978-0134292663 Chapter 11 Lecture Notes Part 2

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Chapter 11: Deliver the Goods

p. 354 2.2 Step 2: Evaluate Internal and External Environmental

Influences

After they set their distribution objectives, marketers must

consider their internal and external environments to develop the

best channel structure. The organization must also examine issues

such as its own ability to handle distribution functions, what

channel intermediaries are available, the ability of customers to

access these intermediaries, and how the competition distributes

its products. Finally, when they study competitors’ distribution

strategies, marketers learn from their successes and failures.

Exhibit: Harley-

Davidson

p. 355

p. 356

2.3 Step 3: Choose a Distribution Strategy

Distribution intensity means the number of intermediaries at

each level of the channel. Planning a distribution strategy means

making at least three decisions.

2.3.1 Conventional, Vertical, or Horizontal Marketing

System?

A conventional marketing system is a multilevel distribution

channel in which members work independently of one another.

Their relationships are limited to simply buying and selling from

one another.

A vertical marketing system (VMS) is a channel in which there

is formal cooperation among channel members at two or more

different levels: manufacturing, wholesaling, and retailing. Often,

a vertical marketing system can provide a level of cooperation

and efficiency not possible with a conventional channel. There are

three types of vertical marketing systems:

oIn an administered VMS, channel members remain

independent but voluntarily work together to become the

power of a single channel member.

oIn a corporate VMS, a single firm owns manufacturing,

wholesaling, and retailing operations, giving the firm total

control over all channel operations.

oIn a contractual VMS, cooperation is enforced by a

contract that spells out each member’s rights and

responsibilities and how they will cooperate. The channel

members can have more impact as a group than they could

alone. A discussion of three types of contractual VMS

follows:

In a wholesaler-sponsored VMS, wholesalers get

retailers to work together under their leadership in a

voluntary chain.

A retailer cooperative is a group of retailers that has

established a wholesaling operation to help them

Chapter 11: Deliver the Goods

p. 356

compete more effectively with the large chains.

Franchise organizations are a third type of contractual

VMS. Franchise organizations include a franchiser (a

manufacturer or a service provider) who allows an

entrepreneur (the franchisee) to use the franchise name

and marketing plan for a fee. In these organizations,

contractual arrangements explicitly define and strictly

enforce channel cooperation.

In a horizontal marketing system, two or more firms at the same

channel level agree to work together to get their product to the

customer. Sometimes these agreements are between unrelated

businesses.

Exhibit: Wetzels

p. 357

p. 358

2.3.2 Intensive, Exclusive, or Selective Distribution?

The three basic choices for deciding how many wholesalers and

retailers to carry a product are intensive, exclusive, and selective

distribution.

Intensive distribution aims at maximizing market coverage by

selling a product through all wholesalers or retailers that will

stock and sell the product. Availability is more important than any

other consideration in customers’ purchase decision. Products

such as gum, milk, and soft drinks are intensively distributed.

Exclusive distribution means limiting distribution to a single

outlet in a particular region. Some cars, pianos, and products with

high price tags are sold this way. The grey market is a

distribution channel in which a product’s sale to a customer is

technically legal, but is viewed as inappropriate by the

manufacturer of the related product. Grey markets often emerge

around high-end luxury goods sold through exclusive distribution.

Selective distribution fits when demand is so large that exclusive

distribution is inadequate, but selling costs, service requirements,

or other factors make intensive distribution a poor fit. Selective

distribution is suitable for shopping products such as household

appliances and electronic equipment.

Table 11.2

Characteristics

that Favor

Intensive versus

Exclusive

Distribution

Exhibit: Chicago

Cubs

p. 359 2.4 Step 4: Develop Distribution Tactics

These decisions are usually about the type of distribution system

to use, such as a direct or indirect channel, or a conventional or

integrated channel. These decisions have a direct impact on

customer satisfaction.

p. 359 2.4.1 Select Channel Partners

Selecting channel partners usually results in a long-term

commitment. Questions to be considered include: Will the

member contribute to profitability? Can the member provide

Chapter 11: Deliver the Goods

services the customer wants? What impact will this have on

channel control? Who are the channel members’ competitors

channel partners? What is the firm’s dedication to social

responsibility?

p. 359

p. 360

2.4.2 Manage the Channel

The channel leader, sometimes called a channel captain, is the

dominant firm that controls the channel. The captain has power

relative to other channel members. The power comes from a

variety of sources:

A firm has economic power when it has the ability to

control resources.

A firm such as a franchiser has legitimate power if it has

legal authority to be in charge.

A producer firm has reward or coercive power if it

engages in exclusive distribution and has the ability to

give profitable products and to take them away from the

channel intermediaries.

