Marketing Channels and Supply Chain Management 12 Principles of Marketing.

Marketing Channels and Supply Chain Management

1212

Principles of Marketing

Learning Objectives

After studying this chapter, you should be able to:1. Explain how companies use marketing channels

and discuss the functions these channels perform2. Discuss how channel members interact and how

they organize to perform the work of the channel3. Identify the major channel alternatives open to a

company4. Explain how companies select, motivate, and

evaluate channel members5. Discuss the nature and importance of marketing

logistics and integrated supply chain management

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Chapter Outline

1. Supply Chains and the Value Delivery Network

2. The Nature and Importance of Marketing Channels

3. Channel Behavior and Organization4. Channel Design Decisions5. Channel Management Decisions6. Public Policy and Distribution Decisions7. Marketing Logistics and Supply Chain

Management

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Supply Chains and the Value Delivery Network

Supply Chain Partners

Upstream partners include raw material suppliers, components, parts, information, finances, and expertise to create a product or service

Downstream partners include the marketing channels or distribution channels that look toward the customer

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Supply Chain Views

Supply chain “make and sell” view includes the firm’s raw materials, productive inputs, and factory capacity

Demand chain “sense and respond” view suggests that planning starts with the needs of the target customer and the firm responds to these needs by organizing a chain of resources and activities with the goal of creating customer value

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The value delivery network is the firm’s suppliers, distributors, and ultimately customers who partner with each other to improve the performance of the entire system

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Value Delivery Network


Marketing Channel Questions

• What is the nature of marketing channels and why are they important?

• How do channel firms interact and organize to do the work of the channel?

• What role do physical distribution and supply chain management play in attracting customers?

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The Nature and Importance of Marketing Channels

Marketing Channel Defined

Marketing channel is a set of independent organizations that help make a product or service available for use or consumption by the consumer or business users

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How Channel Members Add Value

Channel members add value by bridging the major time, place, and possession gaps that separate goods and services from those who would use them

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Producers use intermediaries because they create greater efficiency in making goods available to target markets.

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Intermediaries offer the firm more than it can achieve on its own through their contacts, experience, specialization, and scale of operations

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From an economic view, intermediaries transform the assortment of products into assortments wanted by consumers

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Information refers to the gathering and distributing research and intelligence information about actors and forces in the marketing environment needed for planning and aiding exchange

Promotion refers to the development and spreading persuasive communications about an offer

Contacts refers to finding and communicating with prospective buyers

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Matching refers to shaping and fitting the offer to the buyer’s needs, including activities such as manufacturing, grading, assembling, and packaging

Negotiation refers to reaching an agreement on price and other terms of the offer so that ownership or possession can be transferred

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Physical distribution refers to transporting and storing goods

Financing refers to acquiring and using funds to cover the costs or carrying out the channel work

Risk taking refers to assuming the risks of carrying out the channel work

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Number of Channel Members

Channel level refers to each layer of marketing intermediaries that performs some work in bringing the product and its ownership closer to the final buyer

Direct marketing channel has no intermediary levels; the company sells directly to consumers

Indirect marketing channels contain one or more intermediaries

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Number of Channel Members

Connected by types of flows:• Physical flow of products• Flow of ownership• Payment flow• Information flow• Promotion flow

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Channel Behavior and Organization

Channel Behavior

Marketing channel consists of firms that have partnered for their common good with each member playing a specialized role

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Channel Behavior

Channel conflict refers to disagreement over goals, roles, and rewards by channel members

• Horizontal conflict• Vertical conflict

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Channel Behavior

Horizontal conflict is conflict among members at the same channel level

Vertical conflict is conflict between different levels of the same channel

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Conventional Distribution Systems

Conventional distribution systems consist of one or more independent producers, wholesalers, and retailers. Each seeks to maximize its own profits and there is little control over the other members and no formal means for assigning roles and resolving conflict.

