point of production to the point of consumption. B. The channel thus consists of all institutions and marketing activities in the marketing process. II. Logistics Management Pertains to Activities. A. Two or more activities combine to plan, integrate, and control the efficient flow of raw materials, inventory, and finished goods from the point of origin to the point of consumption. B. These activities may include, but are not limited to 1. Customer service. 2. Demand forecasting. 3. Distribution communications. 4. Inventory control. 5. Materials handling. 6. Order processing. 7. Parts and service support. 8. Plant and warehouse site selection. 9. Procurement. 10. Packaging. 11. Returned goods handling. 12. Salvage and scrap disposal. 13. Traffic and transportation. 14. Warehousing and storage. III. Logistics Management Concentrates on the Movement and Control of Physical Products. Students may find the distinction between distribution channels and logistics management confusing because of their close relationship. Remind them that the distribution channel consists of institutions, whereas logistics refer to activities among and within institutions. However, both are part of supply chain management. Supply chain: focus on the sequence of firms required to create and deliver goods to the final consumer Logistics Management: focus on the flow of raw materials & finished goods from point of origin to final consumption Distribution Channels: focus on the companies that transfer the ownership of goods from the producer to consumers at the point of consumption Topic Two: Functions Performed by Intermediaries Distribution channels perform a variety of transactional, logistical and facilitating functions. One important role played by intermediaries is to reduce the number of marketplace contacts, resulting in more efficient systems. Intermediaries also match the requirements of individual consumers to the goods that manufacturers produce, handle physical distribution and storage of goods making them available for customers to purchase, facilitate searches by both buyers and sellers, and standardize exchange transactions. While channel functions may shift from one intermediary or channel member to another, it’s important to recognize that they cannot be eliminated. Topic Three: Designing Distribution Channel Structure Interactions range from close working partnerships to one-time arrangements, but in all cases, the parties want something from each other. This slide introduces the structure companies use to set up distribution channels. More in depth slides follow. Channel Structure: Direct and Indirect Ask students: Why would a company choose to distribute directly versus indirectly? Some companies choose direct distribution to cut down on the expense of middlemen while others may be forced to distribute directly because they are unable to secure shelf space. For many companies, indirect distribution makes sense, for example, appliance manufacturers know that consumers will want to compare different makes and models from a variety of companies in a retail environment when purchasing a new fridge or stove. Channel Structure: Multichannel Ask students to give examples of companies that use multichannel distribution. Some companies include Hallmark, which has company owned stores, uses catalogues and also sells through retailers such as Shoppers Drug Mart, Zellers, Sears and The Bay to list just a few. Ethical Dilemma 12.1: Listing Fees Influences on Channel Structure A. Firms must know from which manufacturers customers want to buy. B. Manufacturers need to know where their target customers expect to find their products. C. Larger, more sophisticated channel members tend not to use supply chain intermediaries. D. Smaller firms need the help of intermediaries to sell their lines. Ask students: How do customer expectations and the characteristics of the supply chain members dictate the complexity of the supply chain? What kind of supply chain do you expect a company like Zara (from the opening vignette) to use, and why? Answer: If customers have expectations of receiving merchandise quickly, then the supply chain may use a just-in-time delivery system with cross-docking warehouses, or the merchandise may be delivered directly to stores without going through a distribution centre at all. What kind of supply chain do you expect a company like Zara (from the opening vignette) to use, and why? Answer: Zara uses a just-in-time system to get fashion merchandise from concept design to stores within a few weeks, rather than a few months. Determine Distribution Intensity. A. Distribution intensity refers to the number of supply chain members at each level. B. An intensive distribution strategy attempts to get products into as many outlets as possible. C. An exclusive distribution strategy uses exclusive geographic territories. 1. Mandates that only a select few retail customers may sell a particular brand in a particular territory. 2. Ensures manufacturers that the most appropriate retailers represent their products. D. A selective distribution strategy sells to selected customers within a territory. 1. Helps the seller maintain a particular image. 