Channel cooperation is to the benefit of everyone. It occurs

when producers, wholesalers, and retailers depend on one another

for success. Channel conflict refers to incompatible goals, poor

communication, and disagreement over roles, responsibilities, and

functions among firms at different levels of the same distribution

channel that may threaten a manufacturer’s distribution strategy.

p. 360

p. 361

3. LOGISTICS AND THE SUPPLY CHAIN

Marketers place a great deal of emphasis on logistics, the process

of designing, managing, and improving the movement of products

through the supply chain. Logistics is also a relevant

consideration regarding product returns, recycling and material

reuse, and waste disposal—reverse logistics.

3.1 The Lowdown on Logistics

When a firm does logistics planning, the focus also should be on

the customer. Logistics aims to deliver exactly what the customer

wants—at the right time, in the right place, and at the right price.

Figure 11.5

Process: The

Five Functions of

Logistics

p. 361

p. 362

3.1.1 Order Processing

Order processing includes the series of activities that occurs

between the time an order comes into the organization and the

time a product goes out the door.

Fortunately, many firms automate this process with enterprise

resource planning (ERP) systems. An ERP system is a software

solution that integrates information from across the entire

Chapter 11: Deliver the Goods

company, including finance, order fulfillment, manufacturing, and

transportation. Data need to be entered into the system only once,

and then the organization automatically shares this information

and links it to other related data.

p. 362 3.1.2 Warehousing

Warehousing—storing goods in anticipation of sale or transfer to

another member of the channel of distribution—enables marketers

to provide time utility to consumers by holding on to products

until consumers need them.

Part of developing effective logistics means making decisions

about how many warehouses we need and where and what type of

warehouse each should be.

Firms use private and public warehouses to store goods.

Private warehouses have a high initial investment but they

lose less inventory due to damage.

Public warehouses allow firms to pay for a portion of

warehouse space rather than having to own an entire

storage facility.

A distribution center is a warehouse that stores goods for

short periods and that provides other functions such as

breaking bulk.

p. 362 3.1.3 Materials Handling

Materials handling is the moving of products into, within, and

out of warehouses. Once in the facility the goods may be handled

over a dozen separate times. Procedures that limit the number of

times a product must be handled decrease the likelihood of

damage and reduce the cost of materials handling.

p. 363

3.1.4 Transportation

Logistics decisions take into consideration options for

transportation, the mode by which products move among channel

members. Modes of transportation differ in their:

Dependability: ability to deliver goods safely and on time

Cost: the total transportation costs to move a product from

one location to another, including any charges for loading,

unloading, and in-transit storage

Speed of delivery including loading and unloading

Accessibility: number of different locations carrier serves

Capability to handle different products such as large and

small, fragile or bulky

Traceability: ability to locate goods in shipment

Each mode of transportation has strengths and weaknesses that

make it a good choice for different transportation needs.

.Railroads: Railroads are best to carry heavy or bulky

Exhibit: Amazon

Table 11.3

A Comparison of

Transportation

Modes

Chapter 11: Deliver the Goods

p. 364

items, such as coal and other mining products, over long

distances. Railroads are about average in their cost and

provide moderate speed of delivery.

. Water: Ships and barges carry large, bulky goods and are

very important in international trade. Water transportation

is relatively low in cost but can be slow.

.Trucks: Trucks or motor carriers are the most important

transportation mode for consumer goods, especially for

shorter hauls. Motor carrier transport allows flexibility

because trucks can travel to locations missed by boats,

trains, and planes. Trucks also carry a wide variety of

products, including perishable items. Although costs are

high for longer-distance shipping, trucks are economical

for shorter deliveries. Because trucks provide door-to-door

service, product handling is minimal, and this reduces the

chance of product damage.

Air: Air transportation is the fastest and the most

expensive transportation mode. It is ideal to move

high-value items such as important mail, fresh-cut flowers,

and live lobsters.

Pipeline: Pipelines carry petroleum products such as oil

and natural gas and a few other chemicals. Pipelines flow

primarily from oil or gas fields to refineries. They are very

low in cost, require little energy, and are not subject to

disruption by weather.

The Internet: As we discussed earlier in this chapter,

marketers of services such as banking, news, and

entertainment take advantage of distribution opportunities

the Internet provides.

Use website here: www.freightquote.com

Freight broker who coordinates shipments with several trucking companies

►Marketing Moment In-Class Activity

Suppose you are responsible for shipping the following goods to the appointed destinations.

What shipping methods would you choose and why?

Parakeets Ship from Wichita KS to Seattle Washington

Oil Ship from Alaska to Arizona

Modular Homes Ship from Pittsburgh to New Orleans

Steel Ship from Bethlehem PA to Denver CO

Toys Ship from San Francisco to Casper WY

P.S.—Barges were used to transport semi-built houses to New Orleans after Hurricane Katrina.