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Vertical Marketing Systems

Vertical marketing systems (VMS) provide channel leadership and consist of producers, wholesalers, and retailers acting as a unified system and consist of:

• Corporate marketing systems• Contractual marketing systems• Administered marketing systems

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Corporate vertical marketing system integrates successive stages of production and distribution under single ownership

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Contractual vertical marketing system consists of independent firms at different levels of production and distribution who join together through contracts to obtain more economies or sales impact than each could achieve alone. The most common form is the franchise organization.

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Franchise organization links several stages in the production distribution process

• Manufacturer-sponsored retailer franchise system

• Manufacturer-sponsored wholesaler franchise system

• Service firm-sponsored retailer franchise system

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Administered vertical marketing system has a few dominant channel members without common ownership. Leadership comes from size and power.

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Horizontal Marketing Systems

Horizontal marketing systems include two or more companies at one level that join together to follow a new marketing opportunity. Companies combine financial, production, or marketing resources to accomplish more than any one company could alone.

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Multichannel Distribution Systems Hybrid Marketing Channels

Hybrid marketing channels exist when a single firm sets up two or more marketing channels to reach one or more customer segments

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Multichannel Distribution Systems Hybrid Marketing Channels

• Advantages• Increased sales and market coverage• New opportunities to tailor products and

services to specific needs of diverse customer segments

• Challenges• Hard to control• Create channel conflict

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Changing Channel Organization

Disintermediation occurs when product or service producers cut out intermediaries and go directly to final buyers, or when radically new types of channel intermediaries displace traditional ones

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Channel Design Decisions

Analyzing Consumer Needs

Designing a channel system requires:• Analyzing consumer needs• Setting channel objectives• Identifying major channel alternatives• Evaluation

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Analyzing Consumer Needs

Designing a marketing channel starts with finding out what target customers want from the channel

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Setting Channel Objectives

In terms of:• Targeted levels of customer service• What segments to serve• Best channels to sue• Minimizing the cost of meeting

customer service requirements

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Objectives are influenced by:• Nature of the company• Marketing intermediaries• Competitors• Environment

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Setting Channel Objectives


Identifying Major Alternatives

In terms of:

• Types of intermediaries• Number of intermediaries• Responsibilities of each channel

member

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Types of intermediaries refers to channel members available to carry out channel work. Examples include:

• Company sales force• Manufacturer’s agency• Industrial distributors

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Company sales force strategies• Expand direct sales force• Assign outside salespeople to

territories• Develop a separate sales force • Telesales

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Manufacturer’s agencies are independent firms whose sales forces handle related products from many companies in different regions or industries

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Industrial distributors• Find distributors in different regions or

industries • Exclusive distribution• Margin opportunities• Training• Support

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Number of marketing intermediaries to use at each level

• Strategies:• Intensive distribution• Exclusive distribution• Selective distribution

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Intensive distribution is a strategy used by producers of convenience products and common raw materials in which they stock their products in as many outlets as possible

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Exclusive distribution is a strategy in which the producer gives only a limited number of dealers the exclusive right to distribute its products in their territories

• Luxury automobiles• High-end apparel

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Selective distribution is a strategy when a producer uses more than one but fewer than all of the intermediaries willing to carry the producer’s products

• Televisions• Appliances

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Responsibilities of Channel Members

Producers and intermediaries need to agree on:

• Price policies• Conditions of sale• Territorial rights• Services provided by each party

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Evaluating the Major Alternatives

Each alternative should be evaluated against:

• Economic criteria• Control• Adaptive criteria

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Evaluating the Major Alternatives

Economic criteria compares the likely sales costs and profitability of different channel members

Control refers to channel members’ control over the marketing of the product

Adaptive criteria refers to the ability to remain flexible to adapt to environmental changes

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Designing International Distribution Channels

Channel systems can vary from country to country

Must be able to adapt channel strategies to the existing structures within each country

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Channel Management Decisions

Channel management involves:• Selecting channel members• Managing channel members• Motivating channel members• Evaluating channel members

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Selecting Channel Members

Selecting channel members involves determining the characteristics that distinguish the better ones by evaluating channel members