2. Controls the flow of merchandise into an area. Product characteristics drive supply chain structures, in that mass merchandise products use intensive distribution, whereas luxury goods employ exclusive distribution. Group activity: Match the following products to their likely type of distribution: Pharmaceuticals (selective) Clothing (depends on the product type) Soft drinks (Intensive) Answer B Managing Distribution Channels I. Address Supply Chain or Channel Conflicts. A. Conflict occurs when supply chain members do not agree about their goals, roles, or rewards. B. Resolution occurs through negotiation. Managing distribution channels is similar to managing your personal relationships. When conflict occurs, it is best to try to come to a resolution through negotiations. Group exercise: Divide the class into group dyads: one a manufacturer and one a retailer. Make each group have a dominant member. So, one group would be Walmart (dominant), while the other group would be a small vendor. Another group would be P&G (dominant), while the other group would be a small grocery chain. Have groups negotiate a sale. Then have groups report what transpired. It will be interesting to see how the dominant group used its power. II. Manage the Supply Chain Through Vertical Marketing Systems. A. Closely aligned supply chains share common goals and therefore are less prone to conflict. B. Independent or conventional supply chains include independent members that each attempts to satisfy its own objectives and maximize its own profits, often at the expense of other members. C. Administered vertical marketing systems contain no common ownership and no contractual relationships, but dominant channel members control relationships. D. Contractual vertical marketing systems join independent firms at different levels through contracts designed to obtain economies of scale and reduce conflict. E. Franchising describes a contractual agreement between a franchisor and a franchisee, as described previously. F. Corporate vertical marketing systems entail partial ownership of the supply chain by a firm, which dictates the priorities and objectives and thus lessens conflict. Control in distribution channels varies depending on the type of relationships. You might compare distribution channels relationships to more personal relationships familiar to students, such as a group of their friends versus a professional networking association to which they belong. Ask students: How does the formality of your relationships in each group affect your influence over other members or other members’ influence over you? The more formal the relationship, the more control one member has over the others. Group exercise: Have students describe the different types of vertical marketing systems and the level of cooperation needed in each. Explain how cooperation is fostered through more formal supply chain relationships. In essence, cooperation is naturally greater in a corporate system than in an independent supply chain. Topic Four: Supply Chain Management Supply chain management involves a set of approaches and techniques that firms use to efficiently and effectively integrate their suppliers, manufacturers, warehouses, stores, and transportation intermediaries and thus create a seamless value chain for producing and distributing merchandise in the right quantities, to the right locations, and at the right time and for minimizing system-wide costs while satisfying consumers’ service requirements. Wholesalers buy products from manufacturers and resell them to retailers, which sell products directly to consumers. Ask students: Why would a supply chain be more efficient with a distribution centre rather than simply delivering directly to stores? Answer: The distribution centre serves as a place to accumulate merchandise from many vendors and then allocate it to stores in the quantities they need. Imagine the congestion if every vendor had to deliver to every store. Supply Chains Add Value I. Supply Chains Reduce Required Transactions. A. Fewer transactions add value. B. Consumers can purchase merchandise more conveniently and less expensively. Without supply chain management, firms would face significant complications in getting their goods to consumers where they want them. Group activity: Each member of the group represents a supply chain link (e.g. manufacturer, retail distribution centre, retailer, transporter, end customer). Remove one link and attempt to move an object like a pen from one end to the other. Experiment with removing different links. What happens? II. Supply Chain Management Streamlines Distribution. A. It reduces inefficiencies. B. Firms can reduce their dependence on stockpiled inventory. Ask students: How does supply chain management reduce inventory levels? What effect does supply chain management have on sales? Answer: An efficient supply chain can lower overall inventory in the system because merchandise is delivered when it is needed (just-in-time). By having an efficient supply chain, the retailers stay in stock, and sales increase. Answer D III. Supply Chain Management Affects Marketing. A. It keeps delivery promises and thus helps meet customer expectations. B. A distribution centre receives, stores, and redistributes goods to company stores or customers, whether operated by retailers, manufacturers, or distribution specialists. Customers expect to have their goods delivered and services performed on time. Ask students: What happens when the supply chain breaks down? Imagine you order a textbook from Amazon, which promises to deliver it by Saturday, before your classes start on Monday. What happens in terms of your satisfaction with Amazon if some link in the supply chain breaks down and you don’t receive your book until Tuesday? Information Flows I. Flow One Moves from Customer to Store. A. The