Chapter 12 Distribution Channels and Logistics Management
Issues Concerning Distribution Channels What Role Does Physical Distribution Play in Attracting and Satisfying Customers? What is the Nature Of Distribution Channels? How do Channel Firms Interact and Organize to do the Work of the Channel? What Problems do Companies Face in Designing and Managing Their Channels?
What is a Distribution Channel? • A set of interdependent organizations (intermediaries) involved in the process of making a product or service available for use or consumption by the consumer or business user. • Marketing Channel decisions are among the most important decisions that management faces and will directly affect every other marketing decision.
Why are Marketing Intermediaries Used? • The use of intermediaries results from their greater efficiency in making goods available to target markets. • Offer the firm more than it can achieve on it’s own through the intermediaries: • Contacts, • Experience, • Specialization, • Scale of operation. • Purpose: match supply from producers to demand from consumers.
Distribution Channel Functions These Functions Should be Assigned to the Channel Member Who Can Perform Them Most Efficiently and Effectively to Provide Satisfactory Assortments of Goods and Services to Target Customers. Risk Taking Information Financing Promotion Contact Physical Distribution Matching Negotiation
Number of Channel Levels (Fig. 12.2) Channel Level - Each Layer of Marketing Intermediaries that Perform Some Work in Bringing the Product and its Ownership Closer to the Final Buyer. M C Channel 1 Direct Channel M C R Indirect Channel Channel 2 M C W R Channel 3 M J C W R Channel 4
Channel Behavior & Conflict • The channel will be most effective when: • each member is assigned tasks it can do best. • all members cooperate to attain overall channel goals and satisfy the target market. • When this doesn’t happen, conflict occurs: • Horizontal Conflict occurs among firms at the same level of the channel, i.e retailer to retailer. • Vertical Conflict occurs between different levels of the same channel, i.e. wholesaler to retailer. • For the channel to perform well, each channel member’s role must be specified and conflict must be managed.
Conventional Marketing Channel Vs. a Vertical Marketing System (Fig. 12.3) Conventional Marketing Channel Vertical Marketing System Manufacturer Manufacturer Retailer Wholesaler Wholesaler Retailer Consumer Consumer
Corporate Common Ownership at Different Levels of the Channel i.e. Sears Types of Vertical Marketing Systems Contractual Contractual Agreements Among Channel Members Administered Leadership is Assumed by One or a Few Dominant Members i.e. Kraft Degree of Direct Control
Contractual VMS Corporate VMS Wholesaler Sponsored Voluntary Chain Franchise Organizations Retailer Cooperatives Manufacturer- Sponsored Retailer Franchise System Service-Firm- Sponsored Franchise System Manufacturer- Sponsored Wholesaler Franchise System Types of Vertical Marketing Systems Vertical Marketing Systems (VMS) Administered VMS
Horizontal Marketing System Two or More Companies at One Channel Level Join Together to Follow a New Marketing Opportunity. Example: Banks in Grocery Stores Hybrid Marketing System A Single Firm Sets Up Two or More Marketing Channels to Reach One or More Customer Segments. Example: Retailers, Catalogs, and Sales Force Innovations in Marketing Systems
Discussion Connections • Describe the kinds of horizontal and vertical channel conflict that might occur in one of the following: • Personal computer industry, • Automobile industry, • Music industry, • Clothing industry. • How would you remedy the problems you have just described?
Changing Channel Organization A Major Trend is Toward Disintermediation Which Means that Product and Service Producers are Bypassing Intermediaries and Going Directly to Final Buyers or That New Types of Channel Intermediaries are Emerging to Displace Traditional Ones.
Analyzing Consumer Service Needs Setting Channel Objectives & Constraints Identifying Major Alternatives Channel Design Decisions Evaluating the Major Alternatives Designing International Distribution Channels Intensive Distribution Exclusive Distribution Selective Distribution
Selecting Channel Members Channel Management Decisions Motivating Channel Members Evaluating Channel Members FEEDBACK
Nature and Importance of Marketing Logistics • Involves getting the right product to the right customers in the right place at the right time. • Companies today place greater emphasis on logistics because: • customer service and satisfaction have become the cornerstone of marketing strategy. • logistics is a major cost element for most companies. • the explosion in product variety has created a need for improved logistics management. • Improvements in information technology has created opportunities for major gains in distribution efficiency.
Goals of the Logistics System Higher Distribution Costs; Higher Customer Service Levels • Goal: • To Provide a Targeted Level of Customer Service • at the Least Cost. Maximize Profits, Not Sales Lower Distribution Costs; Lower Customer Service Levels
Major Logistics Functions Order Processing Received Processed Shipped Costs Minimize Costs of Attaining Logistics Objectives Logistics Functions Warehousing Storage Distribution Automated Transportation Rail, Truck, Water, Pipeline, Air, Intermodal Inventory When to order How much to order Just-in-time
Transportation Modes Rail Nation’s largest carrier, cost-effective for shipping bulk products, piggyback Truck Flexible in routing & time schedules, efficient for short-hauls of high value goods Water Low cost for shipping bulky, low-value, non perishable goods, slowest form Pipeline Ship petroleum, natural gas, and chemicals from sources to markets Air High cost, ideal when speed is needed or distance markets have to be reached
Choosing Transportation Modes Checklist for Choosing Transportation Modes 1. Speed 2. Dependability 3. Availability 4. Costs 5. Others
Cross-Functional Teamwork inside the Company Integrated Logistics Management Building Channel Partnerships Concept Recognizes that Providing Better Customer Service and Trimming Distribution Costs Requires Teamwork, Both Inside the Company and Among All the Marketing Channel Organizations. Third-Party Logistics
Review of Concept Connections • Explain why companies use distribution channels and discuss thee functions these channels perform. • Discuss how channel members interact and how they organize to perform the work of the channel. • Identify the major channel alternatives open to a company. • Discuss the nature and importance of physical distribution. • Analyze integrated logistics, including how it may be achieved and its benefits to the company.