• Years in business• Lines carried• Profit record

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Selecting intermediaries that are sales agents involves evaluating:

• Number and character of other lines carried

• Size and quality of sales force

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Selecting intermediaries that are retail stores that want exclusive or selective distribution involves evaluating:

• Store’s customers• Locations• Growth potential

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Managing and Motivating Channel Members

Partner relationship management (PRM) and supply chain management (SCM) software are used to forge long-term partnerships with channel members and to recruit, train, organize, manage, motivate, and evaluate channel members

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Public Policy and Distribution Decisions

Exclusive distribution is when the seller allows only certain outlets to carry its products

Exclusive dealing is when the seller requires that the sellers not handle competitor’s products

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Benefits of exclusive distribution include:• Seller obtains more loyal and

dependable dealers• Dealers obtain a steady and stronger

seller support

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Exclusive territorial agreement refers to an agreement where the producer may agree not to sell to other dealers in a given area or the buyer may agree to sell only in its own territory

Tying agreements, while not necessarily illegal as long as they do not substantially lessen competition, are agreements where there is a strong brand that producers sometimes sell to dealers only if the dealers will take some or all of the rest of the line

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Marketing Logistics and Supply Chain Management

• Nature and importance of logistics management in the supply chain

• Goals of the logistics system• Major logistics functions• Need for integrated supply chain

management

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Nature and Importance of Marketing Logistics

Marketing logistics (physical distribution) involves planning, implementing, and controlling the physical flow of goods, services, and related information from points of origin to points of consumption to meet consumer requirements at a profit

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Marketing logistics involves:• Outbound distribution: Moving products from

the factory to resellers and consumers• Inbound distribution: Moving products and

materials from suppliers to the factory• Reverse distribution: Moving broken,

unwanted, or excess products returned by consumers or resellers

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Supply chain management is the process of managing upstream and downstream value-added flows of materials, final goods, and related information among suppliers, the company, resellers, and final consumers

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Importance of logistics• Competitive advantage by giving customers

better service at lower prices• Cost savings to the company and its

customers• Product variety requires improved logistics• Information technology has created

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Goals of the Logistics System

To provide a targeted level of customer service at the least cost with the objective to maximize profit, not sales

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Major Logistics Functions

• Warehousing• Inventory management• Transportation• Logistics information management

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Warehousing is the storage function that overcomes differences in need quantities and timing, ensuring that the products are available when customers are ready to buy them

• Storage warehouses• Distribution centers

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Storage warehouses are designed to store goods, not move them

Distribution centers are designed to move goods, not store them

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Inventory management balances carrying too little and too much inventory

• Just-in-time logistics systems• RFID

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Just-in-time logistics systems allow producers and retailers to carry small amounts of inventories of parts or merchandise

RFID (radio frequency identification devices) are small transmitter chips embedded in or placed on products or packages to provide greater inventory control

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Transportation affects the pricing of products, delivery performance, and condition of the goods when they arrive

• Truck• Rail• Water• Pipeline• Air• Internet

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Intermodal transportation combines two or more modes of transportation

• Piggyback uses rail and truck• Fishyback uses water and truck• Airtruck uses air and truck

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Logistics Information Management

Logistics information management is the management of the flow of information, including customer orders, billing, inventory levels, and customer data

• EDI (electronic data interchange)• VMI (vendor-managed inventory)

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Integrated Logistics Management

Integrated logistics management is the recognition that providing customer service and trimming distribution costs require teamwork internally and externally

• Cross-functional teamwork inside the company

• Building partner relationships12-70



Cross-functional teamwork inside the company refers to the inter-relationship of different departments within the company to achieve the goals of integrated supply chain management

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Building partner relationships refers to the understanding that one company’s distribution is another company’s supply system

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Third-party logistics is the outsourcing of logistics functions to third-party logistics providers (3PLs)

• Provide logistics functions more efficiently • Provide logistics functions at lower cost• Allow the company to focus on its core

business• Are more knowledgeable of complex logistics

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The End

Marketing Channels and Supply Chain Management 12 Principles of Marketing.

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