salesperson scans the UPC tag. B. The customer receives a receipt. II. Flow Two Moves from Store to Buyer. A. The point-of-sale (POS) terminal records the purchase information and electronically sends it to the buyer at corporate office. B. Sales information gets incorporated into an inventory management system to plan future purchases and promotions. III. Flow Three Moves from Store to Manufacturer. A. The retailer aggregates purchase information from each store, creates an order for new merchandise, and sends it to the firm. B. The buyer may communicate directly to get information and negotiate prices, shipping dates, promotional events, or other merchandise-related issues. IV. Flow Four Moves from Store to Manufacturer. A. Frequently reordered merchandise can use an automatic ordering process. B. This process virtually bypasses the buyer. V. Flow Five Moves from Store to Distribution Centre. A. Stores may communicate with the distribution centre directly. B. This communication functions to coordinate deliveries and check inventory status. Each step requires the collection and dissemination of information. Group activity: List the information that each member of the supply chain hopes to gain from each flow. Now list the information each member disseminates during each flow. How can a car company develop a system to ensure customers know exactly when their car will be delivered? If you have ever ordered a car, or any product for that matter, you know that even a short wait can feel like forever. Volvo introduced its “4D system” to coordinate across its supply chain and ensure orders get efficiently processed so it can keep its delivery promises. Group activity: Visit the Volvo Web site. What services does the company offer to both its suppliers and its customers? http://www.volvo.com/logistics/global/en-gb VI. Electronic Data Interchange Enhances Flow. A. EDI refers to the computer-to-computer exchange of business documents from a retailer to a vendor and back. B. In addition to sales data, EDI contains purchase orders, invoices, and data about returned merchandise. C. A supplier can send an advanced shipping notice to a retailer before a shipment to indicate what to expect. D. Intranets provide secure communication systems within a company, such as between buyers and distribution centres. E. Extranets use collaborative networks and Internet technology to link businesses with suppliers, customers, or other businesses. F. Collaboration, planning, forecasting, and replenishment (CPFR) is an inventory management system that uses EDI to transmit sales information from a retailer to a manufacturer. The manufacturer creates a computer-generated sales forecast and delivery schedule agreeable to both firms. The growth of EDI systems has allowed for advanced tracking of information. Each system can seamlessly integrate with others, which creates value for both customers and the firm. Ask students: Exactly how does EDI increase value for end customers? Answer: Since EDI facilitates information, it makes it easier for retailers to plan their deliveries (advance shipping notice) and plan their inventories. Other information is handled through EDI as well. The bottom line is the retailer has the merchandise the customer wants when he/she wants it, and in the quantities that are demanded. Answer D Making Merchandise Flow Remind students that supply chains enable the flow of not just information but also goods. Keeping goods flowing is not a simple task. Ask students: Under what circumstances might a manufacturer deliver directly to stores (flow 2) rather than to a distribution centre (flow 1)? Answer: 1.Because the retailer demands it. 2. Because merchandise is bulky (furniture) or needs to be delivered daily (tortillas) The Distribution Centre This slide introduces the structure companies use to set up distribution channels. More in depth slides follow. Distribution centres are not best if the retailer has few outlets and/or the stores are consolidated. The following list are some advantages of having a distribution centre: • more accurate sales forecasts due to many stores • lower inventory in each story therefore lower overall inventory costs • overstock and under-stock is less of a problem • it is less expensive to store in a remote warehouse then expensive retail location. Group Project – Ask student to draw out the distribution centre for a pair of Nike shoes that are at a Footlocker distribution centre. For each stage, ask them to list 3 things that will happen to the item and 1 thing that might go wrong! I. Inbound Transportation Entails Flow to Retailers. A. A dispatcher coordinates deliveries to distribution centres and assigns a time slot for each shipment. B. Buyers and sellers negotiate transportation costs, but in retailing, the manufacturer often pays these expenses. II. Receive and Check Merchandise. A. Receiving recodes merchandise as it arrives at a distribution centre or store. B. Checking involves going through the goods upon receipt to ensure they arrive undamaged and match the order placed. C. Radio frequency identification (RFID) tags automatically transmit information about a container’s contents. III. Store and Cross-Dock Merchandise. A. A traditional distribution centre (DC) unloads merchandise from trucks and places it on racks or shelves for storage. B. Cross-docking DCs receive merchandise prepackaged in the quantity required for each store, with price and theft detection tags attached, and then send it straight to a staging area and onto