Activity: Assume that you are the director of marketing for a firm that manufactures cleaning

chemicals used in industries. You have traditionally sold these products through manufacturer’s

reps. You are considering adding a direct Internet channel to your distribution strategy, but you

aren’t sure whether this will create channel conflict. Make a list of the pros and cons of this

Chapter 11: Deliver the Goods

move. What do you think is the best decision?

p. 364

3.1.5 Inventory Control

Inventory control means developing and implementing a process

to ensure that the firm always has sufficient quantities of goods

available to meet customers’ demands.

Some companies are even phasing in a sophisticated technology

(similar to the EZ Pass system many drivers use to speed through

tollbooths) known as radio frequency identi!cation (RFID). RFID

lets firms tag clothes, pharmaceuticals, or virtually any kind of

product with tiny chips that contain information about the item’s

content, origin, and destination. This technology has the potential

to revolutionize inventory control and help marketers ensure that

their products are on the shelves when people want to buy them.

Firms store goods for many reasons, such as enabling

production to meet seasonal demand and creating economies in

ordering.

►Marketing Moment In-Class Activity

Think about a store in which your can of beans has a radio code and can be located at any

minute. What are the advantages to such a system (especially when tracking more

expensive/volatile products than beans)? Do you see any ethical implications?

p. 365

Inventory control has a major impact on the overall costs of a

firm’s logistics initiatives. Level loading is a manufacturing

approach intended to balance the inventory holding capabilities

and production capacity constraints of a manufacturer for a

particular product through the implementation of a consistent

production schedule, employed both during and beyond periods

of peak demands. Stock-outs are zero-inventory situations

resulting in lost sales and customer dissatisfaction may be very

negative. To balance these two opposing needs, manufacturers

turn to just in time (JIT) inventory techniques with their suppliers.

JIT sets up delivery of goods just as they are needed on the

production floor. This minimizes the cost of holding inventory

while it ensures the inventory will be there when customers need

it.

3.2 Pulling It All Together through the Supply Chain

A large part of the marketer’s ability to deliver a value proposition

rests on the ability to understand and develop effective

distribution strategies. The supply chain includes all the activities

necessary to turn raw materials into a good or service and put it

into the hands of the consumer or business customer. A large part

of the marketer’s ability to deliver a value proposition rests on the

Chapter 11: Deliver the Goods

p. 366

p. 367

ability to understand and develop effective supply chain

strategies. Outsourcing occurs when firms obtain outside vendors

to provide goods or services that might be supplied in-house.

Outsource firms are organizations with whom the company has

developed a partnership or cooperative business arrangement.

Discussion: The supply chain concept looks at both the inputs of

a firm and the means of firms that move the product from the

manufacturer to the consumer. Do you think marketers should be

concerned with the total supply chain concept? Why or why not?

► METRICS MOMENT

One of the most used measures of inventory control is inventory

turnover or inventory turns, which is the number of times a

firm’s inventory completely cycles through during a defined time

frame (usually in one year). Marketers can measure inventory

turnover by using the value of the inventory at cost or at retail, or

this metric can even be expressed in units.

Benchmarks for inventory turnover vary greatly. A firm can up its

profitability through increases in inventory turnover; however,

management will have to calculate whether increased volume

adds to profits.

Apply the Metrics

1 Spider’s Auto Parts Store ended its fiscal year last month

with a cost of sales of $3,600,000 and an average

inventory of $450,000. What is Spider’s inventory

turnover for that fiscal year?

2 Spider’s would like to boost its turns to 10 during the next

fiscal year. What suggestions do you have that will help

them accomplish this objective?

Supply chain management is the coordination of flows among

the firms in a supply chain to maximize total profitability. These

“flows” include not only the physical movement of goods but also

the sharing of information about the goods—that is, supply chain

partners must synchronize their activities with one another.

Insourcing occurs when companies contract with a specialist who

services their supply chains. Unlike the outsourcing process

where a company delegates nonessential tasks to subcontractors,

insourcing means that the client company brings in an external

company to run its essential operations.

The major difference between a supply chain and a channel of

Chapter 11: Deliver the Goods

p. 367

distribution is the number of members and their functions. A

supply chain is broader; it consists of those firms that supply the

raw materials, component parts, and supplies necessary for a firm

to produce a good or service plus the firms that facilitate the

movement of that product to the ultimate users of the product.

This last part—the firms that get the product to the ultimate users

—is the channel of distribution.

►ETHICS CHECK

Find out what other students taking this course would do and why

at www.mymktlab.com

Do you think restaurants should be required to purchase their

ingredients from sustainable suppliers like Fiscalini, which

produces food while it gives back to the environment?

Real People, Real Choices: Here’s My Choice at

Michael chose Option #3.

Ripped from the

Headlines:

Ethical/

Sustainable

Decisions in the

Real World