the store. C. Many distribution centres are a combination Inbound Transportation - Dispatcher coordinates deliveries, Manufacturer may pay transportation expenses or retailers negotiate directly with trucking companies and pay expenses. Receiving and Checking - After goods arrive at their destination, the recipient must account for them. RFID has the potential of tracking merchandise throughout the supply chain. Items wouldn’t have to be physically checked. A distribution centre or a store could know exactly where and how many of an item it has because each item has an RFID tag. Some are concerned, however, about consumer privacy—being able to track a consumer that is wearing apparel with and RFID tag. Storing and Cross-Docking - One of the most important functions of the supply chain is to hold merchandise until the next link in the chain is ready for it. But many firms strive to hold merchandise a minimum amount of time because holding merchandise in a distribution centre is expensive and the merchandise is not available for sale. So cross-docking distribution centres are part of just-in-time delivery systems. IV. Get Merchandise Floor-Ready. A. Floor-ready merchandise is ready to be placed on the selling floor immediately. B. Ticketing and marking creates price and identification labels and places them on the merchandise. V. Ship Merchandise to Stores I. Sophisticated supply chain partners use Just-in-Time Systems. A. Also known as quick response (QR) systems. Getting Merchandise Floor Ready – Many firms now require that manufacturers ship floor-ready merchandise, which shifts the burden of ticketing and marketing to the manufacturer. Ask students: What cost implications do these requirements have for manufacturers and retailers? Shipping Merchandise to Stores – Technology facilitates shipments to stores by tracking item sales and thus triggering replacement orders. Ask students: How do automatic ordering systems benefit manufacturers, retailers, and customers? Answer: Manufacturers can plan their production schedules. Retailers get more accurate forecasts. Customers get the merchandise they want, when they want it. Inventory Management (JIT Systems) - Because they use smaller but more frequent shipments, JIT systems reduce stock-out situations which in turn increases customer satisfaction. Ask students: Can you think of any potential problems with this inventory management approach? Answer: The systems can be expensive and the supply chain partners must be committed to accurate data or they won’t work. Also, if the system isn’t working properly, out-of-stocks can occur. II. Sophisticated supply chain partners use Just-in-Time Systems. B. Also known as quick response (QR) systems. These inventory management systems deliver less merchandise on a more frequent basis. III. A JIT System Involves Various Benefits. A. The lead time between the recognition of a need and the arrival of the needed merchandise decreases. B. Product availability increases, but inventory investments drop. C. Stores can better satisfy customer demand because they keep just the right amount of merchandise in stock. IV. A JIT System Also Entails Costs. A. Firms and vendors must cooperate. B. They must share data. C. They require systems such as EDI. Inventory management systems track goods throughout stores, warehouses, and DCs. As its name implies, just-in-time inventory management ensures goods get delivered only when they are needed. Because they use smaller but more frequent shipments, JIT systems reduce stock-out situations which in turn increases customer satisfaction. Ask students: Can you think of any potential problems with this inventory management approach? Answer: The systems can be expensive and the supply chain partners must be committed to accurate data or they won’t work. Also, if the system isn’t working properly, out-of-stocks can occur. Case-in-Point Series This slide sets up the Case in Point which follows. Perishable products pose unique challenges to supply chain management, especially those manufactured in one part of the world and sold in another. By taking control of its own inventory management, Guinness can better serve its customers’ demand, track inventory, and ensure product freshness. Group activity: Why was it crucial for Guinness to step in to control its own inventory? Guinness’s unique taste only lasts while the beer is fresh. Stale Guinness would have negative impacts on the overall brand image. Manage Supply Chains through Strategic Relationships. A. In strategic or partnering relationships, members are committed to maintaining the relationship in the long term and invest in mutually beneficial opportunities. B. Mutual trust holds strategic relationships together. 1. Trust is the belief that a partner is honest and benevolent. 2. Greater trust leads to greater willingness to share relevant information. C. With open communication, members share information, develop sales forecasts together, and coordinate deliveries. D. Members must have common goals for a successful relationship to develop. E. Successful relationships demand that both parties make credible commitments to or tangible investments in the relationship. Explain how, like supply chain relationships, like personal relationships are stronger when there is mutual trust, open communication, common goals, and credible commitments. Have students provide specific examples. Instructor Manual for Marketing Dhruv Grewal, Michael Levy, Shirley Lichti, Ajax Persaud 9780071320382, 9780070984929
